Management Consulting/Material Management

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Question
Case-6 (10 Marks)
HAMCO
A case of Integrated Materials Management
Hindustan Aircraft Manufacturing Company (HAMCO) was an old multi-product multi-location company with
its headquarters in the south Indian city of Mangore. Golakh Nath Shetty, a young mechanical engineer,
graduated from Manchester in the UK. He had designed a simple aircraft as his summer vacation project. This
had fetched him an A plus grading and created a keen Interest in him in the aircraft design. Aircraft design and
manufacture was a new subject then and young Shetty studied a lot about aircraft during his spare time. He set up
a manufacturing unit in the garage of his father’s bungalow after returning to India. It was seen that this aircraft
had many buyers, young rich enthusiasts, flying clubs (which were just being set up in India), etc. The year was
1943. HAMCO was thus born. Some more aircraft were produced by HAMCO. All this did not fetch much
financial or commercial success for Golakh, but his reputation as an engineering genius spread far and wide. It
also earned him the title of Rai Bahadur from the government.
Rai Bahadur Shetty had to soon move to a bigger estate with a runway for testing his aircrafts. The financial
crunch caused due to these investments resulted in HAMCO taking up overhauling of big and expensive imported
cars. The company also purchased cheap war-used vehicles, overhauled and sold these at huge profits.
Rai Bahadur built the tools, jigs, fixtures measuring devices, etc., in house. These were based on his own design
and expertize. He would use items from his scrapyard for these requirements and the company learned the
philosophy of never throwing away anyscrap/unwanted material. The general thinking was, You never know
when this item may be needed: don’t scrap it.’ India’s independence, followed by the foreign exchange crunch
resulted in exponential growth of HAMCO. This also reinforced the popular belief of preserving all the materials
not presently needed. An item not needed today may prove to be a replacement for an imported item tomorrow;
thus saving foreign exchange.
HAMCO started the manufacture of more complex aircrafts under licence from foreign companies. Manufacture
of jet aircraft, helicopters, aero-engines, instruments fitted in the aircraft, electronic equipment needed in the
aircraft, etc., followed. Plants were set up at various locations for the manufacture of these products. Rat Bahadur
Shetty became an authority in aviation in India. He dropped the title of Rai Bahadur given by the British
Government and was soon awarded the Bharat Bhushan by the Government of India. Unfortunately, Golakh Nath
Shetty died early in 1963 and his only son Alok Shetty took over as the Chairman cum Managing Director (CMD)
of HAMCO. Young Alok was a Ph.D. in Commerce and MBA from the USA. Dr Shetty, as he preferred to be
addressed, soon realized that almost 40 per cent of premium space in all the company plants was taken up by
different types of stores. He ordered an evaluation and analysis of the inventory and was shocked to find that
imported raw materials purchased from the principals abroad had been lying in the stores for years after the
production of the main item/aircraft had been discontinued. Maintenance spares for plant and machinery alone
accounted for 40 per cent of the total working capital and a very high percentage of the total inventory. Within
seven months of his taking over, Dr Shetty ordered that all raw materials and components not used for over 18
months be sold. He ordered the maintenance inventory for the plant and machinery to be halved in one year and
so on. There were protests from various sections of the company and maintenance departments at many places
concealed the spares. This came to light and three maintenance chiefs were suspended from service. HAMCO
experienced its first strike. The Government of India was forced to nationalize the company since many of
HAMCO’S products were required for national defence, the public sector airlines, state governments, etc.
HAMCO was made into a Public Sector Undertaking (PSU) under the Ministry of Defence.
The PSU title helped HAMCO and it could dictate the prices to government departments and other PSUs. There
was no competitor to HAMCO within the country. Imports, even when cheaper than the prices of HAMCO, were
not allowed so as to conserve foreign exchange. The turnover and the profitability increased at a fast pace because
HAMCO started offering products on ‘Cost plus’ basis. Additional capital had to be injected by the government
almost every year to enable the required growth. Steep hike in the prices of the petroleum products, due to sudden
increase in the international prices of the crude oil, changed the scene substantially. Shortly, the government
started feeling the pinch. The funds were just not available. Questions began to be asked about the returns being
obtained from the PSUs where huge investments had been made by the national exchequer. 1-{AMCO became
very vulnerable, since the investments here were very heavy indeed. Finally, performance figures for the year
1986-87 shook the government. These were:
1. Turnover for the year Rs 634.1 crore
2. Profits for the year Rs 5.8 crore
3. Closing Inventory, i.e. at the
end of the year Rs 1346.8 crore
4. Inventory-carrying cost per year 20%
A consultant was engaged by the government to devise ways and means to bring down the inventory. His
important findings for this state of affairs were:
1. The culture of the company from the very beginning had been to keep the scarp and unnecessary items for
possible future use. This afforded some advantage when the company was small and Golakh Nath Shetty
was available, to use many items from the scrap innovatively.
2. The company has grown too fast and had not had time to adjust to the status of multi-product, multilocation
company; a premium institution of the country. The employees still thought like the workers of a
privately owned company.
3. HAMCO had six production divisions, which were responsible for all the manufacturing activity of the
company. Each division was headed by a General Manager or GM. Six Deputy General Managers or
DGMs (or equivalent level) were in charge of different functions of production, marketing, finance,
Administration and HRD, R&D, etc. They all reported to the GM. The divisions reported to the Corporate
Office at Mangalore.
4. There was no single person responsible for materials management function in the company. The con
sultants noted the organizational control of the following sections:
(a) Raw Materials and Scrap Stores, reported to Deputy General Manager Production, DGM-P.
(b) Materials Forecasting and Planning Depts reported to DGM-P
(c) Purchase (including vendor’s bill payment cell) reported to DGM-Finance.
(d) Inward goods inspection reported to Chief of Quality Assurance.
(e) Transportation reported to DGM-Administration and
HRD.
(f) Finished Goods Store reported to DGM-Marketing.
(g) Production Planning Group reported to DGM-P
(h) Import Substitution Cell reported to DGM-R&D.
(i) Contract Manager was based at the Corporate Office and reported to the Company Secretary.
The consultant recommended the creation of six posts of Deputy General Manager-Integrated Materials
Management, DGM-IMM; one in each production division. Another post of a General Manager 1MM was
suggested to be set up at the corporate office in India to provide functional guidance to the DGMs being
established in the productions divisions. At the first instant, DGM1MM should control the following
sections:
1. Materials Forecasting and Planning.
2. Purchase minus the vendor’s bills payment cell. The cell will continue to report to DGM-Finance.
3. Raw Materials Stores and Scrap Stores.
4.Finished Goods Stores.
5.Transportation.
Suitable chief managers from any of the depts, such as production, R&D, purchase and Stores, with a
minimum qualification of an engineering degree could apply to become a DGM-IMM. If selected, they
should undergo a four weeks’ training programme at the training college of the company before being
promoted and appointed as DGM-IMM at a production division. A GMIMM should be recruited from
outside to bring a fresh approach to the problem. A new stream of managers called materials managers
should be setup. Fresh engineering graduates be recruited and trained for nine months at the company’s
training college. They be thereafter posted to one of the five departments under the DGM-IMM’s at the
divisions. After three years of the fieldwork, these materials managers were to be brought back for four
weeks of training. At that stage, these materials managers be posted to production planning or import
substitution cells. These two departments should also be shifted so as to report to DGM-IMM. The
complete flow of materials from forecasting to planning stage onwards till the delivery of the finished
goods to the customers should be controlled by one manager, thereby creating the structure of Integrated
Materials Management. This would mean forecasting, planning, purchase, raw materials stores, flow of
materials through production facilities, finished goods and scrap stores and transportation would be part of
1MM. Vendor’s bills payment and inwards goods inspection should continue to be under finance and
quality assurance, respectively, so as to have some check on the purchases by independent agencies. A
contract manager should be available to all the production divisions from the corporate office. This was
due to the quantum of workload not justifying an independent manager at each division.
This proposal was presented by the consultant at a meeting of all the directors of the company, general
managers of the six production divisions and a representative of the ministry of defence. The discussions
lasted for eight hours and at times became acrimonious. The main objections to the proposals were:
1. Additional posts were being created, which would add to
overhead costs. Profits were already low, at about. 0.9 per cent and additional costs should be avoided.
2. Shifting of finished goods store away from the marketing department should be avoided. It could
hamper the efficient and quick supply of goods to the customers, especially those located abroad.
3. Transportation also looked after the conveyance for personnel including senior officers’ cars.
4. This was a theoretical concept and there was no guarantee that it would work in HAMCO and bring
down the inventory pf the company.
5. Shifting away the materials forecasting and planning, stores and production planning groups would
make DGM-P jobless.
The consultant responded by stating that even a 5 per cent reduction in inventory would save more than Rs
13 crore, which is more than double of the current level of profits. DGM-IMM would be head of a
function and a company employee. They can be given targets like all other managers and their
performance could be monitored. DGM-P would be responsible for production by maintaining and
operating all the production facilities at optimum efficiency. Finally, the proposal was accepted after some
arm twisting by the government representative. GM-IMM, 6 DGMs-IMM and 30 fresh engineering
graduates were recruited. Syllabi for the four weeks’ training programme and nine months’ course for the
freshers were formulated and training courses started. GM-IMM and DGMs-IMM became effective at
their posts in September 1987. The company set the target of bringing down the inventory by 7.5 per cent
by 31 March 1988.
Question
Q.1) Discuss the merits of the proposal of introducing the concept of IMM in HAMCO. Would you agree
that the apprehensions of the participants at the meeting were correct? Do you feel that the introduction of
IMM would achieve the target of 7.5 per cent of inventory reduction in six months? Give reasons to justify
your opinion.

Answer
Question:   Case-6 (10 Marks)
HAMCO
A case of Integrated Materials Management
Hindustan Aircraft Manufacturing Company (HAMCO) was an old multi-product multi-location company with
its headquarters in the south Indian city of Mangore. Golakh Nath Shetty, a young mechanical engineer,
graduated from Manchester in the UK. He had designed a simple aircraft as his summer vacation project. This
had fetched him an A plus grading and created a keen Interest in him in the aircraft design. Aircraft design and
manufacture was a new subject then and young Shetty studied a lot about aircraft during his spare time. He set up
a manufacturing unit in the garage of his father’s bungalow after returning to India. It was seen that this aircraft
had many buyers, young rich enthusiasts, flying clubs (which were just being set up in India), etc. The year was
1943. HAMCO was thus born. Some more aircraft were produced by HAMCO. All this did not fetch much
financial or commercial success for Golakh, but his reputation as an engineering genius spread far and wide. It
also earned him the title of Rai Bahadur from the government.
Rai Bahadur Shetty had to soon move to a bigger estate with a runway for testing his aircrafts. The financial
crunch caused due to these investments resulted in HAMCO taking up overhauling of big and expensive imported
cars. The company also purchased cheap war-used vehicles, overhauled and sold these at huge profits.
Rai Bahadur built the tools, jigs, fixtures measuring devices, etc., in house. These were based on his own design
and expertize. He would use items from his scrapyard for these requirements and the company learned the
philosophy of never throwing away anyscrap/unwanted material. The general thinking was, You never know
when this item may be needed: don’t scrap it.’ India’s independence, followed by the foreign exchange crunch
resulted in exponential growth of HAMCO. This also reinforced the popular belief of preserving all the materials
not presently needed. An item not needed today may prove to be a replacement for an imported item tomorrow;
thus saving foreign exchange.
HAMCO started the manufacture of more complex aircrafts under licence from foreign companies. Manufacture
of jet aircraft, helicopters, aero-engines, instruments fitted in the aircraft, electronic equipment needed in the
aircraft, etc., followed. Plants were set up at various locations for the manufacture of these products. Rat Bahadur
Shetty became an authority in aviation in India. He dropped the title of Rai Bahadur given by the British
Government and was soon awarded the Bharat Bhushan by the Government of India. Unfortunately, Golakh Nath
Shetty died early in 1963 and his only son Alok Shetty took over as the Chairman cum Managing Director (CMD)
of HAMCO. Young Alok was a Ph.D. in Commerce and MBA from the USA. Dr Shetty, as he preferred to be
addressed, soon realized that almost 40 per cent of premium space in all the company plants was taken up by
different types of stores. He ordered an evaluation and analysis of the inventory and was shocked to find that
imported raw materials purchased from the principals abroad had been lying in the stores for years after the
production of the main item/aircraft had been discontinued. Maintenance spares for plant and machinery alone
accounted for 40 per cent of the total working capital and a very high percentage of the total inventory. Within
seven months of his taking over, Dr Shetty ordered that all raw materials and components not used for over 18
months be sold. He ordered the maintenance inventory for the plant and machinery to be halved in one year and
so on. There were protests from various sections of the company and maintenance departments at many places
concealed the spares. This came to light and three maintenance chiefs were suspended from service. HAMCO
experienced its first strike. The Government of India was forced to nationalize the company since many of
HAMCO’S products were required for national defence, the public sector airlines, state governments, etc.
HAMCO was made into a Public Sector Undertaking (PSU) under the Ministry of Defence.
The PSU title helped HAMCO and it could dictate the prices to government departments and other PSUs. There
was no competitor to HAMCO within the country. Imports, even when cheaper than the prices of HAMCO, were
not allowed so as to conserve foreign exchange. The turnover and the profitability increased at a fast pace because
HAMCO started offering products on ‘Cost plus’ basis. Additional capital had to be injected by the government
almost every year to enable the required growth. Steep hike in the prices of the petroleum products, due to sudden
increase in the international prices of the crude oil, changed the scene substantially. Shortly, the government
started feeling the pinch. The funds were just not available. Questions began to be asked about the returns being
obtained from the PSUs where huge investments had been made by the national exchequer. 1-{AMCO became
very vulnerable, since the investments here were very heavy indeed. Finally, performance figures for the year
1986-87 shook the government. These were:
1. Turnover for the year Rs 634.1 crore
2. Profits for the year Rs 5.8 crore
3. Closing Inventory, i.e. at the
end of the year Rs 1346.8 crore
4. Inventory-carrying cost per year 20%
A consultant was engaged by the government to devise ways and means to bring down the inventory. His
important findings for this state of affairs were:
1. The culture of the company from the very beginning had been to keep the scarp and unnecessary items for
possible future use. This afforded some advantage when the company was small and Golakh Nath Shetty
was available, to use many items from the scrap innovatively.
2. The company has grown too fast and had not had time to adjust to the status of multi-product, multilocation
company; a premium institution of the country. The employees still thought like the workers of a
privately owned company.
3. HAMCO had six production divisions, which were responsible for all the manufacturing activity of the
company. Each division was headed by a General Manager or GM. Six Deputy General Managers or
DGMs (or equivalent level) were in charge of different functions of production, marketing, finance,
Administration and HRD, R&D, etc. They all reported to the GM. The divisions reported to the Corporate
Office at Mangalore.
4. There was no single person responsible for materials management function in the company. The con
sultants noted the organizational control of the following sections:
(a) Raw Materials and Scrap Stores, reported to Deputy General Manager Production, DGM-P.
(b) Materials Forecasting and Planning Depts reported to DGM-P
(c) Purchase (including vendor’s bill payment cell) reported to DGM-Finance.
(d) Inward goods inspection reported to Chief of Quality Assurance.
(e) Transportation reported to DGM-Administration and
HRD.
(f) Finished Goods Store reported to DGM-Marketing.
(g) Production Planning Group reported to DGM-P
(h) Import Substitution Cell reported to DGM-R&D.
(i) Contract Manager was based at the Corporate Office and reported to the Company Secretary.
The consultant recommended the creation of six posts of Deputy General Manager-Integrated Materials
Management, DGM-IMM; one in each production division. Another post of a General Manager 1MM was
suggested to be set up at the corporate office in India to provide functional guidance to the DGMs being
established in the productions divisions. At the first instant, DGM1MM should control the following
sections:
1. Materials Forecasting and Planning.
2. Purchase minus the vendor’s bills payment cell. The cell will continue to report to DGM-Finance.
3. Raw Materials Stores and Scrap Stores.
4.Finished Goods Stores.
5.Transportation.
Suitable chief managers from any of the depts, such as production, R&D, purchase and Stores, with a
minimum qualification of an engineering degree could apply to become a DGM-IMM. If selected, they
should undergo a four weeks’ training programme at the training college of the company before being
promoted and appointed as DGM-IMM at a production division. A GMIMM should be recruited from
outside to bring a fresh approach to the problem. A new stream of managers called materials managers
should be setup. Fresh engineering graduates be recruited and trained for nine months at the company’s
training college. They be thereafter posted to one of the five departments under the DGM-IMM’s at the
divisions. After three years of the fieldwork, these materials managers were to be brought back for four
weeks of training. At that stage, these materials managers be posted to production planning or import
substitution cells. These two departments should also be shifted so as to report to DGM-IMM. The
complete flow of materials from forecasting to planning stage onwards till the delivery of the finished
goods to the customers should be controlled by one manager, thereby creating the structure of Integrated
Materials Management. This would mean forecasting, planning, purchase, raw materials stores, flow of
materials through production facilities, finished goods and scrap stores and transportation would be part of
1MM. Vendor’s bills payment and inwards goods inspection should continue to be under finance and
quality assurance, respectively, so as to have some check on the purchases by independent agencies. A
contract manager should be available to all the production divisions from the corporate office. This was
due to the quantum of workload not justifying an independent manager at each division.
This proposal was presented by the consultant at a meeting of all the directors of the company, general
managers of the six production divisions and a representative of the ministry of defence. The discussions
lasted for eight hours and at times became acrimonious. The main objections to the proposals were:
1. Additional posts were being created, which would add to
overhead costs. Profits were already low, at about. 0.9 per cent and additional costs should be avoided.
2. Shifting of finished goods store away from the marketing department should be avoided. It could
hamper the efficient and quick supply of goods to the customers, especially those located abroad.
3. Transportation also looked after the conveyance for personnel including senior officers’ cars.
4. This was a theoretical concept and there was no guarantee that it would work in HAMCO and bring
down the inventory pf the company.
5. Shifting away the materials forecasting and planning, stores and production planning groups would
make DGM-P jobless.
The consultant responded by stating that even a 5 per cent reduction in inventory would save more than Rs
13 crore, which is more than double of the current level of profits. DGM-IMM would be head of a
function and a company employee. They can be given targets like all other managers and their
performance could be monitored. DGM-P would be responsible for production by maintaining and
operating all the production facilities at optimum efficiency. Finally, the proposal was accepted after some
arm twisting by the government representative. GM-IMM, 6 DGMs-IMM and 30 fresh engineering
graduates were recruited. Syllabi for the four weeks’ training programme and nine months’ course for the
freshers were formulated and training courses started. GM-IMM and DGMs-IMM became effective at
their posts in September 1987. The company set the target of bringing down the inventory by 7.5 per cent
by 31 March 1988.
Question
Q.1) Discuss the merits of the proposal of introducing the concept of IMM in HAMCO. Would you agree
that the apprehensions of the participants at the meeting were correct? Do you feel that the introduction of
IMM would achieve the target of 7.5 per cent of inventory reduction in six months? Give reasons to justify
your opinion.
Integrated Materials Management

Various functions served by materials management include the material planning, purchasing, receiving, stores, inventory control, scrap and surplus disposal. All these functions can have separate working norms including the one for  performance.
   Efficient management of input materials is of utmost importance in a business organization for maximizing materials productivity, which ultimately adds to the profitability of the organization.

This requires well coordinated approach towards various issues involving decision making with respect to materials.
All the materials related activities
such as material planning & indenting, purchase systems & procedure, variety reduction through standardization & rationalization, reducing uncertainties in demand & supply,

handling & transportation, inspection, proper storage & issue of materials to the internal customers, inventory management, vendor management & finally disposal of obsolete, surplus & scrap materials etc. taken together is termed as Integrated Materials Management.

For example , while inventory manager would like to have minimum level of inventory to show of his performance , Purchasing manager would like to place bulk orders in order to lessen his work load and show discounts as reductions. Both of these acts may be little contradictory from the organisational point of view. That is if some of the functions were to be handled separately, a conflict of interests may occur.




Therefore, the conflicting objectives need to be balanced and intertwined from a total organisational viewpoint so as to achieve optimum results for the organisation as a whole.

In an integrated set up, one materials manager (usually the chief) is responsible for all such inter related functions and he is in a position to exercise control and coordinate all the activities with a view to ensure proper balance of the conflicting objectives of the individual functions.

Integration also attains the synergetic advantage in terms of eliminating water tight compartments that set in in a disjointed environment of working. The resulting benefits can be seen in terms of rapid transfer of data, through effective and informal

communication channels.

This is crucial as the materials management function involves handling vast amount of data. Therefore, integrating the various functions  identify themselves to a common materials management department which in turn results in greater coordination and better control.  Now a      

days , in many tradition bound companies too, even the spare part planning which hitherto was done by the operation people has been brought under the umbrella of an Integrated materials Management.
Better accountability better coordination, better performance, better adaptability to EDP are some of the tangible advantages of the Integrated Materials Management besides a perceptible team spirit , morale and cooperation are the intangible gains.

Training and development of staff and executive through rotation of people is another great advantage because of a bigger canvas produced by integration of Materials function.

To carry out these functions efficiently, it is essential       

to have a very good supplier base, order booking process & inventory management system as well as expert Materials Management (MM) professionals
Purchasing :

Pay low price for the best value obtained
Negotiation
Vendor selection
Right quality at right time

Storage :
Minimising transportation and handling costs
adequate and proper storage and preservation of materials
store as per requirement

Movement :
distribution of finished goods to customer
disposal of raw material

The results are a better service level for parts, more reliability for customer maintenance operations, and improved business performance for network suppliers. IMM also offers reduced cost for parts, inventory holding, and logistics.
Integrated Materials Management provides the flexibility to cover expendable and/or rotable parts for the entire fleet of Boeing airplanes.
Boeing guarantees service levels to ensure that our customers have the part when it is needed. This in turn allows the customer to reduce buffer stock.
Part of our commitment is to stock parts at the customer's location so that they are there when needed. The customer pays only when the parts are used.
IMM also supports AOG and expedite requirements at no additional cost. Our top priority is to support


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