Materials Management SIMSR Latest

7/31/2019 Materials Management SIMSR Latest

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Materials Management

ByProf Rahul Mulay

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Week 01- A- Why Materials Management?

Materials are the key resources in anyenterprise as no production is possiblewithout materials.

Materials form the major constituent of thecost of product. Hence a proper control overtheir procurement, storage, issue, movement

and consumption becomes essential.The above are achieved through effective

materials management.

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Definition of Materials Management

(1) Planning and control of the kind, amount,location, movement and timing of thevarious materials used in and/or produced

in an enterprise.(2) Concerned with all activities of

management such planning, organizing,

directing, controlling and coordinating,related to materials.

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Functions of Materials Management

Materials Planning

Purchasing

Inventory control

Stores Management Materials handling.

Transportation.

Disposal of scrap, surplus and obsolete materials. Materials economics

Waste management.

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Significance of Materials Management

Materials offer maximum scope of cost reduction andprofit movement and is aptly described as the lastGold Mine for the business manager.

An illustration

Suppose a company X Limited has a turnover of Rs10,00,000/-. Its total cost amounts to Rs 9,00,000/-,

which includes materials cost of Rs 5,00,000/-. Theprofit earned by a company is Rs 1,00,000/-, which

works out to 10% on turnover. If the companyachieves a savings of 5% in materials cost, other costsremaining same, what would be the profit of the

company? 5


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Profit at 10% on Rs 10,00,000 = Rs 1,00,000

Savings in materials cost = Rs 5,00,000 x 0.05 = Rs25,000 Profit= Rs 1,00,000 + Rs. 25,000 = Rs 1,25,000 Hence, 5% reduction in materials cost is equivalent to

25% increase in profit.

Further, the return on investment (ROI) depends to alarge extent on the manner of utilization of materials. ROI= (Profit/sales) x (Sales/fixed assets +current

assets) Fixed assets constitute capital already sunk and only

scope for improving the return on investment lies inthe efficient management of materials whichconstitute the bulk of current assets.

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Objectives of Materials Management

(a) To maintain steady flow of materials to ensureuninterrupted production.

(b) To achieve economies in cost of materials by valueanalysis, variety reduction, JIT, MRP etc.

(c) To provide right materials, of right quality, in theright quantity, and at the right time.

(d) To reduce investment in inventory through properinventory control techniques.

(e) To improve corporate image by maintaining goodbuyer-seller relations.

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(f) To maintain proper records regarding purchase,stores, transportation etc to eliminate possibility

of corruption.

(g) To reduce operating cost by eliminating/minimizing wastage.

(h) To improve competitive strength of the firm byproducing the best quality products using qualitymaterials at the lowest possible cost.

(i) To have speedy disposal of scrap and surplusmaterials.

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Costs involved in the management of

materials

(a) Basic cost of materials: The cost which is paid tothe suppliers.

(b) Government levies & taxes: The cost paid to the

suppliers towards Government levies and taxesnamely excise duty, sales tax (VAT), octroi etc.

(c) Ordering costs: The cost incurred in effectingpurchasing e.g. cost of tendering, stationery,

postage, visits to the suppliers plant to expeditedelivery, cost of receiving, inspection, bill payment,cost incurred on staff.

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(d) Inventory carrying cost: The cost incurred inmaintaining inventory e.g. interest on capitallocked up, losses due to deterioration andobsolescence, insurance premium, storage andpreservation expenses.

(e) Packaging and packing cost: Costs incurred in

packaging and packing of products.(f) Material handling costs: The cost incurred for

movement, storage and issuing the materials tothe indenter.

(g) Freight cost: The cost incurred in movement ofmaterials from suppliers works to buyer's works.

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(h) Insurance cost: The cost incurred in

providing adequate insurance cover tomaterials in transit and storage.

(i) Wastage during receipt, storage, production

etc: The cost of losses due to defects in design,poor quality of materials, improper storagemethods, wrong issues, rework and rejectionsduring manufacturing etc.

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Integrated Approach to Materials

Management

It is always advantageous to have a centralizedapproach with complete responsibility of planning,procuring, preserving, handling, usage and otherrelated activities pertaining to materials.

A centralized approach is bound with common ideaof planning, acquisition, conversion, flow anddistribution of production materials across theorganization viz. from raw materials state to finishedproduct state.

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What is Integrated Materials

Management?

A well coordinated approach towards decisionmaking with respect to materials. The activitiesinvolved are:

1. Materials Planning

- Ascertaining needs of the users well in advance,translating sales projections into productionrequirements and making realistic estimates of

various items required, their quantities and time

when required.2. Make-or-buy decisions

- Deciding based on relative economics, items to beproduced in-house and items to procure from

outside sources. 13


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3. Purchasing

- Arranging uninterrupted supply of raw materials,

parts, components and consumables to meet target ofproduction.

4. Receiving & inspection

- Inward receipt of materials and deciding with the

help of quality control/ production/maintenance/other departments, the acceptability or otherwise ofmaterials.

5. Storage

- Taking physical custody of materials , providing rightplace for storage, using proper methods forpreservation, providing proper security againstpilferage/ theft/ malpractices, and minimizing

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6. Inventory control

- Maintaining optimum investment in inventories and

at the same time ensuring uninterrupted supply ofmaterials required for production.

7. Issuance of materials

- Arranging fast and efficient supply to the indenters.

8. Transportation

- Arranging the most economical and efficienttransport for incoming and outgoing materials.

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9. Disposal of surplus, obsolete and scrap materials.

- Analyzing and selecting the most economical channel

to dispose off whatever is surplus or not required.10. Developing new sources of supply

- Locating, selecting and developing new sources ofsupply for improving quality and reducing cost.

11. Import substitution- Developing indigenous sources of supply for imported

materials and parts to reduce purchasing cost and saveon foreign exchange.

12. Ancillarization- Developing small-scale captive sources to manufacture

parts and components required by the company.

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13. Insurance management

- Arranging adequate insurance cover formaterials in transit and in storage, lodgingclaims in the event of losses and damages intransit and storage, recovery thereof, and

reducing insurance cost.14. Material cost reduction and cost control

- Utilizing various cost reduction techniques

such as value analysis, variety reduction, JIT,MRP etc.

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15. Waste management

- Minimizing materials waste by identifying

causes of re-work/ rejection/ scrap ofmaterials by reviewing design changes,methods improvement, improving material

productivity.16. Materials Research

- Systematic and formal economic analysis,

market analysis, suppliers analysis, priceanalysis, lead-time analysis, andtransportation analysis.

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Week 01- B Why Integrated Materials

Management?

Leads to speedier decisions, lower cost ofmaterials, low inventory investment, shorterlead times.

Better accountability and hence easy to takecorrective action.

Due to centralized decision making,

conflicting interests are balanced. Better coordination of various functions

under the department.

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Improved relationship with other departments asstaff from other departments need not run from

pillar to post to get their problems resolved. Easier to collect and analyze data for improved

decision making.

Opportunities of growth of employees as they getexposed to all aspects of materials management.

For best results, all activities related to materialsmust be placed under one department viz. materials

department.

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Organization of Materials

Management

In order to be effective, the place of materialsdepartment in any organization has to be on par withother important departments such as design,manufacturing, marketing etc.

Every department has to deal with the materialsdepartment.

Materials management activities are grouped

together thus genuinely adding time and place utilityto the purchased materials.

Materials Manager provides maximum staffassistance to manufacturing and marketing in

physical distribution process. 21


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MaterialDepartment

EngineeringDepartment

PersonnelDepartment

ProductionPlanning

ProductDesign

Plant

Management

MarketingDepartment

ManufacturingShops

Industrial

Engineering


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How do we organize Materials Department? Three options are usually found.

The department may be placed under(1) The Managing Director, Chief Executive,

President, Vice-president to give materialsdepartment status equal to that of production,

sales, finance etc.- Desirable(a) Where purchased items account for a high

proportion of the unit cost of the product, or

(b) When numerous diverse items are required, or

(c) When prices fluctuate very widely, or

(d) When quality of the materials has a considerableinfluence on the performance and/ormanufacturing cost of the product.

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BoardofDirectors

ManagingDirector

ProductionManager

MarketingManager

MaterialsManager

FinanceManager

PersonnelManager

Purchaseeceiving & Stores Inventory Transportation


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(2) The manufacturing manager whereinpurchasing serves as a sub-division of the

manufacturing department.- Desirable insmall firms, especially

(a) If there are no procurement problems such

as materials are not scarce or lead times areshort.

(b) If prices normally remain steady and do not

experience sudden fluctuations.(c) If variety of materials purchased is limited.

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Board of Directors

Managing Director

Engineering

Manager

Marketing

Manager

Manufacturing

Manager

Finance

Manager

Personnel

Manager

Production

Planning&

Control

MaintenanceManager

PurchaseManager

PlantManager-A

PlantManager-B


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(3) The sales manager wherein purchasing servesa sub-division of sales department

Desirable in small firms especially(a) If the materials are purchased and resold

after inexpensive processing.

(b) If the firm is mainly into trading business.

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Centralized versus decentralized structure

A. Centralized arrangement

Refer to the procurement of the requirements of allthe departments of the firm or all plants by a centralpurchase department.

What are the Merits?(a) Consistency in buying policies

- Possible since all purchase contracts and relateddecisions are taken by one department.

(b) Economy in buying- Achieved due to better bargaining on price, terms

and conditions with vendors, and reduction intransport costs, etc on account of large scale

purchasing. 28


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(c) Uniformity in purchase records

- Possible since one department handles all purchases.

(d) Economy in maintenance of records- Because of the fewer purchase indents, fewer receipts,

and fewer payments

(e) Reduction in handling and storage costs

- Due to centralization of receiving, inspection andstorage.

(f) Specializations

- Achieved by performing a particular purchasefunction.

(g) Reduced number of contacts with the companys

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B. Decentralized arrangement

Refers to the system of procurement of

requirements of the different divisions ordifferent plants by local buying sectionattached to the divisions or situated at the

plant concerned, and vested with all thepowers of a purchase department.

The merits are

(a) Individual buyers react rapidly to changes inrequirements of the divisions/plants to whichthey are attached.

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(b) Local buyers can render greater assistance totheir respective divisions

- By providing information on probable prices,deliveries and quality of materials to theconcerned department.

(c) Senior executive in charge of the plant/division can be held responsible

- For production cost attributable to the buyer

as the buyer is under the control of the seniorexecutive.

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Factors determining organization

structure of Materials Department

(a)Complexity of operations i.e.

quantity and variety of items to bepurchased.

(b)Size of the company i.e. small,medium or large scale.

(c)Single or multi-divisions/locations.

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Receiving, storekeeping and

transportation under purchasing.

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Managing Director

Marketing

ManagerFinance

ManagerProduction

Manager

Personnel

Manager

Engg

Design

Purchase

Manager

Receiving &

StoresInventory

Control

Transportation


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Features

(a) Useful in single plant structures.

(b)All materials related activities like

store keeping, receiving, inventoryand transportation can be combined

with purchasing as purchases are

small and are not complex.

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Greater degree of specialization

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MaterialsManager

Stores

& MaterialHandling

Inventory

Control Purchasing

Inbound/

Outboundtransportation

VendorDevelopment

Buyer

(Capital

Goods)

Buyer

(Imports)

Buyer

(Raw

Materials)

Buyer

(Engg

Components)

Buyer(Consumables

&

Packing)


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Multi-plants /multi-divisions

organization structure Centralized structure is preferred in case of company

having different manufacturing divisions or closelylocated plants.

Each division has its own purchase manager tocoordinate the activities of the division and allpurchase manages in turn are responsible to the headof the materials department.

Combination of centralized and decentralizedconcept works better when companys variousdivisions manufacture diversified products with a fewor no common items.

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Under this set up, each division has its own separatematerials department under the control of the head

of the division with a centralized agency tocoordinate the activities and direct policies of thelocal purchase officer.

Centralized agency undertakes contract buying ofimportant materials while the local buyers to placeorders for miscellaneous items fom local suppliers.

Centralized agency undertakes market research of all

divisions. Decentralized set up is preferred in organizations

having more than one plant/ division geographicallylocated in different places in the country.

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GeneralManager

(Materials)

Materials

Manager

(Plant B)

Materials

Manager

(Plant A)

Materials

Manager

(Plant C)

Receipts &

Stores

Inventory

ControlPurchasing Transportation

Buyer-I Buyer-II Buyer-III


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planningA good planing system will answer the following

- What are we going to make

- What soes it take to make it.

- What do we have on hand

- What do we need

- These are the questions of priority an d capacity

- The Factors that affect Materials Planning are:

- 1) Macro Factors price trends, business cycle, import policy, credit policy

- 2) Micro factors

plant capacity, corporate objectives, lead times, rejectionrates, working capital etc

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Strategic Business Plan

Production Plan

Material RequirementPlanning

Master Productionschedule

Production activitycontrol and

PURCHASING


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Material planning

ERP

MRP II ( Closed loop MRP)

MRP

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W k 02 A R ibilit f B i


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Week 02A Responsibility of Buying

Division Selection of vendors

Negotiating terms of purchase

Placing purchase orders

Ensuring receipt of materials in time.

Taking suitable action in case of delays.Divisions of a Purchase Functions

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Purchase Manager

Buying division Clerical division Transportation

division


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Buying Division

Buyer

(Raw

Materials)

Buyer

(Tools

&

Pressed

parts)

Buyer

(Bought

out parts)

Buyer

(Forgings

&

Castings)

Buyer

(Office

Supplies)

Clerical Division

Data

Entry and

Records

Order

PlacingFollow up

Bill

Passing


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Transportation Division

Freights

contracts&

documents

Follow-up

Packing

&Dispatches


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Purchase Objectives

Obtaining the goods and services of the required qualityand quantity

Obtaining goods and services at the optimum cost

Ensuring best possible service and prompt deliveries by the

supplier Developing and maintaining good supplier relationships

and developing potential suppliers

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Buyers Responsibility Include

1. To maintain a file of purchases and therebydevelop the history of each item including detailslike purchase orders placed, suppliers, quantities,prices, lead time etc.

2. To issue purchase orders and delivery schedulesfor items based on purchase indents received fromuser department.

3. To obtain competitive quotations for new

components and suppliers and submit data tosenior staff for decisions.

4. In large firms, buyers evaluate quotations andplace purchase orders.

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5. To negotiate prices with suppliers.

6. To review suppliers request for priceincrease so as to decide whether or notthe request is justified.

7. To act as a liaison between suppliers andthe user department.

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Responsibilities of Expeditors In smaller firms, the buyers themselves function as

expeditors. In larger firms, buyers evaluate quotations and place

purchase orders while expeditors ensure themaintenance of delivery schedules.

To study the delivery dates and suppliers reliability.

To establish a deadline in advance of actual deliverydate and decide an appropriate course of action tomeet delivery dates.

To advise buyers well in advance of expected lateshipments and obtain decisions.

To travel to suppliers plant when suppliersshortages are expected to seriously hamper

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Interdepartmental Relations Excellent interdepartmental relations invariably

lead to1. Satisfaction of the needs of the other departments.

2. Support to other departments, when required.

3. Better communication and information that ishelpful to other departments.

Purchase Management and Production

Purchase department is largely required to meet

the needs of production department by ensuringthe availability of materials on time.

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To satisfy the emergency needs of the departmentto avoid production shutdown.

Production department must allow adequatelead-time for procurement otherwise needlessexpenses will be incurred.

How Production Department contributes toeffectiveness of Purchase Department?

1. By assisting in inspecting materials and inconducting tests/ trials.

2. By undertaking minor rework in vendors

supplies in the event of emergencies therebyreducing the pressures on both departments.

3. By giving fair trial to new/ substitute materials forthe purpose of reducing material cost and/ or

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Purchase Management and Engineering

Engineering is usually responsible for

preparing technical specifications formaterials and equipments.

As specifications determine the cost,

specifications adopted by engineering mustspecify materials that are both economical toprocure and economical to fabricate.

Only those materials which are easily availableshould be prescribed since scarcity andproprietary materials push costs.

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Substitute materials proposed by suppliersshould be given fair trial for suitability.

Variety among parts and materials should berestricted and standardized, and as far aspossible existing parts should be used.

Whenever there are design changes, purchasedepartment should be informed well inadvance so that they dont procure itemswhere design changes are expected.

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Purchase management and Inspection &Quality Control.

Q.C. department is responsible to ensure thatgoods received from suppliers conform to laiddown specifications.

Many times, Q.C. inspectors reject materialsdue to minor defects such as burs, dents, highpoints, rusty etc.

Repetitive rejections due to such minor reasons

drive the vendors away.Suppliers request for deviation especially in

case of expensive items must be given dueconsideration.

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Purchase department should involve qualitycontrol department at all stages ofdevelopment of the item.

Vendors should be selected based on theirquality assurance capability

Purchase management and sales

Accurate sales forecast is necessary foreconomic manufacture and low priceddelivery to customers.

Sales forecasts influence a firms capitalequipment budget, advertising budget,materials budget and production budget.

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Purchase department should provide information oncosts of major items to sales so that the products arepriced correctly.

Sales should provide information on special orderswell in advance so that materials requiring longlead-time can be planned/procured economically.

Purchase management and finance Finance department should periodically advise

purchase department on availability of funds. Timelypayments to the vendors are necessary to guarantee

smooth inflow of materials. Purchase department to maintain close liaison with

finance department in matters of forward buying totake advantage of low prices.

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Purchase management and maintenancedepartment

Maintenance department needs to providepurchase department the list of consumablesspares, which are required regularly so that

they can be covered under inventory levels.Purchase department to ensure that spares are

available in right time as well as emergency

requirements of the department are metimmediately.

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Purchase management and planning

Planning enables purchase department to providematerials without tying up much capital.

Purchase department must be informed of thechanges in production programme failing whichmaterials received will add to idle inventory.

Purchase department should ensure the requirementsare made available as per commitment and expecteddelays are communicated so that production schedulecan be revised if required.

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P h d l


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Purchase management and personnel

Close liaison between these two departments

is necessary to ensure that right types ofpersonnel are selected.

Purchase department must provide job

descriptions of the personnel required by itand personnel department must ensure thatthey provide manpower according to thespecified skills.

Personnel department should also organizetraining of the employees of purchasedepartment.

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Purchase management and legal

All purchase contracts especially those

involving project purchases must havethe review / approval of the lgaldepartment to avoid litigation later.

Many problems can be avoided by properdrafting of tenders and contractual

terms.

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Week 02 BPrinciples of effective purchasing

Purchase department, in order to improve itseffectiveness must take the following actions.

Locate, select, develop, retain and deal with reliablesources.

Provide data about the lead-time necessary fordifferent group of materials.

Involve quality control department in all qualityrelated decisions.

Reduce procurement lead-time by developing newand better sources.

Build good relations with suppliers to ensurepreferential treatment.

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Develop a culture among all buyers to treat indentersas internal customers.

Review stocks regularly to avoid last minute rushorders/ stock outs.

Request for long term planning for standard parts.

Invest time and money to build accurate and efficient

stock record system. Stores to be managed properly thus minimizing

losses due to breakages, spoilage, evaporation,

corrosion, pilferage, and other malpractices. Careful packing, loading and unloading to prevent

damages in transit thereby avoiding the need forreplacement of parts.

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P h i M t


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Purchasing Management Purchasing is procurement of raw materials,

components, tools, consumables, and servicesrequired for the manufacture of products,maintenance of machines, and uninterrupted

running of the manufacturing plant. Purchasing is the process of facilitating

marketing of the companys products in the

quantities desired, at the time promised and ata competitive price consistent with the qualitydesired.

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In essence, purchasing is the task of buyinggoods of right quality, in the right quantities, at

the right time and the right price.The emphasis has to be more on locating,

selecting, developing and retaining right kind

of suppliers.Growing Significance of purchase function

Traditionally, purchase was regarded as one of

the activities of production management. In today's environment, it is considered as one

of the major functions in business.

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Why Purchasing is becoming significant?1. Higher cost of goods and services

(a) Raw materials, components and services accountfor as much as 50 to 60% of the companys totalexpenditure.

(b) Mere one percent savings in material cost can give

benefit equivalent to eight to nine percent rise insales volume.

2. High cost of stock outs

(a) Lack of continuity in the availability of materialsseriously affects the profitability of the company.

(b) Financial losses due to stock out of materialsparticularly in continuous process industriesintensive industries can be enormous.

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3. Higher cost of capital

(a)Around 70% of the working capitalgets locked up in the inventory of rawmaterials, work in progress, finishedgoods, spares, etc.

(b)Thus, no organization can afford toinvest such a big part of its capital inthe stocks.

(c) Bulk of these stocks can be reducedand the capital lock-up can be avoidedif purchasing is made efficient.

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4. Purchase is not just buying

(a) In modern context, purchasing includemany materials related activities such asmarket research, vendor rating,standardization and variety reduction,

codification, indent control, surplusdisposal, pre-purchase value analysis, pricenegotiations, inventory control, purchasebudgets, import substitution, purchasesystem design etc.

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5. Changing nature of purchase

(a) Purchasing is becoming more of a techno-commercial activity rather than a purecommercial function.

6. Professionalization of materials function

(a) Various management concepts such as ABCanalysis, economic lot size, varietyreduction, codification, value analysis,

vendor rating etc has given an improvedstatus to materials management inbusiness.

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7 Changing concept of buyer seller relations


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7. Changing concept of buyer-seller relations

(a) Old concept that a supplier is dependent

upon buyer and he can be made to performthe way a buyer desires no longer existsnow.

(b) To ensure continuity in availability ofmaterials with lowest inventory investment ,buyer must be good at business relations.

(c) With increasing competition, retention ofgood suppliers is becoming difficult andhence buying function is becomingchallenging day by day.

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Obj ti f i tifi h i


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Objectives of scientific purchasing1. To procure at a competitive price the needed

materials of right quality, in the rightquantity and at the right time.

2. To maintain continuity of supply withminimum inventory.

3. To ensure the production of goods of betterquality at the competitive prices.

4. To suggest better substitutes to materials

that are currently being used.5. To assist in standardization, variety

reduction, value analysis and cost reduction

programmes. 69

6 T d i b bl i


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6. To advise on probable prices,deliveries and performance of

materials/ components etc.

7. To create goodwill and enhance the

companys reputation throughethical dealings with the suppliers.

8. To enable company to maintaincompetitive position and earn a fairreturn on its investment.

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Functions of Purchase Department

Locating, selecting and developing qualified sourcesof supply.

Scrutinizing purchase indents and deciding suitablemethods of buying.

Floating enquiries, processing quotations,conducting negotiations, and releasing purchaseorders.

Pre-delivery follow-up and chasing of shortages.

Coordination with inward inspection includingtimely return of defective materials back to suppliers.

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Endorsing suppliers invoices for payment


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Endorsing suppliers invoices for payment.

Processing suppliers requests for price

increases including price renegotiation.Attending to suppliers representatives and

traveling salesmen.

Arranging meetings for necessary discussionsbetween suppliers representative andcompanys officials.

Disposal of surplus, obsolete and scrapmaterial.

Advising management regarding new

materials, new products, forward buying etc. 72

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Acting as a link between companysfinance department and suppliers for

timely payment/ settlement ofsuppliersbills.

Attending to activities like liasioningwith government authorities such ascentral excise etc.

Maintaining companys image amongsuppliers.

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5 R s of Buying

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5 Rs of Buying

Right SourceSource selection

and source

development

Vendor rating

Purchase research

Right Time and Place

Replenishment

Methods

Lead-time analysis

Right Price

Basic cost elements

Competitive bidding

NegotiationsRight place of delivery

Right transportation

Legal aspects

Price renegotiations

Payment methods

Right Quantity

EOQReplenishment

System

Buying methods

Right QualityQuality specifications

Vendor up gradation

Self certification

Value analyses

Standardization


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Week 03 APurchasing Cycle The major activities of purchase cycle are:

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Establishing the

need for

procurement

Scrutiny of the

purchase indent

Purchase market

research

Order

preparationFollow up with

supplerReceiving and

inspection

Storage and Record

keepingInvoicing and

payment

A. Establishing and communicating need for


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A. Establishing and communicating need forprocurement.

- The need originates in one of the firms operating

departments or inventory control section and iscommunicated to the purchase departmentthrough a document called PurchaseIndentor aBillofMaterials.

What is a purchase indent? A formal purchase requisition made to the

purchase department to purchase materials orservices specified therein.

It serves as an authority to purchase department togo ahead with the purchase activity.

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It id itt i f ti


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It provides written informationregarding quality specifications, time

when required etc. The authority to raise purchase indents

is limited and standing instructions as

to who in the organization is permittedto sign the purchase indents fordifferent kinds of materials are issued

by the top management.

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Procedure for raising indents

(a) Stock items i.e. items of regular use

(1) Generally the stores issues indents for itemsof regular use.

(2) Maximum-Minimum levels, re-order levels,

order quantity is generally established foreach of these standard items.

(3) When the stock level drops to or nears the

reorder level, an indent is sent from thestores to the purchasing department toreplenish the stock.

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(b) Capital items


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( ) C p

(1) The purchase department receives indents

for capital items, the purchase of which isapproved by the management committee.

(c) Non-standard items

(1) These are materials that are usually notcarried in stocks.

(2) The operating departments fill the indents.

(3) The request for items to be sub-contractedmay come from planning department of thecompany.

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Procedure for Bill of Materials


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Procedure for Bill of Materials

1. Bill of material is routed through the stores

to purchase as a notification of the need formaterials.

2. The stores checks the availability ofmaterials from the stocks, subtracts thesame, and forwards it to the purchasedepartment.

3. Copy of BOM serves as the purchase

indent.

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B Scrutinizing Purchase Indents


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B. Scrutinizing Purchase Indents

1. The purchase indents must describe

the items clearly by Brand name and/or

Performance standards, and

Should be accompanied by the drawingor sample of the item, where required.

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2. Must be signed by the authorized signatories


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. us be s g ed by e au o ed s g a o esin order to avoid irresponsible purchases.

3. Routed through the stores department tocertify non-availability of the item in stores.

4. Description and the quantity of materialrequired must be clearly stipulated.

5. Whether the right source of supply isavailable.

6. Whether there is any pending order to be

completed. After scrutiny, the indent is logged in the

purchase indent register and given to theconcerned buyer.

82

C. Market research and selection of the sources


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C. Market research and selection of the sourcesof supply

Involvesreview of information about supplysources, catalogues, previous quotationsreceived and selecting potential sources ofsupply that can

(a) Supply goods of the right quality

(b) Supply goods at the right price

(c) Meet buyers quantity requirement andmake delivery promises.

83


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Factors in Selecting the Suppliers

1) Technical ability2) Manufacturing capability

3) Reliability

4) After sales service

5) Supplier location

6) Other factors such as credit terms

7) PRICE

84

The work involved in this phase is as under:1 For off-the-shelf materials telephonic quotations


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1. For off-the-shelf materials, telephonic quotationsare obtained from the vendors and a verbal order isgiven to a supplier whose terms are found to be

better than others.(a) To regularize the transaction, a formal purchase

order is sent later.

(b) Sometimes, placing the blanket orders are alsoconsidered.

2. Where the prices fluctuate from time to time, aninquiry is sent to probable sources and quotations

are received from the suppliers.(a) A comparative statement is prepared from thequotations received from the suppliers and landedcost arrived at, leading to provisional selection of a

particular source. 85

(b) Vendors are then called for negotiations andi f fi li d i h h


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precise terms of contract are finalized with thevendor.

3. When the amount involved is less and item is easilyavailable, the buyer may opt for petty cash purchases.

D. Order preparation

A purchase order is a formal document i.e. writtencommunication prepared by the buying departmenton behalf of the company to authorize the supply ofthe goods and services in the quantities, at the time,

at a place, and at a price specified in the document.A purchase order is a legal document and serves as

an evidence of the contract between the buyer andseller.

86

1. Buyer has to obtain approval of the comparative


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statement by his immediate superior and take hissignature on the same.

2. All possible details such as name and address ofthe supplier, item description, prices, deliveryschedules, mode of transport, place of delivery,insurance, payment terms, and late delivery clauseare required to be furnished in the purchase order.

3. Materials required urgently are purchased onverbal or telephonic orders, which are covered

immediately by written purchase order.

87

A written purchase order must serve the following


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p gfunctions

Provide full and complete details of the materials tobe supplied thereby avoiding ambiguities.

Help buyers receiving department to verify thatmaterial received in accordance with those ordered.

Help buyer's accounts department in linking goodsreceipt reports with suppliers invoices and preventduplicate payments.

Serve as a future reference for placement of orders.

88

H t l t li f it


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How to select a supplier for new itemsi.e. those that have not been purchasedbefore?

Carry out information search on likely

sources.Undertake activity of selection and

development of suppliers.

89

Flow chart in placing order and vendors performance

evaluation


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evaluation

90

Purchase indent

Is this a regular

Item?

Is there an annual

contract for it?

Was last supplier

Satisfactory?

Is it time to checkthe market yet?

Place order

Evaluate performance

No

YesMake short list

of possible sources

No

Yes

No

Yes

Yes

Obtain quotation

Prepare comparative

statement

Select supplier

Finalize terms of

contract

Week 03 B- E. Follow-up with Suppliers Follow up is required to ensure that the suppliers


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Follow-up is required to ensure that the supplierseffect the deliveries on time.

Basic rules of follow-up

(a) Should be done on the basis of market conditionand buyers experience with the vendors deliveryperformance.

(b) Buyer should keep a constant track of outstandingorders and keep himself up-to-date with the latestprogress on each order.

(c) Post-dated folder should be used to remind the

buyer of the action to be taken.(d) Mode of follow-up should be based on the

importance of the item, reliability or otherwise ofthe supplier, number of suppliers, locations etc.

91


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92

Follow-up

Pre-deliverfollow-up Shortage chasing

Pre-delivery follow-up is required to


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Pre delivery follow up is required to

To remind the supplier of the due date, and

To obtain advance information of expecteddelays.

Pre-delivery follow-up enables buyer

To make alternate arrangement if the supplieris expected to fail in the delivery commitmentby requesting other source for an early

delivery.To decide on an alternate mode of

transportation for delivery from suppliers.

93

Methods used for follow-up are


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Phone call to local suppliers at a set period prior todue date.

Letters to outside supplier typed and signed by thebuyer, preferably by the Head of MaterialsDepartment.

Regular visits, particularly to new suppliers to review

progress.Shortage chasing Universally accepted vital part of

purchase follow-up. The objectives are:

To obtain the shortage materials as soon as possible,and

To create feeling that this company wants qualitydeliveries and that too, in time thereby preventing

future recurrences. 94

Approach to the shortage chasing


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pp oach to the sho tage chasing

In case of suppliers of proprietary materialsnothing much may be possible except requestingthem to expedite and take care in future supplies.

During negotiations, the cost implication should beexplained to the supplier in case of any sucheventuality.

Suppliers performance should be measuredregularly and their ratings be communicated onperiodic basis.

(1) Suppliers with A and B ratings should beencouraged.

95


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(1) Those with C and D ratings should becoaxed to improve their delivery

performance and those who fail to improveeven after repeated warnings should beblacklisted and removed.

(2) Those below D ratings should be removedfrom vendor base.

New sources should be developed and moreorders should be given to these new sources.

Regular meetings between the seniormanagers and the suppliers should beorganized to discuss the problems.

96

F. Receiving and Inspection


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Materials in the receiving department arereceived against certain specific documentsdepending upon the mode of dispatch andgeographical location of the supplier.

In case of domestic supplier, the materials are

received along with the delivery challan andL/R or R/R.

In case of imports, the materials are received

along with the packing list, Bill of Entry andthe B/L or AWB.

97

Traditionally, all supplies are subjected toi ti d t ti It th t h d


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inspection and testing. Items that are purchased onthe basis of Brand Name do not require detailed

inspection. Only visual inspection is adequate. Critical items requiring specialized measuring

instruments are inspected at the vendors plantprior to dispatch.

Quite often, materials are inspected on receipt bythe inward inspection at the buyers works for oneor more of the following checks.

(1) Conformance to dimensions(2) Conformance to materials specifications

(3) Conformance to performance98

Conformance to dimensions


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Conformance to dimensions

- Checked against component drawings.

- Components are subjected to both visual as well asdimensional checks with gauges and other measuringinstruments.

Conformance to material specifications

- Checked with the help of chemical and metallurgicaltests.

- Small samples of materials are forwarded to thelaboratories for checking hardness, material

composition, microstructure and other properties.

99

Conformance to performance

h k d h b f d l


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- Checked on the basisof tests and trial runs e.g.machinability tests for raw materials, life tests

for bearings, r.p.m. tests for motors, burstingstrength for corrugated cartons.

A Goods Receipt Inward Note (GRIN) is

handed over to the inspection or concerneddepartment.

The inspector checks receipted materials andaffixes the stamp Accepted or Rejected onthe GRIN.

A copy of GRIN is sent to the supplier.

100

G. Storage and Record Keeping

f h d d


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After inspection, the goods are segregated intoaccepted/ rejected, or rework categories.

Only accepted quantity is forwarded to the stores. The quantity is physically verified and then

entered into kardex/ ledgers or bin cards andthereafter issue is allowed.

H. Invoicing and Payment

Invoices are raised on receipt of GRINs enablingthe supplier to know the exact quantity ofmaterials accepted by the buyer.

101

The invoices are linked with the necessary papersthereby avoiding delays in payments.


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thereby avoiding delays in payments.

Need to raise credit or debit notes for discrepancies

in quantities due to rejections are avoided. Reconciliation statements are easy to prepare.

The work of handling invoices may be carried outeither by accounts department or purchase

department.I. Scrutiny of invoices

Suppliers invoices are sent to accounts departmentwhere they are sorted out according to suppliers

and the payment due date. GRNs are received and supplier's invoice file is

reviewed daily to link incoming GRNs andsuppliers invoices.

102

Missing GRNs and missing invoices are investigated


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g g gat the end of each accounting period and thereceiving department (for GRNs) or the suppliers (forinvoices) are asked to furnish the same.

Invoices that are found linked up with GRNs aretaken up further for verification in respect of price,

sales tax, transport charges, discounts etc against thepurchase order while quantity is checked againstGRN.

Arithmetic calculations are also checked to ensurecorrectness of invoice amount, invoice is stamped for

verification, countersigned by the authorized personand is passed for payment.

103

J. Journal entries


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Verified invoices are entered in purchase register,supplier wise, called purchasejournal.

Each invoices prior to its entry in the purchasejournal is allotted a serial number called JE No.

K. Effecting payment

The purchasejournal is reviewed periodically, sayweekly, and the accountant is informed of theinvoices, which are due for payment.

Cheques are drawn to effect the payments on duedates.

104

Week 04 A Methods of Buying


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The method of buying would largely depend uponthe following :

(1) Production or non-production materials.

(2) Low-priced or expensive items.

(3) Materials that are controlled by the market forces

or available off-the-shelf.(4) Materials that are to be procured from

manufacturers or from middlemen.

(5) Seasonal or non-seasonal materials.

(6) Materials produced to buyers specification /design or produced to commercial standards.

(7) At a time when prices are stable or at a time whenprices are falling down.

105

To summarize, factors influencing the selection


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gof a buying method are:

1. Nature of the material.2. Regularity of its demand.

3. Quantities required.

4. Susceptibility to price variations.

Different buying methods are

Hand to mouth buying

Scheduled buying

Market purchasing

Speculative buying

106

A. Hand to Mouth Buying


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Materials are bought exactly according

to requirements. The characteristics are:

1. Purchases are made only when the

demand arises.2. Purchases are made only to cover

immediate requirements.

107

3. Quantity purchased is generally small thought ti l titi b h d


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at times large quantities may be purchased.

4. The terms of contract are negotiated andgenerally competitive quotations are notobtained, as normally there is not enoughtime.

The effectiveness of purchase departmentdepends upon selection of suitable vendorswho are known for quality, reliability andintegrity so that they fill the buyers orderswithout taking advantage of the situation.

108

Suitability ofhandto mouthbuying


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(a) Items required for product development.

(b) Items that are used infrequently therefore notrequired to be stocked hence are purchased whenthey are needed for definite consumption e.g.machine tools, special building materials, office

furniture etc.(c) To cover immediate requirements of a stock out

item caused either due to delay in delivery fromregularly suppliers or due to increase inconsumption.

(d) To cover immediate requirements of items whoseprices are expected to fall in near future.

109

(e) Procurement of replacement spares.


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(f) Items having limited shelf life and are normallynot stocked for fear of perishability.

(g) Items that are bulky and need a lot of storagespace e.g. wooden boxes as packing materials,thermocol sheets, cotton waste etc.

B. Scheduled Buying Materials are procured in a staggered deliveries

according to the delivery schedule furnished to thesupplier by the buyer.

110

The characteristics are

(1) A purchase order covering annual


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(1) A purchase order covering annualrequirements or alternatively a purchase

order without specifying the order quantitycalled open order is placed.

(2) The supplier is given the estimate of the

procurement needs covering a mutuallyagreed period of time.

(3) Commonly, 2-3 months confirmed scheduleand 2-3 months tentative schedule is given.

(4) Monthly deliveries are specified especiallywhen supplier has set up productionfacilities particularly for the buyer.

111

The system is best suited for


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Items of regular use such as oils,lubricants,

castings and forgings etc. Items produced to buyers specifications and

requiring long lead-time to manufacture.

Proprietary items from suppliers wh insist onlong-term schedules.

C. Market Purchasing

Procurement of sufficient quantity of an

item in advance of its need, and at a timewhen prices are low or expected to rise; alsoknown as Forward buying

112

The characteristics are

( ) P h d d i


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(a) Purchases are made to cover productionrequirements for a considerable period.

(b) Quantity purchased is generally large.

(c) Market is generally favourable for negotiations.

(d) Purchases are made when prices ar low and buyer

also gets discounts on large purchases. The purchase department must keep updated on

market conditions, prices and changing trends.

High inventory carrying charges and deteriorationshould be constantly balanced against priceadvantage.

113

Forward buying is best suited for

Non perishable items


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Non-perishable items

Items of steady and regular consumption.

Materials such as coal, steel, coke, bought out partsthat are less susceptible to radical changes inspecifications.

Seasonal items

Pre-budget purchases.

D. Speculative Buying

Refers to buying large requirements of an item when

its price is low with intention to sell bulk of it at ahigher price for speculative profits.

114

The characteristics are:

(a) Purchases may not be related to the companys


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(a) Purchases may not be related to the company sproduction programme. A particular material,

which is not even required for production mayalso be purchased.

(b) Buying does not base decisions on quantity as itssole aim is to make speculative profits. Thus,

quantity purchased is generally high and is asmuch as the company finance can permit to buy.

(c) The speculative buying is really not a function ofpurchase department and it should be ordinarily

discouraged.

115

E. Contract Buying

Purchasing made under a formal contract in


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Purchasing made under a formal contract inwhich the delivery of materials is frequently

spread over a period of time. The characteristics are:

(a) Contract are given to suppliers for large amount offuture requirements or for a certain time frame

usually a year.(b) Quantity received per delivery is generally small.

The cycle time between two consecutive receiptsmay be a week, fortnight or a month. The period

would depend upon the value of requirements.

116

Merits of contract buying


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It saves company from the trouble of

inviting quotations, preparingcomparative statements, placing oforders, etc which in turn reduces the

procurement expenses.The buyers company is assured of

regularity in supply despite market

fluctuations.

117

The buyer needs to keep very little inventoryd f t t k th b d i th ki


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and safety stock thereby reducing the workingcapital lock up and cost of carrying inventoryto the barest minimum.

Prices and other terms of contract are generallyfavourable to the parties involved.

The buyer can plan his requirement of financeas he has an advance idea as to when and whatamount he has to pay to his vendor.

118

Week 04 B Types of Contracts


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yp Contract buying is of three types:

(a) Rate Contract The rate is fixed and not the quantity.

However, some tentative requirements are given.

(b) Running contract Rate and quantity both are fixed for the contract

period.

As soon as the vendor supplies the specifiedquantity, the contract automatically comes to anend.

119

(c)Service contract

b d d ll


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Various services are obtained periodically.

Suitability of contract buying Contract buying is suited to the procurement of

materials and production items of regular use.

Service contract may be entered into for getting

periodical services such as servicing of computers,air-conditioners, water filters, fire-fightingequipments, cleaning of boilers etc., repairs orcalibration of measuring instruments, pressuregauges etc.

120

F. Tender Buying

Government departments and public sector


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Government departments and public sectorundertakings in India follow this method of

buying. A few large-scale private organizations too aopt

tender buying.

Characteristics of the system are

(1) The buying department establishes a list of biddersand invites a written bid to be submitted by them.

(2) Bids are evaluated by comparing and the right

supplier is selected.(3) Lowest price is the criteria used except when thelowest price supplier is not able to commit to thedelivery schedule, quality and is poor on reliability

or financial stability 121

Merits and Demerits are:

(1) Purchasers most important single tool to select


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(1) Purchaser s most important single tool to selectqualified supplier on the basis of competitive

prices.(2) Eliminates possibility of favouritism , patronage

and personal preference.

(3) Costly, and time consuming and hence used by

large private sector undertakings only when valueof purchases is high.

The responsibility of buying department:

For each new product, material or service, a buyermust obtain quotations from at least threepotential suppliers.

122

Past performance of old supplier must be takeninto account while deciding on the contract of a


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gnew item.

Buyers should guard against such suppliers whosubmit extremely low quotations initially andincrease their prices later.

The bids should be evaluated considering the

capabilities of the competing firms. Types of Tenders

123

(1) Limited or closed tender

An enquiry is sent to limited number of suppliers


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q y ppand bids are received in response.

All registered suppliers are mailed enquiry from thebuyer.

(2) Open tender

The enquiry is advertised in the newspapers or

periodicals or trade journals of the home countryand bids are received in response.

Encourages unlimited competition by publicizingthe enquiry.

124

Used for items, which are required in large value/volume and/or difficult to procure


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volume and/or difficult to procure.

(3) Global tender

Enquiry is advertised in the newspapers and tradejournals of not only the home country but also in theforeign countries and bids are received in response.

Used for purchasing involving huge investments suchas procurement of plant and machinery.

Used for purchases that are both capital intensiveand technical.

125

G. Seasonal Buying

Buying of the annual requirements of an item


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Buying of the annual requirements of an itemduring its season.

Used for materials available in particular season onlysuch as items required for food industries.

Need to be purchased and stocked in sufficientquantities till the next season e.g. oranges,

sugarcane, apples etc. Materials are normally purchased at the cheaper

rates.

Usually purchases are made directly frommanufacturers/ producers of goods.

Suitable for materials that are either of purelyseasonal nature or which show marked pricefluctuation during off-season.

126

H. Sub-contracting

f h f f f


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Hiring of another firm to perform some of

the manufacturing operations or to providecertain parts and sub-assemblies to beincorporated into the buyers end product.

Types of sub-contracting

(1) Company makes some quantity of the finalproduct an buys balance from outside.

Happens when company receives big orders

but is unable to supply the full quantitywithin the contracted period.

127

(2) The company gets certain operations likel t l ti h t t t t i di d


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electroplating, heat treatment, grinding and

finishing etc done from others because eitherit does not have necessary manufacturingfacilities or its present facilities areinadequate.

128

When to undertake sub-contracting ?


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g

Product involves number of components requiring

different types of machines. Specialized operations are called for certain

components and the same are not available with the

buyers firm. Shortage of capacity that cannot be made good

immediately.

Comparative economies of cost to manufacture the

part at the companys own plant versus cost of sub-contracting justifies procurement from sub-contractors.

129

Why proximity of the sub-contactors to the buyersplant ?


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p

Transportation cost, both of men and materials is

less. Follow up is easy and less costly.

Buyer can have better control on suppliers qualitythat gets facilitated by periodical visits and

feedback.Responsibilities of the buying department

1. Must work out a detailed quality assurance system,complete manufacturing process and inspectioncriteria with the sub-contractor.

130

Manufacturing process must include sequenceof operations


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of operations.

Inspection criteria should include rawmaterials inspection, in-process inspectionand finished product inspection.

Inspection criteria should also includeinstruments to be used during inspection ateach selected inspection points in themanufacturing process.

131

Week 05 ACentral PurchaseOrganization


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A large firm in the public or private sector may

have decentralized stores at different places. The purchases can be made in either of the

following ways.

1. Each store to make its own purchases.

2. A central stores to make purchases and supplymaterials in turn to different stores.

Advantages of central stores purchase

(1) Quantity discounts, lower rates, and bettercontractual terms due to large purchases thatresult from consolidating the requirements ofindividual stores.

132

(2) Better control on consumption thereby


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minimizing the risk of malpractices.

(3) A single direct contact with themanufacturer for obtaining materials as perthe specifications becomes possible.

Typical examples are State Road TransportCorporations such as MSRTC, GSRTC, etc.,Nationalized Banks, and Co-operative Banks

etc.

133

Directorate General of Supplies &

Di l


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Disposals

A central Purchasing Organization forvarious Government departments

Enters into contract with various firms for

supply of materials for the Govt. departmentsduring the year at an agreed rate.

A formal document raised for this purpose is

called ratecontract.

134

Purchasing Capital Equipment


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g p q p Purchase of major capital equipment, plant and

machinery differs substantially from other routinepurchases of production materials, MRO inventoriesand spares which are occasionally required forreplacement.

Capital equipments are characterized by their non-repetitive nature and, therefore, one-time inventory,

which form the fixed capital asset of the company

installed to earn revenue. They are charged as capital expenditure and

depreciated over a fixed period for recovery ofinvestment and replacement.

135

As compared to stocks and stores, they involve aninvestment of a large amount of money and also a


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investment of a large amount of money and also alonger duration.

Capital equipment purchases are decided at top-management level, and generally, a committee isformed represented by: production, finance,

engineering , design and purchase managers. The recommendations of the committee are

forwarded to top-management and when finallyapproved, they are pushed to purchase management

level for necessary action and final procurement.

136


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Capital goods are those that are not bought or sold as a regular courseof the business

Used for over 1 year, depreciated

Examples

design of equipment and buildings, real estate purchase,

enterprise wide hardware and software

137

Components for Decision Making

(a) Negotiating Time


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(a) Negotiating Time

With the increase in the number of contacts andavailable alternative sources, negotiating time variesgreatly and generally it is greater than for otherpurchases.

(b) Source availability Due to specific and stringent requirements of

engineering and design features, sources quiteoften are limited.

Therefore, purchase decisions would be based onthe requirements.

138

(c) Quantum of investment

Since this criterion greatly influences manufacturingbili il bili f fi d h f i l


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capability, availability of finance and the cost of capitalweighs more with top management.

(d) Lead-time requirement

Keeping in view the operating characteristics andengineering features, special plant and machinery are

custom built . Therefore, they require longer lead time than standard

equipment, plant and machinery.

(e) Evaluation of bids

Operating characteristics and engineering features

Rate of obsolescence in the industry

Economic analysis of the proposal.

139

Operating characteristics and engineering features

Generally the production department or the user


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Generally the production department or the userdepartment establishes the need and defines the

functions which form the basis of its performancecharacteristics and design features.

Selection is done on the basis of one which is best

suited to the existing process.Rate of obsolescence

In many industries the rate of obsolescence is muchhigher due to technological advancement and

innovations. In such cases, rate of expected return on investment

has to be higher .

140

Economicanalysis of the investment proposal

Depends upon the number of acceptable offers


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Depends upon the number of acceptable offersavailable in the market for the same kind of

equipment and machines.

Initial cost involved may not always be the decidingfactor.

The cost of operation as well as the cost ofmaintenance have to be weighed.

The cost of operation can be more accuratelyestimated, but the cost of maintenance beingsubjective in nature, cannot be accurately gauged.

Therefore, it is included in the cost of operation forthe purpose of economic analysis of the total cost.

141

(a) Payback period method

M i l d id l d h i h l h


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Most simple and widely used, wherein the length

of the time required for cash inflow as a result ofinvestment is calculated.

The shorter the payback period, the better theinvestment from economic viewpoint.

(b) Return on investment

In this method return on investment is stressed.

There can be two methods to calculate ROI.

(1) Return on investment is calculated on the actualvalue of original outlay.

142

(2) Calculated on the average value of the investmenti.e. mean of original value over the time period plus

d l l h d f f l lif


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expected salvage value at the end of useful life.

(c) Internal rate of returnA procedure is established to find out a rate of

interest that will make the present value of cashproceeds expected from the investment to equate thepresent value of investment.

The rate of discount, when applied to the future cashinflows, will equate the original value of the

investment. This is also known as discounted rate of return or

yield method.

143

Year 01 - 22000


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Y 02- Rs 22000

Y 3- Rs 16000Y4 13000

Y5 11000

Y6- 9000Y7 8000

Y8 -8000

Y9- 6000

Y10- 5000

Total Profit- 120000

144

Year 10 years


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y

Average revenue Rs 12000

Initial Investment in machine is 100000/-

Salvage value is Rs 5000

Thus payback is .

Return on Investment is Profit / investment =12000/10000

return on avg investment = avg invetsment is Rs100000/10 = 10000

145

10000 x 8. 3 (payback) = 83000


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Add 5000

Hence 83000 + 5000 = 88000

Hence 12000/88000 = 13.6 %

146

Discounted Cash Flow:


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Discounted Cash Flow:

147

(d) Discounted cash flow (DCF) method


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It takes into account differences of times when

revenues are generated from an investment. In using present value concept in evaluating an

investment , all future revenues are discounted in

order to find out the total present value of the futureearnings and compared with the present value of theinvestment.

Thus, if it is found that the total present value of the

future revenues is greater than the present value ofinvestment , then it is worthwhile to invest in theequipment or the machine, otherwise not.

148

Presentvalue simply means a rupee earned today isworth more than a rupee earned in future.


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p

Similarly, it means a rupee earned in future years is

less than a rupee earned today..

149

Week 05 B Purchasing versus Leasing


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Capital equipments are often available on lease and

rent basis.

The need of leasing of capital equipment arises due to

short period requirements and non-availability of funds.

When the equipment is urgently required, it is easier toget it on lease.

Purchase involves procedural delay and needs

immediate release of funds.

150

The points to be considered when lease to be

resorted to instead of purchasing.


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1. When equipment is needed for shorter period.

- It is most economical method of procurement.

- As lease agreements can be terminated at a short

notice.

2. When the technology is fast changing and because ofresultant obsolescence the particular equipment

becomes less efficient.

3. In case of a lease, the lessee bears the dismantling

charges including transportation on its return as well

as the installation charges

151

- Whereas in purchase, the equipment is almost alwayssold at delivered price, unless specifically mentioned


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in the purchase contract.

4. In case of lease, lease-rent is treated as revenueexpense for tax purposes, whereas in case ofpurchase it is treated as capital expenditure to bedepreciated over years of useful life.

5. In case of a lease, lessor retains control over theequipment during lease period.

152


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Advantages Of Leasing:1) Lease rentals become expenses for income tax purposes.

2) There is a smaller initial outlay

3) Obsolescence risk is reduced.

4) Expert services are available

5) A test period is generally provided before purchase

6) The burden of investment is shifted to the supplier

Disadvantage;

1) Less freedom of control and use

153

Import Procedure

First the point to be checked is if the item is allowed to be imported .


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p p

To check from local manufacturers if they are in a position to supply. If

not a written statement to be presented to the government . Thengovernment will clear.

Steps

1) Locating the foreign source Of Supply - to be done throughMinistry of Trade and Commerce, Consulates, Trade attaches etc

2) Procurement Of the Item- At this stage the importing firm isinvolved with the foreign source of supply, his own user departmentsand governmental agencies like DGTD

3) Documentation-

154

Why Global Purchase Global supply chain imapcts of supply and demand.

Unavailability in local market


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Unavailability in local market

Price, quality

Technical support, service,

Technology

Example: Li Feng

Issues:

Lead time, source identification

Expediting, currency f luctuations

Hidden costs, govt regulations Tariffs, duties, legal issues

Language, cultural etc

155


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The International Chamber of Commerce has

internationalized these terms.


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From a sellers view point, ex works offersmaximum protection, in that the liability and all

transportation costs are transferred to the

buyer at the sellers origin dock- at the plant

door.

A buyer would normally prefer delivered duty

paid where the seller is basically handling all

the risks and costs of the shipment to the final

destination.

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Ex Works (EXW named place)

- The seller makes the goods available at the named place, usually

the sellers docks


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the seller s docks.

- The buyer is responsible for all costs and risks involved in takingthe goods from the named place to the destination.

- The INCOTERM provides minimum risk for the seller.

Free Carrier (FCA named place)

- The seller fulfills his/her duties when the goods cleared forexport, are given to the carrier chosen by the buyer at the named

place.

- The named place is domestic for the seller

- The buyer assumes risk at the point of exchange and pays for allfreight.

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Free Alongside Ship (FAS named port and vessel)

- The sellers obligation is to deliver the goods


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alongside the ship on the quay.

- The buyer then assumes all the risks and costs

from that dock (port of export).

- The seller must also provide export clearance. Free on Board (FOB named port)

- The seller delivers the goods to the ship and has

fulfilled his/her duty when the goods pass overthe ships rail at the named port.

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- This means that the seller pays for loading charges, paysfreight charges to the named port, and provides exportclearance


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clearance.

- The title passes to the buyer when the goods pass over theships rails

- The buyer bears all costs and risks from that port on.

Carriage Paid To (CPT named port of destination)

- The seller pays the freight costs to the named destination aswell provides export clearance.

- Once the goods are delivered to the carrier, risk is transferredto the buyer.

- The named port of destination is domestic to the buyer butnot necessarily the final delivery point

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Carriage and Insurance Paid To (CIP named place ofdestination)

- This means that the seller has the same duties as under CPT.


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- In addition, must also purchase cargo insurance in the nameof the buyer while the goods are in transit to the named portof destination.

Cost and Freight (CFR named port of destination)

- The seller arranges and pays for the transportation to thenamed port of destination.

- Risk and any other costs while on the ship are passed to thebuyer as the goods pass over the ships rail at the port ofshipment.

- CFR is used for ocean and inland water transport and thenamed port of destination is domestic for the buyer

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- Seller provides export clearance.

- The seller must also pay for unloading/loading


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charges at the named port of destination andare included in the freight cost.

Cost, Insurance and Freight (CIF named port ofdestination)

- The seller has the identical obligations as inCFR.

- In addition, must also provide marineinsurance while the goods are in transit in thename of buyer.

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Delivered Ex Ship (DES named place ofdestination)


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- The seller meets his/her duties when thegoods have been made available to the buyeron the board the ship-not cleared for import-at the port of destination.

- All risks and costs involved in getting thegoods to the named port of destination arethe sellers.

- The buyer takes delivery at the port ofdestination, provides import clearance andpays port fee, if any.

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Delivered Ex Quay (DEQ) named port of

destination


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- Seller meets his/her obligations when the goods

are made available to the buyer on the wharf

(quay) at the named port of destination and

cleared for importation.

- The seller assumes all the risks and costs,

including duties, taxes, and any other charges in

delivering the goods.

- The buyers obligations begin after taking the

delivery from the quay at the port of destination.

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Delivered Duty Unpaid (DDU named place ofdestination )


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- The sellers duties end after the goods havebeen made available to the buyer at thenamed place in the country of importation.

- Seller has to pay the costs and assume therisks involved in bringing the goods to thenamed place of destination.

- The buyer pays the duties, taxes, and othercharges along with costs and risks of carryingout custom formalities.

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Delivered Duty Paid (DDP named place of

destination)

Th ll t d li th d t th d


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- The seller must deliver the goods at the named

place of destination and provide importclearance, including duties, taxes, and fees.

- The buyer simply takes the delivery at the named

place, and costs and risks transfer here.- In terms of sellers obligations, this is the

maximum obligation that can be assumed by the

seller. INCOTERMS were revised in 2000 to recognize

the way international trade is now conducted.167

Global Documentation Air Way Bill


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Air Way Bill

- The AWB serves as the contract between the carrier and theshipper.

- It is non-negotiable, and three original bills are issued.

- It is equivalent of an ocean bill of lading and is issued by the

airliner or a consolidator. Ocean Bill of Lading

- Serves as the contract of carriage, receipt for the goods, and

evidence of the title to the goods.

- Provides shipment details such as weights, volumes, quantities,destination, legal responsibilities, and liability limits for all

parties.

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Global Documentation Bill of lading is evidence of the fact that goods have been dispatched by

the exporter and gives the importer the title to the goods and enableshim to claim them on arrival at the destination.


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Bill of lading are prepared by the Shipper on the forms that given to

him by the shipping company. Normally bill of lading shows date andplace of shipme

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