Management Consulting/Material Management
Case 7 (10 Marks)
Decentralized Materials Department:
The Libra Corporation has four divisions at a location. Each division manufactures different product like washing
machines, refrigerators, TV sets and control panels.
There are different purchase departments and stores for each of the product line since these businesses have
grown sufficiently. However company has intentions to keep good homogeneity in the four divisions and
maintain a centralized materials department. Mr. Ranade heads this department. Mainly company expects him to
spearhead the activities, rules and regulations relating to the four materials departments. Mr. Ranade has common
activities under his command. These are planning/ budgeting, Standardization/codification, planning common
items like maintenance items and hardware items, etc. Mr. Ramanujam is looking after the planning of commonly
required items. This department is coordinating needs of the four divisions. Mr. Ramanujam got the requirement
of the hardware item a screw, M8 x 40 mm long, from the four divisions as follows:
Planner Product Quantity
Mr. Ramanujam took action and planned for total quantity of 36800l numbers. This quantity has to be procured in
4 lots since the lead-timer for this screw is of the order of 4 wks. Each time he gets quantity of bout 90,000
numbers in the stocks and he rests happily in his chair.
The requirement of the washing machine by marketing department was doubled. One fine morning planner
Mr.Varma drew extra quantity of 5t000 numbers due to production change. There was no feeling of any error
from the side of Mr. Varma. He thought this I a hardware item and big stocks are in the stores.
This brought all the planners in trouble, when the stocks went down. Mr. Ramanujam came to know about the
shortage of the item when Mr.Ranade called him. They came to know the real problem. About the common
required items this was their experience. At times some one else draws the item for some need at their place,
which do not use the item regularly, thinking that it is hardware item there is no problem to draw it. In their dayto-
day business no one feels that they must draw any item only when they have planned for it.
Mr. Ranade and Mr. Ramanujam had been facing this type of problem in past. The reasons as are follows.
The item users different than the planner. Their bosses are different, with different goals and commitments.
The items, which are planned by Ramanujam are of common nature. Many people need them at some or other
When any one is drawing the item, it is difficult to keep control/ check whether it was planned in the beginning
of the year.
It was decided to find some relief for the problem by following methods.
The respective planner should see and authorise the material request before it is released to stores. He will verify
the item is planned in the beginning.
Q.1) Discuss with en or to reduce the lead-time to almost to zero level. This can avoid the situation of the stock
Case 8 (10 Marks)
CORPORATE SCENARIO Prof. Ganapathy Ram, the managing director of Ganapathy Ram Bus Transport
Corporation, has invited Prof. Gopalakrishnan to study the companys operations and identify the problems faced
by the company with a view to suggesting suitable solutions, For this purpose, Gopalakrishnan interviewed the
officials and collected relevant information from files, manuals, records, and press briefings, a summary of which
is presented below.
The central government, realizing that the transport industry should help achieve the laudable national
objectives, enacted the Road Transport Corporation Act in 1950. By this act, each state has been asked to
establish its own road transport corporations as a state government undertaking. The present major objective is to
provide adequate, economic, efficient and well-coordinated transport services to the travelling public and at the
same time ensure that the operations are run on sound commercial lines. Till 1950, the passenger transport
industry was concentrated in the hands of a few private operators, whose only object was to make profit. But the
state transport undertakings have been set up to open up communications and thus contribute to the development
of backward/tribal/hilly regions of the state.
Ganapathy Ram Bus Transport Corporation has a fleet strength of 12,500 buses organized into 15 divisions.
This accounts for about one- tenth of the fleet strength in the entire country. The number of buses in this
corporation has been gradually increased due to availability of financial assistance from the government in the
past. One division caters to the needs of the state capital, with about 2000 buses and each of the remaining
divisions handles about 1000 buses. Over 2000 vehicles are more than eight years old and hence rickety,
dilapidated and scheduled for scrapping; buses have been purchased during the last three years and the remaining
buses have been working between there to eight years.
Half of the fleet consists of Tata diesel vehicles and the other half is from Ashok Leyland. To enable greater
control on operations and inventory, seven divisions operate exclusively with Tata vehicles, leaving remaining for
the other divisions. Each division has been organize into 7 to 10 depots and in all, the corporation has 125 depots
spread throughout the state. The total route length is about six lakh kilometres and during the last year about
80 crore kilometres have been covered by the buses of the corporation. Complete nationalization of all the buses
in the state is yet to be achieved and this may involve an expenditure of Rs. 30 crores half of which could be
borrowed from the central and state government organizations and financial institutions, while the balance is to be
found internally within the organizations depreciation/reserves fund. The company employs nearly 60,000
persons, which includes 2,000 officers.
Even though the company has two models of vehicles, the manufacturers do not make any advance
commitment of change of models to the road transport corporations. According to the senior officials, the models
are changed by the manufacturers periodically, without caring for customers economies of continuing the
existing models and ensuring the supply of spares for old models. This results in difficulties in standardization
and cost reduction in the organization.
The companys board of directors is headed by a part-time chairman. Professor Ganapathy Ram, the vicechairman
and the managing director a senior Indian police service officer, is the chief executive of the
organization. The board also consists of three full-time directors in charge of operations, finance and personnel.
Besides, four senior officials of the state government and four politicians form the part- time members of the
board. The board gives broad policies in its quarterly meetings. The operations director, is in charge of routing,
traffic, cost control, performance of divisions, purchase, stores, maintenance workshop, safety, civil works,
mechanical engineering, industrial engineering and quality control. The finance director is in charge of money
management, capital investment decisions, account. ing, electronic data processing, financial control, and
strategic planning, source and application of funds, costing and other conventional finance functions. The
personnel director is in charge of selection, recruitment, training, promotion, grievance handling, suggestion
schemes, canteen, administration, labour welfare, union matters, industrial relations, legal aspects, public
relations, etc. The company has a fourth generation computer which is used by all sections. Weekly coordination
meetings are held at different levels in the headquarters, divisions and depots to ensure a smooth working of all
Each division is headed by a general manager and each depot is looked after by a depot manager. All divisional
headquarters and all depots have a workshop and a store each. At the state headquarters, there is a well-equipped
central workshop under the control of a general manager. The general manager, purchase. and stores, in the
headquarters reports to the director operations. The main operations are carried out by divisional general
managers and depot managers and are supported by functional specialists at the headquarters.
According to the managing director, the complexity of the road transport industry stems from the extremely
perishable nature of the final product, namely seat kilometre. It follows, therefore, that the supply and demand
should be perfectly matched, in order to reduce waste, which is to be the goal of the corporation. In order to
ensure that the demand does not go uncatered for, planning the route timings, an economic fleet-utilization and
upkeep of healthy fleet are the major prerequisites for the undertakings success, according to the managing
director. The fleet can be healthy if the materials that go into it are available when required, are of right quality
and at the same time reasonably priced.
The corporation has been making losses, while a few private operators still make substantial profits. The average
earning per kilometre is Rs.-5.80, whereas the expenditure per kilometre, including wages, fuel, tyres, spares,
maintenance, depreciation, interest, etc. is six rupees. The cost of operation has started going up in the recent past,
due to price increases in fuel. Added to the high oil prices, the cost of us bodies, chassis, tyres, and other spares
have registered steady creases, approximately by 100 per cent in the last three years. Trade union activities have
also intensified due to general inflationary conditions, in spite of declining profitability owing to political and
labour pressures, wages have been periodically enhanced and the statutory bonus is being paid. The present wage
of the lowest paid worker is about Rs. 1000 per month.
In order to eliminate the leakages in revenue collections, a five per cent incentive on daily ticket sales is paid to
the bus crew. The social responsibilities, without bothering about the financial viability, that have to be home by
Ganapathy Ram Bus Corporation include the following: (a) concessions to school children, journalists,
politicians, policemen, government employees, handicapped persons and other stipulated categories of persons;
(b) operating loss-making city services and providing connections to rural/tribal/hilly/backward areas; (c)
maintaining the services during monsoon, when volume of traffic is low; (d) purchasing material from small-scale
units located in the state, with high price and low quality.
Increases in the fares to compensate for the higher expenses, however, need the approval of the state government.
When some elections are always around the corner, for fear of political repercussions, the state government has
been reluctant to increase the fares. To make matters worse, the taxes to be paid to the state government have
doubled fi the last five years. During political agitations, particularly in sensitive areas, every year a few buses are
burnt by the infuriated mob. Occasional pilferagein -diesel and ticket collections has also been reportd. The
pollution control board has also drawn the corporations attention to the noise and smoke in the buses.
Out of the 35,000 kilometres of the national highways, only 2000 ) kilometres pass through the state and are
maintained excellently by the centre. The state highways and urban roads, even though blacktopped, are full of
pot holes and uneven. Buses also have to pass through roads without black top, feeder roads, kutcha roads linking
villages, etc. which constitute more than 50 per cent, and it will be very difficult to negotiate these roads in the
monsoon season. The culverts on some of the canals are so weak that the buses have to crawl. Due to roadbuilding
repair activity, diversions, which are permanent in nature, are to be used.
The urban passenger pays subsidized fare in the city areas. Similarly, the rural agricultural labour always agitates
whenever slight increases are introduced in the subsidized fare. The urban commuter blames the organization for
not providing shelters, while he waits for the bus. Due to appalling road conditions, heavy overloadings, poor
driving habits, use of spurious spire parts and inadequate skills of maintenance, there are always problems of offroad
vehicles requiring spares for repairs. The depot managers are primarily responsible for meeting the
transportation demand in a geographical area and are usually preoccupied with social/political pressures to
increase the frequency of services, particularly in marriage seasons and summer holidays. Added to this, the
operating staff consists of barely literate workers of agricultural origin who are seldom amenable to proper work
discipline. The threat to industrial peace is never absent.
The finance director, while agreeing with the role played by transportation in the development strategy of the
state, however, has pointed out that the demand will be very low in hilly terrain, forest areas, backward regions
and monsoon seasons, necessitating the fares being heavily subsidized, for economic viability. The poor road
conditions adversely affect the fleet performance. He has also pointed that to build one kilometre of a new pucca
road, it costs the exchequer rupees one crore, and no department in the state is interested in improving the road
The finance director has felt that the continuous loss in the corporation affects the morale of the employees of the
organization. The loss in the major city transport system of the corporation alone works out to about rupees three
lakh per day, whereas the fare revenue contributes only 50 per cent of the operating cost!
Suggestions for using aluminium body or long-lasting, light stainless steel body, realignment of some routes, use
of natural gas instead of fuel oil, etc. have been examined as possible strategies for better. viability, but these
could not be implemented on a commercial scale, The introduction of a split-shift system of working instead of a
continuous eight hour shift in urban areas, also has not brought the desired results and there has been resistance
among the crew, who have been pleading for a reduction in working hours and better standards of living. Further,
the politician members in the board of directors at times interfere with the recruitment o personnel, purchase of
materials, transfer and promotions.
While discussing the strategy, the managing director has often been wondering whether to regroup the activities,
as in TamilNadu, into small road transport corporations of a fleet of 1000 buses each. He has also been toying
with the idea of suggesting to the board to hand over the heavy, uneconomical feeder routes to private parties. He
is also thinking of diversifying to other areas, like freight traffic, manufacture of spares, etc. He is very keen to
develop operational indices for each depot, based on (a) market potential, (b) present market efforts, (c) economic
viability, (d) maintenance/safety, breakdowns, (e) morale of labour, (f) daily kilometre per bus, (g) earnings per
seat, (j) contribution by each bus/route, (i) fleet performance, profitability etc. in order to streamline the overall
effectiveness. The managing director has been thinking of buying some new buses, after scrapping 500 old buses,
which have put in ten years or more of service. He felt a new bus would cost less on maintenance, compared to a
ten year old bus. A new bus would have less frequent breakdowns and would consequently be on the road for a
much longer period than the old bus at a cheaper operational expense. It has also been pointed out that most
private operators find it cheaper and more economical to dispose of buses after six years and replace them with
new vehicles. This provides them with the maximum income, reduced operating costs, a good resale value, less
cost of service and a better public image.
From the economic investment point of view, it is obvious that the capital investment on an asset should, during
its lifetime, earn not only its running expenses, but also its maintenance, repairs, depreciation charges and interest
on the capital. The series of returns which the asset gets during its life must compensate for all those expenditures
and should earn higher than an investor could get at any place. Secondly, these economics have nothing to do
with the efficiency of an asset from the engineering point of view. The price of a new bus is around rupees five
lakh, which can be depreciated in three to four years period. In its effective life, the bus is engaged to earn a
constant net maximum return, after allowing for the relevant cost of operation. After the fifth year, the return
would show a downward trend, when the maintenance and repair cost would increase about two-fold. The bus is
likely to be overhauled after 30 months or after two lakh kilometres. The managing director is keen to raise the
capital needed for buying the buses through public bonds, bank loans, rural credit corporation loans, World Bank
loans, non-suppliers loans from private sector parties, etc.
The State chief minister, while inaugurating a new divisional headquarters of the corporation in the state, has
appealed to the corporation to extend its services to reach all corners of the state. About 70 per cent of the
population of the state lives in villages and about 30 per cent of villages is yet to be connected by bus routes,
according to him. He has further emphasized that the development of backward areas can be expedited only if
punctual, reliable, safe, regular and comfortable bus services could be provided to link all villages adequately., in
a time-bound fashion, particularly before the next elections. The chief minister has also exhorted the corporation
to complete the task of nationalization of buses in the next few years.
The state transport minister and some board members feel that the cause of inefficiency and accumulated losses of
the corporation is lack of commitment, discipline and delegation. He has suggested that the corporation be spilt
into ten independent self-sufficient profit making organizations, following the TamilNadu pattern. The managing
director is conscious of the need for some drastic changes, but feels that the time is not yet ripe for dividing the
corporation into separate entities. He is keen that ways must be found to avert the present crisis. But the minister
for transport wants to gain publicity by a dramatic announcement of splitting the corporation into ten cohesive
units in the last session of the legislature before the next elections.
Over 2000 buses of the corporation are more than eight years old and are scheduled to be scrapped. About 500
buses on the road are more than ten years old. In view of the stringent financial situation, the scrap kilometre limit
has been raised a year ago, from the desirable six lakhs kilomefres to eight lakh kilometres. The old buses
consume more spare parts and give inefficient service. Hence, the challenge to the maintenance staff has been
tremendously increasing, while the burden on maintenance ha doubled because of flogging the bus and no extra
staff has been provided to meet the challenges in main tenance systems. Even the existing staff norms in
maintenance are being scaled down to effect more economy on personnel! Inadequate maintenance has resulted in
cancellations, unpunctuality, and breakdowns in the middle of the road, thereby affecting the image of the
organization. Sometimes, the drivers exceed the prescribed speed limit, resulting in more wear and tear.
A general manager, maintenance, reporting to the operations director is in charge of the overall maintenance and
the central workshop in the headquarters. He is assisted by a group of five maintenance engineers on various
special activities such as mechanical, civil, electrical, etc. These maintenance engineers located at the divisions
periodically visit the depots. Ten mechanics are attached to each depot. All maintenance engineers have been
trained in various plant engineering concepts.
The preventive maintenance system expects the spares to be checked and replaced before they cause breakdown.
The day-to-day maintenance is carried out by fitters and mechanics attached to the depots/divisions. A set of
tools is carried in the bus for rectification of very minor defects. Minor repairs are attended to at the depot level;
for major repairs, the defective assembly/module is replaced by a fresh assembly from stores, or through the
cannibalization of standby buses in the depot/division. The defective assembly is then sent to the central
workshop for rectification. The central workshop has facilities for overhauling, heavy repairs, electrical repair,
heat treatment, tool repair, foundry forgings and reconditioning. After two lakh kilometres or 30 months running,
the engines are completely overhauled in the workshop. The overall maintenance expense works out to Rs. 1.50
per kilometre, half of which is accounted for by spare parts alone. Maintenance job history cards for each bus are
slowly being introduced and there are plans to computerize them in the future. The engineers also admit that the
maintenance function needs improvement, as there had been two major accidents in the recent year.
A few maintenance engineers have complained about the poor after- sales service and that during the guarantee
period by the vehicle manufacturers. The maintenance engineers claim that they spend a lot of time in identifying
the indent status, follow-up, etc. They also complain that due to faulty planning of central purchase, spares
intended for one depot are sent to another. Non-availability of correct quality spares is a common cause for delays
in repairs in depots. Another complaint is that some retired defence personnel and MBAs have joined the
organization. The political members of the board sometimes interfere with recruitment of personnel, transfers,
promotion and purchase of materials.
It is generally said that an aircraft is a combination of spare parts flying in formation a bus is no less, if
operating on the surface. Almost each part has a life of its own and is affected by the conditions of wear and tear,
unless the defective part is replaced by a new one, it may give way and result in a possible breakdown. The fixed
cost for holding a bus from plying the route, or the stock-out cost, has been estimated as Rs. 5000 per day. This is
the loss if a breakdown results in the non-operation of a bus for a single day. The stock-holding charges, including
storage charges and capital cost, is 30 per cent per annum. Major tyre companies have opened their depots near
the central stores. The ordering cost per order works out to Rs. 750 per order. The total inventory in the
organization, other than fuel is about Rs, 20 lakh, while the annual consumption is about Rs. 50 crore, comprising
25,000 items. Rupees ten crore worth of non-moving items and rejected items worth a similar sum are lying in all
A ten-digit codification has been introduced with the last digit serving as check digit. But according to
materials executives, the maintenance people indent only by part numbers, like V-belts manufactured by Fenner
India Ltd. According to the materials department, the company faces typical spare parts problems as faced in
other organizations. In some categories of spares like piston, thin wall bearing, etc., acute shortage is experienced
due to lack of good manufacturers. The materials officials are not sure as to how much of spares could be
centralized and how much decentralized in the organization. The traditional ABC categorization has been done; A
items with annual consumption of more than rupees one lakh, are kept in the central stores, B items with
consumption above Rs.10,000 in division stores, and C items below Rs. 10,000 in depots. One super A item,
accounts for 20 per cent consumption in the fuel oil, for which arrangements have been made with the Indian Oil
Corporation and one weeks stock is kept. The stock level of lubricants and tyres are maintained at about one
months level and monitored periodically. The buses also carry tool kit and emergency items on an imprest basis.
It is aimed to have a maximum stock level of three months for A items and six months for all other categories,
including critical items.
The spares which are generally required for the purpose of reconditioning of assemblies, building bus bodies,
etc. are stocked in the central stores, where such activities are carried out. All items pass through the central store
for accounting purposes. The surplus material held by the divisional stores is also sent to the central stores, which
is to be redistributed to the needy divisions in future. The type of maintenance carried out at the depot level is
only to the extent of daily and weekly maintenance, consisting of oiling and greasing, engine oil change, docking
of vehicles and day-to-day service repairs. The spares required for such purposes are kept at the depot level and
the vehicles are serviced after about 10,000 kilometres. At the divisions, replacement of major assemblies like
engine/starter/dynamo! fuel injection pump, 30,000 kilometre docking and reconditioning minor items are taken
up and all necessary spares for the same are maintained at the divisional level. The central workshop does major
repairs like body building/reconditioning, overhauling of vehicle bodies! assemblies/engines/fuel
injections/pumps/starters/dynamos, retreading tyres and adequate spares are maintained there.
In addition to the scheduled preventive maintenance inspection, top overhauling of engines is required to be done,
after 30,000 kilometres for new engines and after 60,000 kilometres for old engines. Vehicles are scrapped only
after 15 years presently, due to the financial constraints. It has not been possible to forecast the exact requirement
of spares in view of non-availability of data. In view of heavy expenses and lack of staff, records on the
consumption of spares vehicle- wise and assembly-wise are not available, and hence it is difficult to estimate the
future consumption of spares. As a result, when purchase is effected on the basis of previous years consumption,
sometimes there is an acute shortage if more spare parts become due for replacement in the following year, and
sometimes there is an excess if fewer parts become due for replacement. The consumption also fluctuates due to
varying quality of spares, as facilities for testing the metallurgical quality of spares is not available in the
Ganapathy Ram Bus Transport is a member of the association of the State Road Transport Undertakings in Delhi
and enters into rate contracts with spare parts manufacturers. The rate contracts are signed after the testing of
samples in the laboratories of the association, and the quality and price are negotiated. Deviations from the rate
are done, only in emergency and crisis situations. As far as possible, preference is given to buying the spares from
the original equipment manufacturers, while taking purchasing decisions. There have been several instances
where the original equipment manufacturer is unable to supply as he has stopped manufacturing the item.
In view of the large number of tyre manufacturers, the corporation has been expecting a good competition in the
tyre industry. But very recently, a cartel was formed, which denies the advantages of competition and has been
dictating terms to bulk buyers, like the Association of State Transport. Further, the local joint sector springs
manufacturing company has been turning out substandard material and is exercising powerful political influence
to palm off its substandard products on the Association of Transport Undertakings. The association, however, has
made representations to allow imports in these two categories of items. The government has constituted a
committee to go into the question of manufacturing, pricing and ready availability of auto spared.
The general manager, materials reporting to the director, operations, is the competent authority of the corporation
for all purchases. There are 10 officers and 20 other category staff in the central purchase. He is also in charge of
the central stores and the central workshop and controls the same with adequate staff. The general manager,
materials has powers of up to rupees one lakh per item, but his authority is subject to the approval of the finance
department. The purchases are mostly by limited tenders and finalized by a committee consisting of user, finance
and purchase. The director, operations has powers of up to rupees one million per order. All capital machinery is
purchased by the hoard. The board also purchases other items within a maximum of rupees one million.
Advertised tenders are resorted to only when necessary. Emergency powers have been given to the field staff in
exceptional cases. Indents are prepared by the stores, divisions, depots and sent to the materials department.
Procedures for indents, budgets, placing orders, lead-time budgets, follow-up, inspection, pre-qualification of
suppliers, etc. have been specified in the materials manual prepared about five years ago. The general manager,
materials constitutes a committee with the other general managers before placing an order. The lead-time of
placing an order is six months and the total lead-time goes up to one year. One month is required for the
preparation of indents and estimates by divisions, one month for consolidating the requirements, four months for
purchase departments activities for placing the order and follow- up and the remaining time for external leadtime.
The depot manager can ratify any expenditure incurred in the purchase of spares parts and their powers extend up
to Rs. 1000 per bus per year. For the divisional manager, this emergency power is Rs. 5000 per bus per year. This
implies that the division can incur an expense of only about rupees five million over and above supplies from the
central materials department, subject to the condition that there is a nil stock certificate from the central stores or
an emergency. However, the divisional managers feel that the materials department is insensitive to the operating
environment and play safe by hiding that local powers have been delegated, primarily to tide over unforeseen
gaps in supply and operational fluctuations. But the line managers feel that the job of the materials department is
the required quality materials at the right time to the operational units. Resorting to increased local purchase is a
direct reflection on the inefficiency of the materials department. Some of the line managers feel that complete
decentralized purchase will wind up the materials departments. It is the line managers, not the inefficient
materials department, who are questioned for the losses due to non-operation of the fleet. Further, the material
bought by line managers from the open market to meet the crises, is overpriced and of inferior quality. In their
anxiety to put the fleet on the road, they may overlook some procedural aspects, like getting three quotations for
the same item, perhaps from the same typewriter; but they complain that the audit does not take any such lapse
Q.1) Summarize and analyze the above case with reference to the principles of material management?
Q.1) Discuss with en or to reduce the lead-time to almost to zero level. This can avoid the situation of the stock
Effective supply chain management - improving product replenishment
The most effective way for businesses to reduce stock is by reducing the supply lead time. Lead time can be defined as the time it takes from when you first determine a need for a product until it arrives on your doorstep. If lead time was zero, inventory could be zero.
In a perfect world, imagine how simple business would be with a lead time of zero and orders being filled instantly. A customer could walk through the door of your business, place their order, and walk out happy with no delay. If business was this easy, you would require no warehouse space, no order follow-up, no inventory counting, no forecasting, no product damage, no obsolete inventory, fewer employees, less risk of theft, and less cost overall.
Of course the real world does not work like this, but the shorter the lead times, the less complex our inventory management will be. In general, you can expect the following reductions in inventory as lead times are reduced:
Note that lead time can be separated into three components:
Review time is the time it takes for your company to generate an order. Changing your order frequency from twice a month to once a week or even daily can cut total effective lead times substantially.
It should be clearly understood that lead time reliability is just as important as lead time itself. Short lead times with a high degree of uncertainty can force necessary inventories upward. Obviously this is something to keep in mind when selecting suppliers.
Reduction of product replenishment lead times is a core element of our supply chain management services.
Q.1) Summarize and analyze the above case with reference to the principles of material management?
PRINCIPLES OF MATERIAL MANAGEMENT
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
& storage cost
Continuity of supply
Consistency in quality
Good supplier relations
Development of personnel
Good information system
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
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
2. Central service supply
3. Central stores
4. The print shops
Determine needed quantities
Reconcile needs & funds
Choose procurement method
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
Buyer approaches selected potential Suppliers & bargain directly
Used in long time supply contracts
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
Invite quotations from reputed firms
Comparison of offers based on basic price, freight & insurance, taxes and levies
Quantity & payment discounts
Delivery period, guarantee
(reliability, technical capabilities, Convenience, Availability, after-sales service, sales assistance)
Short listing for better negotiation terms
Seek order acknowledgement
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
Reserve bin should contain stock that will cover
lead time and a small safety stock
Issue & use
Can be centralized or decentralized
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 = 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
Small in number, but consume large amount of resources
Rigid estimate of requirements
Strict & closer watch
Low safety stocks
Managed by top management
Larger in number, but consume lesser amount of resources
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:
Shortage cannot be tolerated.
Shortage can be tolerated for a short period.
Shortage will not adversely affect, but may be using more resources. These must be strictly Scrutinized