Management Consulting/Material Management

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Question
Case 3 (10 Marks)
Pool Stores
(A case of stores management in material management)
The National Authority for Civil Aviation, NACA, is a public sector undertaking reporting to the Ministry of
Civil Aviation, Government of India. It is responsible for maintaining the facilities and services at all the civil
airfields in the country. It offers these facilities/services to aircrafts owned by various airlines, private aeroplane
owners, government aircrafts, etc., on payment basis. The facilities include runways, taxi tracks for the aircraft to
operate and aprons for these to be parked. NACA also provides lights for the aircraft to take off and land at night
and in bad weather. Air traffic control and communications for the same are needed for the safe operation of the
aircraft. Similarly, aids for aircrafts to operate and navigate to their destinations are installed and operated by
NACA. Majority of the important facilities are provided by modern electronic equipment. Terminal buildings,
cargo/baggage handling facilities, etc., are important requirements. NACA not only has to install these facilities,
but also maintain these. NACA is responsible for 72 airfields. An airfield is categorized as A, B or C, depending
on the facilities available there. An important consideration for awarding category to an airfield is the time
required for all the facilities to come on in an emergency such as power failure, breakdown/ failure of the
equipment, etc. Important facilities are, therefore, duplicated. One system is ON and working, while the second
system is on standby. The role of the two systems is changed at suitable intervals. The standby system has to
quickly come ON in the event of the failure of the system that is working. The same applies to the power supply.
This highlights the importance of keeping the facilities available at all times.
All the airfields in India are not under the charge of NACA. Some airfields are looked after by the Indian Air
Force, a few belong to private or public sector companies and many airfields, constructed during the Second
World War, are lying abandoned. Air Force officials must maintain their airfields in Al condition since the speeds
of present generation aircraft and the requirements of defence operations call for airfield facilities to be available
virtually without a break. This requires a high quantum of maintenance spares. The swift advances in technology,
‘especially in electronics, have reduced the chances of breakdown; at the same time, the cost of the spares has sky
rocketed.
Mr. S. Rao took over as joint Secretary Expenditure, Government of India, and was disturbed by NACA’s heavy
maintenance inventory. He suggested that non-moving stores be identified and was truly appalled to learn that 67
per cent of maintenance stores—totalling to 2012 type of items—had not been used during the previous 40
months. He approached Mr. U.N. Rao, Chairman, NACA, to review the situation since these stores had blocked
Rs 902 crore. Mr. U.N. Rao wrote back that he could not take chances with Rs 400 to 600 crore worth modern
airliners, which carried over 250 human lives. He clarified that these stores should be treated as Assurance
Spares.
Mr. S. Rao met Mrs. Shashi Jam, Joint Secretary in charge of Air Force Finance at a conference and persuaded
her to obtain the corresponding figures of non-moving stores for airfield maintenance for the air force. It
eventually emerged that the Air Force managed 54 airfields and had 2007 non-moving maintenance spares,
costing Rs 777 crore. The Air Force also suggested that these stores should be treated as Assurance Stores and not
as non-moving maintenance spares. These provide the much-needed protection against stock-out during an
emergency. This was extremely important since many of these spares were sourced from foreign suppliers and
hence had a long lead-time.
The two Joint Secretaries got the lists of 2012 and 2007 nonmoving airfield maintenance spares from NACA and
the Indian Air Force. They approached a mature, retired, senior Air Force engineer, Air Marshal Kuldip Singh, to
suggest ways and means of reducing these dead inventories. Air Marshal Kuldip Singh’s analysis revealed that:
1. 929 types of items were common in the two lists.
2. Greater commonality could be achieved if this aspect was given due weightage while purchasing the
capital systems.
3. Indigenous development and manufacture of these equipment would automatically achieve the aim of
commonality, since both NACA and Air Force will buy their requirements from Indian manufacturers.
This trend was increasing very fast.
4. Many NACA and Air Force airfields are located fairly close to each other.
5. Facilities for ‘airlifting the stores are easily available to NACA and Air Force at their airfields.
6. Each airfield had a main and a standby system. Maintenance spares would be required to repair the
standby system. The failure rate of the current generation systems has been coming down and the
philosophy of repair by replacement has minimized the repair time.
7. Many foreign suppliers of the capital equipment have set up spares holding depots, which are open all the
time in order to meet the urgent requirements of their customers.
The Air Marshal, therefore, suggested that the Air Force and NACA should set up ‘Pool Stores’. These
stores should store common items, especially the non-moving maintenance spares. These Pool Stores
should meet the demands of all the airfields within a radius of 150—200 km. This should result in
maintenance spares being available at the airfield that requires these spares within 1 to 1.5 hours. The Pool
Stores could be managed by NACA and the Air Force in the ratio of 4: 3 or by a newly-created
government agency.
Recommendations made by Air Marshal Kuldip Singh were turned down both by NACA and the Air
Force. It was pleaded that this concept would fail during emergencies, especially military operations,
when the bombs were falling on the airfield. You have been given the powers to decide. What will you
decide and why?
Question
Q.1) Study & Analyze the case with ref to the principles of materials management?

Answer
THE  COMPANY  SHOULD  ADAPT  AND  FOLLOW  THE  
PRINCIPLES  OF MATERIAL MANAGEMENT
         
To get
 1. The Right quality
 2. Right quantity of supplies
 3. At the Right time
 4. At the Right place
 5. For the Right cost
PURPOSE OF MATERIAL MANAGEMENT
•   To gain economy in purchasing
•   To satisfy the  demand during period of replenishment
•   To carry reserve stock to avoid stock out
•   To stabilize fluctuations in consumption
•   To provide  reasonable level of client services
Objective of material management

Primary
•   Right price
•   High turnover
•   Low procurement
•   & storage cost
•   Continuity of supply
•   Consistency in quality
•   Good supplier relations
•   Development of personnel
•   Good information system
Secondary
•   Forecasting
•   Inter-departmental harmony
•   Product improvement
•   Standardization
•   Make or buy decision
•   New materials & products
•   Favorable reciprocal relationships

Economy in material management
•   Containing the costs  
•   Instilling efficiency in all activities
Four basic needs of Material management
1.   To have adequate materials on hand when needed
2.   To pay the lowest possible prices, consistent with quality and value requirement for purchases materials
3.   To minimize the inventory investment
4.   To operate efficiently
Basic principles of material management   
1.   Effective management & supervision
It depends on managerial functions of
•   Planning
•   Organizing
•   Staffing
•   Directing
•   Controlling
•   Reporting
•   Budgeting
2.   Sound purchasing methods
3.Skillful & hard poised negotiations
4.Effective purchase system
5.Should be simple
6.Must not increase other costs
7.Simple inventory control programme
Elements of material management
1.   Demand estimation
2.   Identify the needed items
3.   Calculate from the trends in Consumption   during last 2 years.
4.   Review with resource constraints
Functional areas of material management
1. Purchasing
2. Central service supply
3. Central stores
4. The print shops
PROCUREMENT
Procurement cycle
•   Review selection
•   Determine needed quantities
•   Reconcile needs & funds
•   Choose procurement method
•   Select suppliers
•   Specify contract terms
•   Monitor order status
•   Receipt & inspection
Objectives of procurement system
•   Acquire needed supplies as inexpensively as possible
•   Obtain high quality supplies
•   Assure prompt & dependable delivery
•   Distribute the procurement workload to avoid period of idleness & overwork
•   Optimize inventory management through scientific   procurement procedures
•    First technical bid is opened & short listed
•   Then financial bid of selected companies are opened & lowest is selected  
•   Delayed tenders & late tenders are not accepted. But if, in case of delayed tenders, if the rate quoted is very less, then it can be accepted.
•   Quotations are opened in presence of indenting department, accounts & authorized persons of party
•   Validity of tenders – generally 90 days
Negotiated procurement
Buyer approaches selected potential Suppliers & bargain directly
Used in long time supply contracts
Direct procurement
Purchased from single supplier, at his quoted price
Prices may be high
Reserved for proprietary materials, or low priced, small quantity & emergency purchases
Points to remember while purchasing
•   Proper specification
•   Invite quotations from reputed firms
•   Comparison of offers based on basic price, freight & insurance, taxes and levies
•   Quantity & payment discounts
•   Payment terms
•   Delivery period, guarantee
•   Vendor reputation
(reliability, technical capabilities, Convenience, Availability, after-sales service, sales assistance)
•   Short listing for better negotiation terms
•   Seek order acknowledgement
Storage
•   Store must be of adequate space
•   Materials must be stored in an appropriate place
•    in a correct way
•   Group wise & alphabetical arrangement helps in
•   identification & retrieval
•   First-in, first-out principle to be followed
•   Monitor expiry date
•   Follow two bin or double shelf system, to avoid
•   Stock outs
•   Reserve bin should contain stock that will cover
•   lead time and a small safety stock
Issue & use
Can be centralized or decentralized
Inventory control
It means stocking adequate number and kind of stores, so that the materials are available whenever required and wherever required. Scientific inventory control results in optimal balance
Functions of inventory control
•   To provide maximum supply service, consistent with maximum efficiency & optimum investment.
•   To provide cushion between forecasted & actual demand for a material
Economic order of quantity
EOQ = Average Monthly Consumption X Lead Time [in months] + Buffer Stock – Stock on hand
•    Re-order level: stock level at which fresh order is placed.
•    Average consumption per day x lead time + buffer stock
•    Lead time: Duration time between placing an order & receipt of material
•    Ideal – 2 to 6 weeks.
•   ABC ANALYSIS
•   (ABC = Always Better Control)
•   This is based on cost criteria.
•   It helps to exercise selective control when confronted with large number of items it rationalizes the number of orders, number of items & reduce the inventory.
•   About 10 % of materials consume 70 % of resources
•   About 20 % of materials consume 20 % of resources
•   About 70 % of materials consume 10 % of resources
‘A’ ITEMS
Small in number, but consume large amount of resources
Must have:
•   Tight control
•   Rigid estimate of requirements
•   Strict & closer watch
•   Low safety stocks
•   Managed by top management
.
‘C’ ITEMS
Larger in number, but consume lesser amount of resources
Must have:
•   Ordinary control measures
•   Purchase based on usage estimates
•   High safety stocks
ABC analysis does not stress on items those are less costly but may be vital
•    Based on critical value & shortage cost of an item
–   It is a subjective analysis.
•   Items are classified into:
Vital:
•   Shortage cannot be tolerated.
Essential:
•   Shortage can be tolerated for a short period.
Desirable:
   Shortage will not adversely affect, but may be using more resources. These must be strictly Scrutinized  

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