Materials Management

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MATERIALS MANAGEMENT

Materials Management has always been an area of scrutiny for organizations. This has become a central focal point as trends from the supply chain arena have indicated that substantial operating cash can be freed with leaner and more efficient handling of inventory.

As organizations examine the state of their inventory, they often find that visibility across locations and warehouses are inadequate, stock levels are inconsistent, demand is uncertain, and communication between stocking locations or warehouses may be minimal or non-existent. Among other things, the lack of an integrated interaction between peripheral systems and materials managers leads to unnecessary purchasing and overstocking.

The concepts of "materials management," "physical distribution management," and "logistics management" are the primary materials organizational tools-tools which have been used successfully in the past and will be used increasingly in the future to achieve closer coordination and control of a firms various materials activities.

In general materials management is concerned with bringing materials from outside of an organization to the point of production and moving in processes inventory. It deals with moving material inputs from suppliers into the organization and within the organization. The materials management concept advocates the assignment of all major activities, which contribute to materials' cost to a single materials management department. This includes the primary responsibilities which are generally found in the purchasing department, plus all other major procurement responsibilities, including inventory management, traffic, receiving, warehousing, surplus and salvage, and frequently production planning and control. Some companies also include customer service, scheduling, shipping, materials handling, and physical distribution in their definition of materials management.

It's clear that top management and materials management personnel focus their attention sharply on material costs and there is no doubt that reliable long term supply of materials is an increasingly important materials.

Physical Distribution Management is related to marketing in a manner similar to the way materials management is related to production. Advocates of the physical distribution organization traditionally refer to it as "the other half of marketing." This view divides marketing into two parts (1) conventional marketing (market research, product development, sales promotion, advertising, and selling) and () physical distribution. To people holding this view, physical distribution consists of the following minimum functions

· Sales order processing, Traffic and transportation, Production control, Inventory control, Materials handling, & Sales planning

Physical distribution can also include additional functions such as customer service and technical service.

Many of these materials function are plainly the same functions claimed by materials management. For the most part, however, the functions are concerned with different materials and are performed at different points in time in the materials system (cycle). For example, the inventories controlled by physical distribution management are finished goods inventories. The warehouses controlled by physical distribution are primarily finished goods warehouses, field warehouses, or distribution centres; those controlled by materials management are the raw materials and production stores warehouses. On the other hand, traffic and production control frequently constitute points of contention between physical distribution management advocates and materials management advocates. In the case of both of these functions, each organizational group can lay legitimate claim to them. The optimum location for traffic and production control will vary from one company to another, depending on specific operating and organisational factors within each firm.

Logistics management is a combination of materials management and physical distribution management. On the basis of the preceding discussions of the latter two concepts, it is clear that a number of similarities exist between them. Not only are the activities involved in both concepts a part of the same overall materials system, many of the skills required to perform the respective operating activates are also similar. The same skills required to perform the respective operating activities are also similar. The same skills and knowledge required to control production inventories are also those used to control finished goods used in traffic, materials planning, and materials handling are identical skills. Although physical distribution is the final stage of the marketing process, the training and orientation of physical distribution personnel is much more akin to that of the materials management personnel. These factors have combined to produce the logistics management concept.

Historically, these similarities and relationships were first recognized by military officers, and the organizational concept of logistics was initially developed in the armed forces. In industry today, logistics management includes all of the functions of both materials management and physical distribution management. In the broadest sense, logistics management views a firm as a single operating system; it seeks to minimize total costs associated with the acquisition and handling of materials from the inception of materials requirements to the final delivery of finished products to their users.

I. What is Logistics?

Logistics is the management of the storage and movement of goods and information. Good logistics cuts costs, speeds work, and improves customer service.

Logistics involves the co-ordinated management of material and information flows throughout the organisation. Supply chain management deals with the same issues throughout the chain from sources to customers. Its objective is to simplify the supply chain to control total cost, improve total quality, maximise customer service, and increase profit. Logistics is a complex discipline getting the right balance between ways of buying, moving and storing goods involves juggling a lot of balls at once. But getting it right is extraordinarily rewarding. Immediately, good practice can take a lot of non-value-added waste out of a system. Perhaps more importantly, it will add value to activities it will make the firm more competitive.

People have different names for these activities when they are managed together. Supply chain management, logistics and materials management are terms widely (and interchangeably) used. People mean different things when they discuss logistics they often concentrate on transport, and limit themselves to systems, which move goods from factory gate to customer and supply chain concentrate on transport, storage, information flows, and commercial relationships.

a. Logistics and supply chain management

Supply chain management is about getting a smooth and efficient flow from raw material to finished goods in customers hands. It is a concept which is increasingly replacing traditional fragmented management approaches to buying, storing and moving goods.

Traditionally, the management of material flows has centred around stocks of product on trains and boats and trucks; in warehouses and stores and factory-floor queues. Managing those stocks meant buying enough goods far enough in advance to ensure that long, steady production runs were seldom jeopardised by shortages of components. Tougher competition has brought shorter product life cycles and made that approach increasingly expensive. Replacing these inventory-driven systems are service-driven systems. This type of system, pulled by customer demand rather than pushed by a supply system, is long familiar in retailing and over the last decade has become a necessity in many manufacturing sectors.

b. Where logistics fits in businesses?

Before managing supply chain its better to know

· What it's needed/wanted from the business?

· What the customers want from the firm?

· How well the competitors meet customer needs?

The place of the logistics discipline in business depends on the answer to these questions. For some companies - largely those which assemble physical goods in volume and ship them to customers - there is an argument that managing the business is indistinguishable from managing its logistics. Procurement, transport, manufacturing, sales and customer service can all benefit from an integrated logistics function, leaving just marketing, personnel, finance and research as separate functions. In other firms, the role of time and place is less critical. Most service companies, and many low-volume manufacturing businesses would pay less attention to logistics skills.

c. What is the supply chain?

Traditionally, companies have dealt with moving and storing goods in a disparate way, and under a number of different managers. In manufacturing, transport from supplier to plant was handled by suppliers themselves or by purchasing departments. Transport and storage within the plant was handled by the stores department (in the stores) and by manufacturing operations (within the plant). Transport from plant to customer was handled by transport or distribution departments; buying was handled by purchasing; sales forecasts by marketing and communicated to manufacturing and procurement in a generally one-way information flow.

This approach splits functional departments into watertight compartments when, as every manager knows, business isnt like that. Particularly in this area, where the essence of supply chain management is managing flows across departments, sites and - often - companies. So a high degree of management integration is needed.

Logistics deals with geography, time and value. Many of its concerns are with things in places and transport between the places. In this view logistics deals with everything from raw materials through their movement into and between various stores and processes to the customer. It looks at material flows within sites as much as between sites.

Materials Management Physical Distribution Management

Procurement Activities1. Materials specifications. Value analysis. Supply market research4. Negotiation5. Buying6. Quality assurance7. Buying transportation inbound Inventory DecisionsRaw materialsSubassembliesManufactured partsPacking materials

Receiving

Transportation

Storage

Goodsin-process inventory Finished goods inventory

Materials

Handling

Production

Scheduling

&

Control

Transportation

Logistics Management

Figure-1

Systems management concepts imposed in the flow of materials and related activities in a firm's materials system.

II. Types of materials

There are different ways of classifying materials. The following is an example of the categories of classification of materials.

1. Production Items

a. Raw materials

b. Manufactured and fabricated parts

c. Component parts

d. Finished goods

. Capital Items

a. Installation items

b. Accessory equipments

. Consumable Items

a. Maintenance

b. Repair

c. Operating supplies

4. Industrial Services

Production Items are those materials that are used as an input for the production of the final product. These materials or items become part of the physical make-up of final product. It includes

Raw materials they are the basic materials that actually become part of the physical make up to the final product. They are natural or near natural resources. Natural such as minerals, iron ore, forest products, stone, etc. Near natural such as grains, cotton, and dairy products.

III. Objectives of materials management

The objective of materials management include

1. Customer Service aims at the satisfaction of the customer needs and wants through customers relations and by making materials available

a. Material Management attempts to create and maintain favourable relations with its customers (users of materials) by providing the right quantity, at the right quality and at the right price.

b. Material management should aim at making materials available to the users when they need them in order to avoid the risk of stock out and interruption of operation and production.

· Availability of materials = Satisfied need

Total Need

. Economic Operations Materials consumes the largest proportion of expenditures of the organization and is a fertile ground for reducing costs and increasing profit.

. Assure timely delivery of goods and services to meet company requirements. Provide high-quality products that meet all specifications.

4. Offer cost-effectiveness that will assure a firm's position in its markets, including obtaining the best overall value for each purchasing birr/dollar expended.

5. Continuously search for new products, equipment, and services to improve the quality of product offered to customers.

6. Cultivate mutually beneficial long-term relationships/partnerships with suppliers.

7. Adhere to the highest ethical standards in all business dealings. Comply with all company policies and procedures. Conduct negotiations ethically and without attempts to influence through personal gifts or entertainment

8. Keep all dealings confidential.

. Keep company's informed of changes in the economy or other conditions that may effect purchasing decisions

IV. Functions of Materials Management

The functions of materials management are a series of activities that are related and help the functioning of the management of materials. They include

a. Forecasting materials demand

Forecasting demand for materials is an estimate of the level of demand for materials for some period in the future. If there will not be an accurate forecasting for a level of demand for materials, organizations may end-up in having too much materials or too few materials. Therefore managers should

· Recognize the increased importance of forecasting in both manufacturing and service giving organizations.

· Know how to go about implementing forecasting at all levels in the organization.Understand how to use the various forecasting methods to decide when to add manufacturing capacity and where to locate retail service outlets for maximum sales

Types of forecasting

· Qualitative Techniques

o Non-quantitative forecasting techniques based on expert opinions and intuition. Typically used when there are no data available.

· Time Series Analysis

o Analysing data by time periods to determine if trends or patterns occur.

· Causal Relationship Forecasting

o Relating demand to an underlying factor other than time.

Comparing the Costs and Benefits of Forecasting

Components of Demand

· Average Demand for the Period, Trends, Seasonal Influence, Cyclical Elements, & Random Variation

i. Time Series Analysis

· Simple Moving Average

o Average over a given number of time periods that is updated

o By replacing the data in the oldest period with that in the most recent period.

· Weighted Moving Average

o Simple moving average where weights are assigned to each time period in the average. The sum of all of the weights must equal one.

· Exponential Smoothing

o Times series forecasting technique that does not require large amounts of historical data.

§ Benefits of Using Exponential Models

· Models are surprisingly accurate, Model formulation is fairly easy, Readily understood by users, Little computation is required, & Limited use of historical data.

§ Exponential Smoothing Constant Alpha (a)

· A value between 0 and 1 that is used to minimize the error between historical demand and respective forecasts.

· Use small values for a if demand is stable, larger values for a if demand is fluctuating.

· Adaptive forecasting

o Two or more predetermined values of alpha

o Computed values of alphaLinear Regression Analysis

o A forecasting technique that assumes that the relationship between the dependent and independent variables is a straight line.

· Standard Error of the Estimate

o A measure of the dispersion of data about a regression line.

o How well (or closely) the regression line fits the data.

ii. Causal Relationship Forecasting

· Leading Indicator

o An event, whose occurrence causes, presages or influences the occurrence of another subsequent event.

§ Warning strips on the highway

§ Prerequisites to a college course

§ An engagement ring

· Reliability of Data

o Coefficient of determination

§ The proportion of variability in demand that can be attributed to an independent variable.Mean squared error�A measure of the variability in the data about a regression line.Multiple Regression Analysis

o Forecasting using more than one independent variable; measuring the combined effects of several independent variables on the dependent variable.

· Neural Networks

o A forecasting technique simulating human learning that develops complex relationships between the model inputs and outputs.

b. Purchasing

i. The role of the purchasing department

· Many different items are not purchased by the Purchasing Department, but by Management, Accounting, and Administration etc.

· The Purchasing Department is mainly involved in the procurement of indirect materials, some less in production-related items and least in investment goods

· The involvement of the Purchasing Department is limited during the first stages of the purchasing process

· Purchasing role is most dominant in the last stages of the process, when contracts have to be drawn up and when orders have to be placed

ii. Objectives of Purchasing

A key step in the corporate procurement planning process is the specification of the objectives to be achieved through the department's/agency's purchasing activities. These activities should be consistent with the objectives of the overall organization.

Purchasing organization is the focal point for all contacts with suppliers concerning the commitment of company funds for materials and services. It is instrumental in establishing and managing effective supplier relationships. It is purchasing's responsibility to locate and maintain the best source of supply. The mutual success depends on every supplier supporting in achieving the following strategic objectives

1. Total Quality

In order to achieve excellence and customer satisfaction, the focus must be on continuous improvement in the quality of all products, processes and services. The organization and its suppliers must strive to examine and improve all of the systems by which to get things done. By making suppliers an integral part of the overall quality process, it's possible to build better products right from the start.

. Supplier Collaboration

Success in achieving Total Quality depends on viewing suppliers as a valuable extension of own business. The goal in purchasing is to build long-term business relationships with a select group of supplier who share total quality vision by consistently delivering the highest quality products and services. Ultimately, this focus means selecting fewer but better suppliers.

. Availability

Suppliers must be responsive to the rapid changes in design and manufacturing strategies. Reducing the time it takes to deliver materials and services to manufacturing facilities helps to bring products to market sooner and to reduce inventory exposure for both the organization and suppliers. The speed of technological changes drives the need for reduced cycle times, shorter lead-times, 100% defect-free materials, and on-time delivery.

4. Other Objectives

Ø To support the organization operations with an uninterrupted flow of materials and services.

Ø To Purchase competitively and wisely. This includes two distinct considerations to purchase competitively involves keeping abreast of the forces of supply and demand that regulate prices and availability of materials and services; to purchase wisely involves a constant search for better values that yield the best combination of price, quality and service.

Ø To develop and maintain reliable sources of supply.

Ø To develop good and continuing supplier relationships. Under such relationships the myriad of problems that inevitably arise between buyer and seller are readily solved.

Ø To achieve maximum integration with other departments of the firm. This requires understanding the needs of other departments in order that these needs can be translated into support actions.

Ø To train and develop highly competent personnel who are motivated to help the firm, as well as their department, meet its objectives.

Ø To develop policies and procedures which permit accomplishment of the preceding six objectives at the lowest possible operating cost.

iii. Purchasing Procedures

a. Purchase Requisition

Purchase requisition is a step used to stimulate purchasing of materials by purchasers. It will emanate directly from the user or from the stores or inventory control. Organizations have policies on how purchase requisitions will be originated. Purchase requisitions for stock items will be originated from the stores or inventory control. Purchase requisition for no-stock items may be originated from the users. Purchase requisition is usually made by using a requisition form, which contains several information such as the name and indentification of materials, quantity, the quality in terms of specification, the time it is needed, the user, recommended supplier.

b. Verification of purchase requisition

When purchasing receive purchase requisition, it will verify the following

· Is the requisition properly filled and is it clear?

· Is it authorized?

· Is it within the budget?

c. Request for Quotation

Possible suppliers are invited to bid through request for quotation. This could be through any communication way.

d. Evaluation and selection of Suppliers

When suppliers quote and return quotations evaluation of suppliers will be made. Evaluation is made on the basis of the criteria set in the request for proposal (RFP).

The criteria include quality factors, delivery factor, quantity, service, etc. each factor has weight based on its importance and there are methods of supplier evaluation including a weighted point method and cost ratio method.

e. Purchase order / contract

A purchase order can be made to the best supplier you have been selected. Purchase4 order can be make in a number of coped depending on te parties entitled to receive it.

f. Follow-up and expedition

Once purchase order has been made purchasing may not need to wait until materials are sent. It may require follow-up. Follow-up is contacting a supplier in order to ensure that he is taking measures to send the materials on the agreed upon time without delay.

Expediting - sometimes supplier may need materials to be delivered earlier than agreed upon date. This is requirement to enhance the delivery. This requires separate agreement with the supplier since he is not obliged in the contract.

g. Receiving, inspecting and storing

When materials are sent by the supplier they are received, inspected, and stored. In a very small organization all these activites can be done by one unit. In big organizational there may be separate units.

Receiving deals usually with general make-up of quantities, packages, damages, overages and shortages.

Inspection is concerned with find out whether the materials meet the specifications such as quality. Inspection procedures and methods are applied such as the use of census or sample.

Store make the final receipt and place the materials in stores. The receiving and stores makes the respective reports.

h. Payment

Payment will be made by finance or accounts after comparing the purchase order in various reports and assuring that the supplier has fulfilled the requirements of the agreement.

i. Post Purchase Evaluation

Post purchase evaluation is made to find out whether the supplier has supplied the materials according to the agreement and whether the materials purchased have satisfied the needs of the users. This is very crucial for future decision of purchasing of the same material and in considering the supplier.

iv. Considerations in Purchasing

There are several considerations that will be made during purchasing, which includes

a. Organization of Buying

Centralized Vs Decentralized Purchasing

Ø Decentralized purchasing

Individual departments or separate locations handle their own purchasing requirements.

Advantages

· Direct responsibility for profit centers

· Stronger customer orientation towards internal user

· Less bureaucratic purchasing procedures

· Direct communication with suppliers

Disadvantages

· Dispersed purchasing power, lack of economies of scale

· No uniform attitude towards suppliers

· Scattered market research

· Limited possibilities for building up specific expertise on purchasing and materials

· Probably different commercial purchase conditions for different BU's

Ø Centralized Purchasing

In basic terms, centralized purchasing simply describes the type of organization in which there is some form of centralized control over the purchasing function.

Ø Centralized versus decentralized purchasing some criteria to consider

· Commonality of purchase requirements. The greater the commonality of the purchased products required, the more benefits can be obtained from a centralized or co-ordinated approach.

· Geographic location. When the BU's are situated in different countries or regions this may hamper co-ordination efforts considerably because of differences in trading, management practices and culture.

· Supply Market structure. A company can be confronted with one or a limited number of suppliers in some of its supply markets. In such a situation a co-ordinated purchasing approach makes sense to adopt for a better negotiating position vis a vis these powerful suppliers.

· Savings Potential. Prices of some types of raw materials are sensible to volume in such situation buying higher volumes may immediately lead to cost savings

· Expertise required. Sometimes very specific knowledge is required for effective buying, as in the purchase of high-tech semiconductors and microchips. In such cases purchasing is centralized.

· Price fluctuations. If materials (e.g. fruit juices, coffee) prices are highly sensitive to the political and economic climate, a centralized purchasing organization is favored.

· Customer demands. Sometimes a customer will dictate to the manufacturer which products to purchase (e.g. aircraft industries). This practice will clearly obstruct any efforts aimed at purchasing co-ordination.

b. Quality Considerations

What is Quality?

"... a perception of class, excellence, a type of referential standard or (in definition) reflecting the needs and expectations of the customer."

A range of eminent champions have contributed to definitions relating to what quality is

o A product or services nature or features that reflect capacity to satisfy express or implied statements of need (Deming)

o Conformance to requirements (Crosby)

o Fitness for purpose or use (Juran)

o Product and service characteristics as offered by design, marketing, manufacture, maintenance and service that meet customer expectations (Feigenbaum)

o Owner satisfaction - the perceived quality of some products or services as interpreted by owners. An expensive to maintain, unreliable car may offer a high status experience if it is, say, a 61 Thunderbird. A set of wine glasses purchased from Harrods may provide more satisfaction than similar ones from a street trader -albeit that the Knights bridge crystal was more expensive.

o Oakland (15) suggests perceivable (and measurable) move from mere satisfaction by a customer to delight and reputation for excellence. Customer expectations are consistently met with an after-glow of well-being.

o In materials management quality can be defined in terms of specifications (such as Chemical, Physical, Performance, and Method Specification and Blue print) and standards.

A Policy for Quality

In any business a clear policy framework is needed to guide the practices and behaviours essential for quality achievement throughout the system as a whole. The policy has to be properly and consistently implemented by all concerned.

Quality to meet requirements and delight, calls for clear understanding of

1. What customers really want and like. A marketing orientation and market research is essential.

. All players in the quality chain having the scope to contribute creatively. Continuous quality improvement (CQI) needs to be embedded into personal commitments and behaviours - from top to bottom throughout an organisation. This applies to relationships along internal as well as external supply chains. The adoption of quality circles is just one element in a CQI process.

Quality Control (QC) vs. Quality Assurance (QA)

Inspection is a QC process. It generally involves inspectors who check for defects in products or services. A statistical sample is inspected e.g. some chocolates from a batch. An inspector may be stationed at the end of an assembly line testing for defects. In a bank an inspector may infiltrate as a customer to vet how counter staff are handling clients.

Inspection doesnt stop poor products being made. Action only after inspection is insufficient. Why? Quality cannot be inspected in; it must be planned, designed and manufactured.

ISO 000 (000) and TQM

· More than Quality Control

o Quality assurance is more than quality control. Assurance encompasses control beyond just inspection and testing. QA requires a structured approach to prevention of quality problems through planned and systematic activities specification, review, monitoring and documentation. QA demands a quality management system.

· ISO 000

o ISO000 is the internationally agreed set of standards for the design, installation and operation of quality management systems. The standards have a history dating back to 168 (and with earlier antecedents). ISO 001 000 recently replaced the ISO 001 (14) standard and ISO 00 and 00 (14) standards are discontinued. The 000 QMS standards define conformance, specification and consistency in quality monitoring and action.

· Total Quality Management

o TQM is an approach to improving the competitiveness, effectiveness and flexibility of a whole organisation...a way of planning, organising and understanding each activity and it depends on each individual at each level. TQM is a way of ... bringing everyone into the processes of improvement. Oakland 15 pp 18

A TQM approach promotes quality as a strategic imperative for the business. Introduction and maintenance of a comprehensive programme of TQM will require re-evaluation of the way in which organisational members address the quality of their work - their production and service processes. TQM is underpinned by a policy commitment covering

o A change or re-emphasis in organisation culture with all staff encouraged to practice positive, initiative taking behaviours and adopt a prevention and continuous quality improvement ethic.

o Quality improvement teams/circles and use of a range of methods and techniques (tools) to structure and support a TQM programmes objectives and tasks.

TQM Doctrine - still a ubiquitous, powerful, driving force.

Although specific problems may have been experienced with corporate wide TQM programmes, TQM thinking and approaches remain a powerful force in business today.

o The language of TQM drives a quality movement" as an imperative, rhetorical (persuasive) language.

o The doctrine authorises management to drive business practice as a response to the demands of competitiveness and customer-orientation.

o The vocabulary of TQM, competitiveness and customer-orientation is complementary.

c. Types of Purchasing

Ø Materials Requirement Planning

Materials requirement planning (MRP) is widely used in manufacturing and construction businesses. Once a manufacturer has established its production schedule for the coming 6 or 1 months, purchasing can then order and schedule supplies. Quantity and timing requirements are dependent upon the production schedule. Thousands of items, all with variable lead times, often are involved in a production process. The starting point is the master production schedule detailing what will be produced and when. This schedule is then exploded into a bill of materials, a detailed recipe of parts and materials. It provides precise delivery dates and quantities for each component in the recipe. If components arrive any later, production may be stopped. If they arrive any sooner, there may not be space available to store them. Ideally an MRP system runs on a Just in Time basis with no buffer stocks.

Ø Just in Time (JIT)

JIT is not a technique. Its a management philosophy, now adopted by many successful manufacturing businesses, which aims to bring certainty and smoothness to the flow of materials through the supply chain, and to eliminate wasteful practices such as holding safety stocks. Businesses hold stocks because of uncertainty, either about the future level of demand or about the lead-time to manufacture or replenish stocks. As well as coping with extra demand, buffer or safety stocks are held to cover an unexpected extension of lead times or to carry if a supplier delivers a poor quality batch. The more unreliable a supplier, the bigger a safety stocks need to be.

· What is trying to develop with a JIT approach is a network of quality-assured supply partners who can deliver the right quantity to the right place at the right time, every time. The delivery point may be to a retail outlet or it may be to a production line. Suppliers are delivered against an agreed schedule with absolute certainty on the day they are required, rendering expensive safety stocks redundant. Working towards JIT will make the entire business more competitive, for its implications spread far beyond purchasing and stock management.

d. Legal and Ethical Considerations

The purchaser's action in purchasing materials is governed by the law. The purchaser creates legal and binding commitments between the company and suppliers. Therefore knowledge of the law becomes and important requirement of purchaser. Litigation is both costly and of uncertain outcomes and be avoided except as a last resort. There are many legal issues that must be considered in purchasing

1. Contract

No legal purchase contract will arise until offer and acceptance is made between the two parties. A contract is completed when the supplier makes quotation and purchaser accepts the offer through such as purchase order or contract signature within a specified period of time.

. Cancellation of contract

Once a contract is made it is not allowed to cancel the contract in favour of one party. Cancellation of a contract in favour of one party cause financial and other loses on the other party and becomes illegal.

Conditions that one party has the right to cancel the contract

§ Default when one of the party fail to perform to the terms and conditions of the contract

§ Force majure when situations are beyond control such as disasters, earthquake, war, etc.

. Shipping Terms/ Trade Terms

Shipping terms tells us

§ When the legal title of ownership passes from supplier to the purchaser?

§ Who is responsible for freight?

§ Who has the right to claim for damage in case of damage?

e. Supplier Evaluation

As a matter of good procurement practice, periodical evaluation of all major suppliers on the basis of actual performance as compared to promised delivery dates, their ability to meet rush requirements, the number of rejects due to poor quality, and adherence to purchase order prices is essential. Subsequent buying decisions are strongly influenced by this evaluation. It does also have an active cost reduction and savings program. Thus, the ability to give and maintain low prices, combined with consistent quality and service, is of great importance in selection of suppliers.

There are two major ways of evaluating suppliers

1. Weighted Point Method

§ In the weighted point method, purchase set criteria against which they can evaluate the performance of the supplier. Criteria may include quality, delivery, and price.

. Cost-Ratio Method

§ The cost ratio method relates all identifiable purchasing costs including receiving to the value of total purchase. The higher the ratio of cost, the lower is the rating and selection. Quality, delivery, service, and price are the usual factors used in cost-ratio method.

f. International Buying

Ø Initial Foreign Purchases the easiest way for buyers to start making foreign purchases is for them to place initial orders wit a trading company orj an important merchant. Trading companies are large organizations that deal in imported and exported products of all types. The trading company guarantees quality, and it takes care of all the necessary documentation. Import merchants buy and inventor commodities for their own account, assume all importing risks, take care of all needed documentation, and sell through their own outlets.

Ø Unique Considerations in foreign Purchasing

1. Product categories international purchases of raw materials involve considerations different from those involved in purchases of components, subassemblies, and operating supplies.

. Distance between supplier and buyer the greater this distance, the more difficult it is to get satisfactory service and economical transportation.

. Government polices government regulations and trade polices frequently make international purchasing uneconomical or impractical.

4. Nationalism some buyers are totally prejudiced against making any foreign purchases.

5. Marketing pressures firms frequently differentiate their products to be sold in foreign markets; thus, domestic firms wanting these products are forced into foreign purchasing.

6. Supplier industry characteristics some suppliers are so powerful economically that they are capable of forcing their customers deal with domestic suppliers.

7. Buying firm characteristics some firms grow so fast that they outgrow the resources of domestic suppliers; thus they are forced to use foreign suppliers.

Ø Potential Difficulties in International Buying

Reduced tariffs, trade agreements, and the formation of free trade regions have resulted in worldwide competition and reduced prices for many materials. Nonetheless, buying in international markets presents unique situations one does not encounter when buying locally. A brief overview of some of the more difficult foreign buying situation follows

o Communications not only must the buyer and seller be able to communicate clearly in a common language, but the buyer must also understand the culture and the customs of the foreign country in which he or she is buying. Only this type of perceptiveness can give the buyer an insight into matters such as the important elements of business etiquette in the seller's country, the capabilities of the foreign country's selling agents, their honesty, their intention of keeping contract commitments, their political stability, and the specific products they produce at low unit costs.

o Financial, Legal, and Related Issues Potential difficulties in these categories, to cite some of the more important ones, arise from factors such as export-import license requirements, currency differences, non tariffs barriers, laws and ethics, exchange restraints, documentation requirements, payment terms, government controls, and transportation facilities.

Buyers and sellers work in different legal systems, and the laws affecting purchasing activities are different in each country. Consequently, the terns used in negations and the methods for setting disagreements or disputes must be explicitly defined.

Financing foreign purchases involves matters such as knowledge of currency exchange rates and documentation requirements, including bills of lading, invoices, certificates of origin, weight certificates, analysis certificates, insurance policies, and the marking of packages. Payments are another matter, including such things as terms of payment, letter payments, letters of credit, and drafts. Each of these financial issues requires decisions, which should stem from solid financial expertise.

o Quality the principal difficulties focus on two dominant factors (1) a scarcity of international standards, () the real possibility that foreign products entail greater obsolescence risks and longer corrective cycles for design changes.

o Lead Time because of the larger number of variables involved in foreign purchasing activities additional lead times, which traditionally exceed thirty days, must be considered in planning foreign purchases.

o Selecting Foreign Suppliers for foreign products and materials, buyers must search out desirable suppliers. For large dollar/birr volume and highly technical purchases, visits to selected foreign suppliers' plants are usually a necessity.

c. Inventory Control

Inventory incurs costs, ties up working capital, it consumes space and must be managed in and out. Stocks can deteriorate or get stolen. Most operations, capacity planning and scheduling, depend on inventory. Stocks serve to smooth out timing gaps in the rates of supply and demand. Inventory offers insurance and good planning/ control can minimise the associated costs and satisfy efficiency/effectiveness requirements.

In order to manage stock effectively, firms must know how much it have, its value, and where and how it is stored. Some of this is about information systems ('Information handling'); some is about analysing the physical storage, which interacts closely with materials handling systems ('Materials handling'). It must also know what inventory costs. That includes

Ø Carrying costs. In addition to the interest on the working capital tied up, there are the costs of storage space, stores staff, handling, deterioration, loss through damage or pilferage, obsolescence (particularly important in retail clothing and electronics), and insurance.

Ø Opportunity costs. Stock is normally unproductive capital. Carrying it restricts other investments you could have made with the same money.

Ø Stock-out costs. In retailing, if an item is out of stock it could mean a sale is lost. In manufacturing, for the want of a spare part for a machine tool, production could be halted. A shortage of a raw material could mean using a more expensive substitute.

The costs above suggest trade-offs between the factors. A few large orders mean low purchase costs but high stock costs; many small orders mean low stock costs but high purchase costs. High buffer stocks mean low stock-out costs but high stock carrying costs. Firms need to strike the right balance between these various factors.

i. Out-of-stock situations

Operations mostly depend on stock. Raw materials shortage in manufacturing means halting production, rescheduling to make something that has raw materials or quick action to secure alternative supply.

Obviously average inventory for a stock item is represented by half the stock. A replenishment delivery is received (Q) and is added to any remaining stock. In an out of stock situation some of it may indeed be allocated already to outstanding (waiting) orders. The stock is now issued to jobs and orders and steadily depletes.

A personal computer assembly line that runs out of memory chips must stop; if a Wimbledon runs out of strawberries might perhaps change to peaches. If a paper supplier is hit by strike action urgent approaches will be made to other suppliers.

If finished goods are out of stock, or raw materials or consumables shortage affects the customer (sorry, the soup is off today) then customers may go off elsewhere, orders may be cancelled. Loss of goodwill means that competitors develop a relationship with your customer. All stock outs involve costs.

ii. Costs of Inventory

Costs are tied up in the inventory itself and in ordering and carrying the stock.

Ø Holding costs

· Expressed as a % of stock value and may be 15-0 % per annum.

o Cost of capital tied up in inventory (the opportunity cost of money).

o Storage costs space, equipment, warehouse and stores staff, services etc often 5-10 % of stock value per annum.

o Stock losses/wastage (legitimate or otherwise). Theft, accidental damage, stock exceeding its shelf life, and stock obsolescence and write-offs. How much depends upon the goods (perishables, rust, aging designs) but the write-off level will usually be greater than zero.

Ø Acquisition/ordering costs

Costs arise from ordering/acquiring goods regardless of the actual value of the goods. In both making to stock and making to order, stock acquisition costs are incurred. Replenishment and purchasing administration paid for. It may take a skilled operator an hour to set up equipment for a new order or scheduled batch. Material may be wasted in the set up process. On completion of the job, equipment must be cleaned and tools put away. The inventory associated set-up costs include labour, material wastage, associated loss of production time collecting or waiting for stores, paperwork and administration. The set-up cost may easily be $45-75 irrespective of the order or batch size.

The purchasing order processing costs include receiving the goods, delivery for large or small orders and invoice processing. Precise costs per ordered unit are often elusive, but the staff and overhead costs are significant. In actual terms £40 may be incurred to initiate and process one purchase order.

Ad hoc purchasing must be compared with long-term contracts involving regular deliveries perhaps with just-in-time supply or amounts that the operation can call off from a supply agreement over, say, a quarter. There are costs in

o Researching and negotiating the supply contract (requires a expenses of its own given the specialist nature. A whole team may be involved with travel and hotel costs)

o Processing each consignment (packaging, bill of lading, insurance, transport planning etc).

iii. Economic order quantity (EOQ)

We could buy-in, or make for stock either a few large orders or frequent small orders for a given usage. Few big orders involve low acquisition and high holding costs. Conversely many small orders result in low holding and high acquisition costs.

Purchasing an economic order quantity (a.k.a. economic batch quantity, economic lot size or EOQ) seeks to reconcile ordering and holding costs to obtain an optimum order size.

Therefore Total cost = Ch + Co

These relationships can be seen in the graphic representation of EOQ.

The EOQ is found at the lowest point on the total cost curve. Here the order size optimises the cost of stockholding with the cost of acquisition. The equation is

iv. Inventory Control Systems

It is important to understand systems of inventory management. As demand and lead times vary we can order fixed quantities of stock at variable times or order variable quantities at fixed times. Each has implications for safety stock, operational responsiveness, the level of risk involved given variable demand and supply and security. Many factories will use a two-bin replenishment system. Stock records systems; computerised more often than not today, provide move detailed control over stock levels, issues and receipts. They are essential to stores management. The data content and flows of such systems are needed by just-in-time methods. It must be aware also that the records say we have 5 in the warehouse but only three can be found and one of these is damaged.

Ø Pareto (ABC) Analysis

Pareto analysis (a.k.a. ABC analysis or 80/0 rule) can be used to classify stock groups. Stock items are ranked in descending order of usage value, and plotted on a cumulative frequency curve. it is common to find that 0% of items account for 80 % of usage value, the next 0% has 15% of value. The final 50% have 5% of value.

ABC or Pareto analysis points the way to where control efforts are best directed. Judgment is needed on critical inventory items or security matters that Pareto analysis in itself does not reveal.

Ø Safety stock and service levels

We may run out of stock because of a re-supply delay or higher than anticipated usage. If we can predict demand then we merely place EOQ orders on time.

But firms risk a stock-out with unpredictable demand, usage and resupply. So introducing a safety or buffer stock reduces the risks of variable demand/lead time.

Ø Lead-time

o The time between replenishment need arising and new deliveries being ready for use. It includes e.g. time to detect then authorise replenishment

o Establish supplier contact and complete admin/paperwork

o Obtain, produce and have the goods delivered

o Goods inwards/receiving and quality checking time

Ø Service Levels

Rather than guarantee 100% stock availability for any foreseeable need, inventory managers would normally agree a inventory service level (% probability of stock availability to meet demand). This mediates the estimated costs of stock-outs with the cost of carrying a safety reserve. If demand and lead times are normally distributed, the safety stock formula is

§ Safety stock levels

Calculating safety stocks requires understanding of demand and lead-time. Assuming that these are normally distributed then

Safety stock = (L Dv+D Lv)

L = mean lead time, D = mean demand (in the lead time) Lvar = variance of lead time, Dvar = variance of demand and

For a safety stock level in a service agreement, an Sdev (standard deviation) value of 1.6 gives 5% stock availability and . gives %.

The controllable aspects of lead-time should be investigated. It is seldom normally distributed and improved control over the length and variability of lead-time will reduce the need to maintain safety stocks.

d. Receiving, Inspection and Storing

Deliveries can usually be anticipated because of shipment notices, delivery dates on requisitions, or other notifications, and preparations should consequently be made to receive the material. Receiving personnel should be ready to inspect the material, storerooms should be ready to receive the material, and the necessary arrangements for working parties should be made well in advance so that once the anticipated material arrives, it maybe stored immediately to prevent temperature fluctuations. Such fluctuations will reduce the quality and storage life of the materials.

Ø Receiving

Many manufacturers lack clear documentation of receipt of shipments. This can cause problems when the business has to prove that there was a shortage in shipment or that the shipment does not meet quality specifications, or when other problems exist.

Upon receiving purchased goods or even services from a supplier, it is important that the shipment is checked to make sure that the correct quantity and quality was received. A receiving report should immediately be completed which indicates

o The date the material was received or service was performed

o Whether the delivery was on time

o The quantity of material received and whether any discrepancies exist when compared with the packing slip

o Whether the quality of the material meets specifications

o The names of the personnel who performed these checks

This receiving report can be of great help to the bookkeeper in maintaining accurate records, and when paying the bills.

Ø Inspection

It is important, upon receiving a shipment, to make sure that the material meets quality specifications. If it is of great importance that no defects in quality exist, you will probably want to run a quality check on each item of the entire shipment.

If, in your manufacturing process, you are able to detect defective materials, and it is clear that the problem lies with the supplier, then the incoming quality check can be limited to assuring that there is no massive quality problem which would disrupt your production.

In some cases, however, defective material could pass through manufacturing operations unnoticed, or a problem in production could be the fault of your people. In such situations, it is wise to conduct a quality check of materials, upon receiving the shipment.

However, since checking items against design specifications can be quite time consuming and expensive, it is rarely necessary to run a quality check on all items received.

Instead, spot checks on quality can be made on a small representative portion of the shipment. The reasoning behind spot checks is that if some of the material is defective, then you should have a fairly good chance of finding some defects if you sample items at random. Thus, you might pick some material from different places in the shipment. In the case of several packages, you might select a few pieces from the top of one package, from the bottom of another one, from the sides of a third one, etc., and run quality checks on this material instead of on the whole shipment.

Ø Store

There are many activities under stores including identification, stores counting (stock taking), stores accounting, materials handling, classification of materials, etc.

e. Materials Handling

Within a node - a warehouse, a plant, a retail store - goods have to be moved between incoming transport, storage, processes, and outgoing transport. The spectrum of available systems ranges from one person with strong arms through the supermarket trolley (in its way a revolutionary technology) to fully automated systems incorporating robot order picking and automated guided vehicles (AGVs). Most handling systems, and the packaging adopted by suppliers, are geared to supplier-warehouse-process transactions. In fact increasing numbers of businesses are moving towards JIT deliveries once supplier quality is sorted out, incoming goods can go directly into the process, without inspection or spending any time in a store.

This can have important implications for handling and packing - for instance, shrink-wrapped pallet loads of small parts are unlikely to suit JIT deliveries where the processes are based on assembly stations. A smaller load unit, with no unpacking needed, might be the right answer, at the price of higher-cost machinery to unload from the suppliers truck into robot carts. Bar-coding gives instant recognition of individual items to stock management systems - and to production systems.

Analysing the effectiveness of the existing handling systems involves assessing their cost and appropriateness to the rest of the firm's operations. It also means knowing something about the characteristics of different systems. The key factors for assessing a materials handling technology are

§ The physical characteristics of loads

§ The number of loads to be moved

§ The distance to be moved

§ Speed of movement required.

f. Transportation

Transportation provides access to natural resources and promotes trade, allowing a nation to accumulate wealth and power. Transportation is usually classified by the medium in which the movement occurs, such as by land, air, water, or pipeline. Within each of the first three media, many different methods are used to move people and goods from place to place. Pipelines are used mainly to transport liquids or gases over long distances.

g. Value Analysis/Value Engineering

The terms value analysis/value engineering originated in the early days of development of the techniques. The first approach was rather than reduce costs, to increase values. Hence the need to analyses value. Value Analysis is currently used to describe the application of the techniques to existing products or services. Value Engineering is used when the techniques are applied to projected products or services. Value Analysis/Value Engineering can be applied with equal success to any other cost generating areas.

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