Procedure Followed for Material Procurement - Group 3

8/4/2019 Procedure Followed for Material Procurement - Group 3

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CERTIFICATE

This is to certify that Project Title Procedure followed for

material procurement at Mascot Universal Pvt Ltd is based

on the Original study conducted by members ofGroup-3, under

my guidance and this had not formed basis for the award or any

other degree of this Institute/University.

Place: Mumbai

____________

Date: 18.12.10

Faculty Sign

Prof. Sandeep

Chopde

3 Procedure Followed for Material Procurement MMM Sem I (2010-2011)


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INTRODUCTION

Inventory Management:

Inventory Management is the starting point in the process of

procurement of material since it forms the base depending on

which the management or the particular purchase department

takes decisions for the procurement of the material. It is very

important since an optimum inventory management includes

optimum inventory carrying costs. Inventory management is

primarily about specifying the size and placement of stocked

goods. Inventory management is required at different locations

within a facility or within multiple locations of a supply network to

protect the regular and planned course of production against the

random disturbance of running out of materials or goods. The

scope of inventory management also concerns the fine lines

between replenishment

o Lead Time This is important since it gives an idea to the

procurement department about the right time at which they

will have to place orders for procuring the material such thatthey get the delivery on time. This avoids out of stock

situation.

o Carrying costs of Inventory This helps the inventory

control department as well as the management to analyse the

material movement pattern & advise or recalculate the

inventory levels to be maintained.

o Asset Management This is an important aspect of Costingsince it involves the maximum investment of funds

o Inventory Valuation Allows a company to provide a

monetary value for items that make up their inventory.

Inventories are usually the largest current asset of a business,



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and proper measurement of them is necessary to assure

accurate financial statements. If inventory is not properly

measured, expenses and revenues cannot be properly

matched and a company could make poor business decisions.

There are different methods which are followed in order tocarry out effective inventory valuation. The following methods

are the most commonly used for inventory valuation by

companies:

o Inventory Forecasting This helps in forecasting the

inventory levels to be maintained in future in order to plan the

material procurement process

o First-in First-Out (FIFO): The first goods to be sold (cost ofsales) are the first goods that were purchased or consumed

(cost of production). The ending inventory is formed by the

last goods that were purchased and came in at the end to the

inventory.

o Last-in First-out (LIFO): The first goods to be sold (cost of

sales) are the last goods that were purchased or consumed

(cost of production). The ending inventory is formed by the

first goods that were purchased and came in at the beginning

to the inventory.

o Weighted average method: This method requires to

calculate the average unit cost of the goods in the beginning

inventory plus the purchases made in the period. Based on

this average unit cost the cost of sales (production) and the

ending inventory of the period are determined.

Balancing these competing requirements leads to optimal

inventory levels, which is an on-going process as the business

needs shift and react to the wider environment.

http://en.wikipedia.org/wiki/Valuationhttp://en.wikipedia.org/wiki/Valuation


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Stock Status

The procurement department conducts meetings with the

inventory control individuals and analyses the stock status for theparticular product. Every year, the inventory control department

revises the following aspects of the inventory of a particular

product:

o Minimum stock level: The minimum level or minimum

stockis that level of stock below which stock should not be

allowed to fall. In case of any item falling below this level,there is danger of stopping of production and, therefore, the

management should give top priority to the acquisition of

new supplies.

o Re Order Quantity: This is that level of materials at

which a new order for supply of materials is to be placed. In

other words, at this level a purchase requisition is made out.

This level is fixed somewhere between maximum and

minimum levels. Order points are based on usage during

time necessary to requisition order, and receive materials,

plus an allowance for protection against stock out.

The order point is reached when inventory on hand and

quantities due in are equal to the lead time usage quantity

plus the safety stock quantity.

o Safety Stock Level: It is a term used by logisticians to

describe a level of extra stock that is maintained to mitigate

risk ofstock outs (shortfall in raw material or packaging) due

to uncertainties in supply and demand. Adequate safety

stock levels permit business operations to proceed according

http://en.wikipedia.org/wiki/Logisticshttp://en.wikipedia.org/wiki/Stockouthttp://en.wikipedia.org/wiki/Logisticshttp://en.wikipedia.org/wiki/Stockout


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to their plans.[1] Safety stock is held when there is

uncertainty in the demand level or lead time for the product;

it serves as an insurance against stock outs.

With a new product, safety stock can be utilized as astrategic tool until the company can judge how accurate

their forecast is after the first few years, especially when

used with a material requirements planning worksheet. The

less accurate the forecast, the more safety stock is required.

With a material requirements planning (MRP) worksheet a

company can judge how much they will need to produce to

meet their forecasted sales demand without relying on

safety stock. However, a common strategy is to try and

reduce the level of safety stock to help keep inventory costs

low once the product demand becomes more predictable.

This can be extremely important for companies with a

smaller financial cushion or those trying to run on lean

manufacturing, which is aimed towards eliminating waste

throughout the production process.

o Reserve Stock level: This is maintained to cover

unexpected contingencies.

http://en.wikipedia.org/wiki/Safety_stock#cite_note-0http://en.wikipedia.org/wiki/Lead_timehttp://en.wikipedia.org/wiki/Material_requirements_planninghttp://en.wikipedia.org/wiki/Material_requirements_planninghttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Safety_stock#cite_note-0http://en.wikipedia.org/wiki/Lead_timehttp://en.wikipedia.org/wiki/Material_requirements_planninghttp://en.wikipedia.org/wiki/Material_requirements_planninghttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Lean_manufacturing


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Therefore, lesser number of orders may be placed. These items

may be under the supervision of lower level of management and

only exceptional reports or monthly reports are needed by top

management.

B-Type Inventory: Items other than A and C type constitute 20-

30% in terms of percentage of items and 10 to 25% in terms of

their annual consumption value. These are termed as B-type

inventories. Their control and supervision are moderate as

compared to A or C type inventories.


Graph 2.1


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Demand analysis vis--vis stock status

The Sales & Marketing departments communicate the

demand pattern of a particular product in the market to thematerial planning department. This helps the procurement team

to understand the amount of products that need to be procured

after they have checked with the inventory levels by co-ordinating

with the inventory department.

Most of the times in the manufacturing plants, a purchase

requisition is initiated from the end user department.

Purchase requisition

A purchase requisition is an authorization for a purchasing

department to procure goods or services. It is originated and

approved by the department requiring the goods or services.Typically, it contains a description and quantity of the goods or

services to be purchased, a required delivery date, account

number and the amount of money that the purchasing

department is authorized to spend for the goods or services.

Often, the names of suggested supply sources are also included.

A purchase requisition is owned by the originating department

and should not be changed by the purchasing department without

obtaining approval from the originating department. Thisimportant distinction (e.g. essential control) is not clearly defined

in some of the more popular integrated procurement software

systems on the market today. In some industrial (e.g. production

line) environments, the purchasing department may be assigned

responsibility for requesting and purchasing goods. This is



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especially true for raw material purchases where the purchasing

department is also responsible for inventory management. A

purchase requisition is not a purchase order and therefore should

never be used to purchase goods or services or be used as an

authorization to pay an invoice from a supplier or serviceprovider.



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Once the quantity of placing the order is finalised, then comes the

stage where the company analyses 2-3 vendors for procurement

of material. Most of the companies always keep more than one

approved vendors for a particular material, so that if one of the

vendors is not able to supply any quantity of the material, theother can do so & thus the out of stock or short supply situation is

avoided.

Negotiation

Companies often have their procurement department

negotiate various terms with vendors or suppliers.

o Resource cost,

o Shipping methods,

o Contractual agreements and

o Trade discounts (TD)

o Payment terms Advance/ Credit period

o Cash discounts (CD)

o Rate specific to MOQs (Minimum order quantities)

o MOVs (minimum order values)



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Procurement employees are typically required to follow pre-

determined guidelines for these items. Following up on issues and

correcting errors is a common function of this procedure.



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Supplier Management

After locating proper suppliers and securing contracts, it

then falls to the purchasing function to monitor and control thesuppliers' performance until the contracts are fulfilledand

beyond, if further business is to be conducted. All purchasing

organizations need some vehicle for assessing supplier

performance. Many firms have formal supplier-evaluation

programs that effectively monitor supplier performance in a

number of areas, including quality, quantity delivery, on-time

delivery, early delivery (just-in-time users do not like early

deliveries), cost, and intangibles.

For some firms, consistent supplier performance results in

certification. Supplier certification generally implies (or in some

cases formally asserts) that the supplier has been a part of a

formal education program, has demonstrated commitment to

quality and delivery, and has proven consistency in his processes.

Frequently, organizations are able to take delivery from certified

suppliers and completely bypass the receiving inspection process.

The buyer is also responsible for maintaining a congenial

relationship with the firm's suppliers. If the buyer is an

unreasonable negotiator, and does not allow the supplier to make

an adequate profit, future dealings may be endangered. The

supplier may refuse to deal with the buyer in the future, or the

supplier may greatly increase the price of a product the buyer

could not obtain elsewhere. Also, relations can become strained

when the buyer consistently asks for favored treatment such asexpediting or constantly changing a particular order's delivery

schedule.



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Raising purchase order

The purchase order needs to include all the terms &

conditions which have been decided with the vendor or thesupplier to avoid any sort of miscommunication during the time of

supply& receipt of goods. Following are the factors included in a

purchase order for a standard purchaser.

o PO no.

o

PO date

o Product name

o Pack size

o Rate per unit

o Quantity

o Freight terms

o Payment terms

o Delivery schedule

o Authorized signature

Next step is the follow up of the material status with the

supplier on regular basis. After this is done efficiently, the nextstep would be the receipt of material.



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After receipt of material, the purchase follows the following

procedure to ensure the material received matches with the order

raised.

o

GRN (Goods receipt note)

o Purchase inward entry



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Procedure Followed For Material

Procurement at

Core Business: Mascot Universal Pvt Ltd is a firm engaged inprocurement of Raw materials from MNCs based outside India in

order to make available these raw materials to Indian

manufacturers in the Pharmaceutical & Cosmetic industry. Since

the company provides more than 400 customers (Manufacturers)

with more than 200 different raw materials, they undergo a

regular & extensive material procurement process.

In Mascot, more than one department is involved before taking

decisions for material procurement. Following is a chart whichgives an idea about the different teams involved in the decisions

for material procurement.

http://www.mascot.in/index.html


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Following process is followed for the material

procurement at MASCOT:

o Next page shows the example of the Purchase order raised

o Confirmation from the supplier for logging of the order isvery important because unless the confirmation is sought,

one cannot be confident of the material procurement.

o In Mascot, the material procurement department personnel

meets the supplier in order to reconcile the purchase orders


Graph 2.2


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A/c From

placed & takes the ETA (Expected time of arrival of the

material)

o This gives them an idea about the material arriving

which in the end helps to analyse the further orderplacing process.



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After the receipt of material in the warehouse, certain

procedures are followed in order to ensure proper condition of

the material.

o Here the third point i.e matching the product name, quantity

& batch number is considered very important at Mascot. This


Graph 2.3


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helps them identify rejections if any. If any of these

parameters do not match the physical material received,

then they reject the material & it is returned to the supplier.

o This identification is crucial because returning of the material

immediately will affect the payment of the material to the

supplier. Mascot will not have to pay for this material since it

is not acceptable.

o This helps control unnecessary costs.



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Graph 2.4

Some more inputs related to Material Procurement

in general

Following Graph can give us an idea of the entire procurement

process in a nutshell. This gives an idea how the procurement

department has to co-ordinate with different departments in a

company for effective decision making.

E -Purchasing And E-Procurement

The Internet and e-commerce is drastically changing the waypurchasing is done. Internet use in buying has led to the terms "e-

purchasing" or "e-procurement." Certainly, communication

needed in competitive bidding, purchase order placement, order

tracking, and follow-up are enhanced by the speed and ease

afforded by establishing online systems. In addition, negotiation



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may be enhanced and reverse auctions facilitated. Reverse

auctions allow buying firms to specify a requirement and receive

bids from suppliers, with the lowest bid winning.



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E-procurement is considered one

of the characteristics of a world-class

purchasing organization. The use of e-

procurement technologies in some

firms has resulted in reduced prices forgoods and services, shortened order-

processing and fulfillment cycles,

reduced administrative burdens and

costs, improved control over off-

contract spending, and better

inventory control. It allows firms to

expand into trading networks and virtual corporations.

Criteria for e-purchasing include:

o Supporting complete requirements of production (direct) and

non-production (indirect) purchasing through a single,

internet-based, self-service system.

o Delivering a flexible catalog strategy.

o Providing tools for extensive reporting and analysis.

o Supporting strategic sourcing.

o Enhancing supply-chain collaboration and coordination with

partners.



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CONCLUSION

From all the above project content & observations, following is a

comprehensive list of objectives for purchasing and supply

management personnel would include:

o To support the firm's operations with an uninterrupted flow

of materials and services:

o To buy competitively and wisely (achieve the best

combination of price, quality and service);

o To minimize inventory investment and loss;

o To develop reliable and effective supply sources;

o To develop and maintain healthy relations with active

suppliers and the supplier community;

o To achieve maximum integration with other departments,

while achieving and maintaining effective working

relationships with them;

o To take advantage of standardization and simplification;

o To keep up with market trends;

o To train, develop and motivate professionally competent

personnel;

o To avoid duplication, waste, and obsolescence;

o To analyze and report on long-range availability and costs of

major purchased items;

o To continually search for new and alternative ideas,

products, and materials to improve efficiency and

profitability; and



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o To administer the purchasing and supply management

function proactively, ethically, and efficiently.



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Appendix I Questionnaire

o

Would you suggest E- procurement procedure to be theoptimal process for the procurement of material?

o Which is the process of Stock valuation used in the industry?

Which one is the most optimal one?



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Appendix II Bibliography

o Cost Accounting Babatosh Banerjee

o Principles and Practice of cost Accounting N. K. Prasad

o Cost Accounting Charles T. Horngern

o

Cost and Management Accounting S. N. Maheshswari

o Cost Accounting Blocker and Weltmer

o Cost Accounting Prof. Vanita Patel

o Cost Management and Accounting Ravi M. Kishore

o http://www. google.co.in

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