Study of material flow and procurement control systems of material

Study of work flow of material & procurement control system of UPL

June-July 2006 - 1 -

EXECUTIVE SUMMARY

UMA PRECISION LIMITED is one of the largest automobile machine component

manufacturing company. The company is an ISO/TS 16949-2002 certified company and

heading towards TPM excellence. Company manufactures precision parts and assemblies

as per customer s requirement. UMA PRECISION manufacturers over 650 different

automotive and standard parts to cater domestic market and another 400 types specially for

export market with a monthly volume of 8 million parts to supply to automotive and

electrical industries with over 95% schedule adherence. Precision parts play important role

in any automobile industry.

The major customers are BAJAJ AUTO LTD, TATA MOTORS LTD, PIGGIO

VEHICLES LTD, CARARO INDIA, L&T and many other auto ancillaries. They have

major export business with LUCY SWITCH GEAR UAE, MULTI TECH USA& AL

AHIELA.

The project is STUDY OF MATERIAL FLOW AND PROCUREMENT

CONTROL SYSTEMS OF MATERIAL IN UMA PRECISION LIMITED carried out

at UMA PRECISION LTD, D2 BLOCK, Pimpri, Pune.

As we know that the materials are the key resources in an industrial enterprise since

no production is possible without materials. Materials also form a major constituent of the

cost of the product and therefore proper control over their procurement, storage, issue,

movement and consumption is necessary. If materials do not arrive on time, Production

facilities fail, workers are ill; customers change or cancel the orders, and so forth causing

deviations from the plan. So it is necessary to study material flow and control systems of

material



This project requires two months time for the completion. The steps involved in

understanding the all the functions of material department, which are the activities are

carried under material department, to understand why it act as a profit centre for

organization. To studying the existing purchase functions &problems associated with it.

This has been achieved by studying the overall purchasing procedures and function.

By collection of appropriate data from marketing department, Collection of Purchase data,

collection of Supplier data, Categorizing & analyzing data for exploring areas where

improvement can be made. I have also studied inventory control system of material, as we

know the inventory is the working capital of the business. It is observed that by using

various control techniques such as ABC, Reorder level, management minimizes investment

in inventory meet a demand for the product efficiently organizing the material flow and

production. The concept of purchasing today is undergoing tremendous changes. Major

focus is on cost saving. Considering this view, output examined for:

1. Reduction in variety.

2. Standardizing of machinery.

3. Bringing down inventory.



2. PRIMARY OBJECTIVES

1. To understand the flow of material.

2. To understand the existing procedures of purchasing in the company.

3. To understand the vendor development procedure in the company.

4. To study the material codification systems.

5. To study the vendor rating systems of company.

6. To study the material inventory control system.



3. GROWING IMPORTANCE OF PURCHASING

Purchasing is being considered too specialized activity because of the following reasons:

1. Higher cost of goods and services.

Raw materials, components services account for a significant portion (as much as

50-60%) of the company s total expenditure. Effective purchasing can therefore result in

substantial saving to the company.

2. Escalating cost of stock outs.

Lack of continuity in availability of materials seriously affects all major companies.

It can damage profitability of the company and lower employee moral. Financial loss due

to stock out of material can be enormous.

3. Purchasing is not mere act of buying.

Purchase is much broader concept than just an act of buying. In today s context it

includes a wide range of material related activities such as market research, vendor rating,

pre purchase value analysis, price negotiation, standardization and codification

4. Higher present day cost of capital.

Around 80% of working capital of a company locked up in inventory of raw

materials, work in progress, finished goods, spares, etc. No organization can afford to

invest such a big part of its capital in the stocks these days especially when the cost of

borrowing is high. Bulk of these stocks can be reduced and unnecessary capital lock up can

be avoided if purchasing is made efficient.



5. Changing nature of purchases.

Purchase is today no longer commercial activity but a techno commercial activity.

More and more technical persons are being inducted into the purchase dept. and naturally

these people like their counter parts in production, design, and other departments expect a

better treatment.

6. Changing concept of buyer-seller relations.

Buying scene has also undergone a major change. In today s world the supplier is

no longer dependent on the buyer. Efficient buying-continuity in availability of materials

with the lowest inventory investment demands a buyer to be good at business relations with

the supplier. Retention of good suppliers with increasing competition is becoming difficult

and hence the buying function becoming challenging day by day.



4. COMPANY PROFILE:

Uma Precision Limited was founded in 1979 to manufacture precision assemblies,

systems and machined parts. It has had the privilege of serving the top industries in India

for over 25 years, through a period marked by continuous change in the industry, our

customer have remained our primary focus.

Uma Precision Limited has remained in the forefront in adopting the new

technologies, systems and continues to be industry leader in machined parts by utilizing the

long rich production knowledge; our engineers have continuously out performed the

industry standards in improving productivity and reducing the losses, to retain the

competitive advantage.

The company has evolved in to a group of companies backed by team of qualified

personnel. The group has manufacturing facilities for precision assemblies, systems and

machined parts at four locations in India. Uma Precision also have surface treatment

facilities like heat treatment, plating and phosphate coating enabling us to deliver quality

products in a stipulated time and one stop facility for customers.

Presently, Uma Precision manufactures over 650 different parts to cater to

domestic market and another 400 types, specifically for export market with a monthly

volume of approximately 8 million parts to supply to automotive & electrical industries

with over 95 % schedule adherence.

Uma Precision is ISO / TS 16949

2002 certified and practicing TPM (Total

productive maintenance) company to achieve excellence in manufacturing, which assures

incorporated systems for sustaining a good quality.

Uma Precision is well known for quality, cost competitiveness and timely

deliveries. We, at Uma Precision believe in continuous training of our employees with the

belief that, People make the organization .



We also manufacture rubberized coir foam mattresses, pillows and seats to cater to

automobile industries, government enterprises and service sectors, in our group company.

LOGO OF THE COMPANY:



4.1CONTRIBUTION - PRODUCT FAMILY




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4.2 STRATEGY

To be no. 1 in quality, cost and delivery of precision assemblies, systems. And

machined parts by adopting latest and innovative technologies / systems.

Total focus on customer requirements by proactive approach.

To involve and contribute at design level by way of concurrent engineering with

customer.

Dedicated facility for customers (next door).

4.3 STRENGTH

Over 25 years experience in manufacturing of Precision Assemblies, Systems,

Machined and Press Parts for OEM s

Customer focus

Just in time delivery to customers

Well organized logistics

Certified quality management system

Delighted, satisfied and strong corporate customer base

Young, qualified and multi-skilled technical work force with average age of 24

24 years


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4.4 GROWTH:

4.5 EXPORT GROWTH:


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4.6 CAPABILITIES:

Handling large volumes and different type of parts with various

types of materials

Short Product development time and concurrent engineering

with customer

In house tooling, jigs and fixture design and manufacturing facility

Dedicated supply partners

Reduction of losses and continuous improvement

High inventory turnover ratio in considered segment

Certified updated quality management system and

direct online supplies to major customers

Over two decades of experience in machining business

4.7 QUALITY MANAGEMENT SYSTEM


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4.8 QUALITY POLICY

Uma Precision Limited is built for result oriented work culture,

to fulfill customer s needs in terms of Cost, Quality and Delivery

by enhancing effectiveness of people and plant equipment safely

for achieving zero losses and profit making organization,

by continual improvement for effectiveness of Quality

Management System through Team Work, Training and Focus on

Actions and Results.

4.9 AWARDS & ACHIEVEMENTS

ISO/TS:16949-2002 Certification

by Det Norske Veritas (DNV) 2004

National Award for Equal Opportunities for the Handicaps

- 2003

Good Performance Award for TPM

by BAJAJ auto ltd. 2004

State Award for Best Entrepreneurs

by Government of Maharashtra 2001

4.10 EMPLOYEES MOTIVATION:

Best kaizens.

Excellent progressive department.

Best attendance and punctuality

Best Safe Department


June-July 2006 - 16 -

4.11 HR & TRAINING

FOCUSED TRAINING AREAS

1. Quality Management System

ISO / TS: 16949-2002

Root Cause Analysis

FMEA - Failure Mode Effect Analysis

MSA - Measurement System Analysis

SPC - Statistical Process Control

APQP - Advanced Product Quality Planning

2. Productivity Improvement

TPM - Total Productive Maintenance

JH - Jishu Hosen

5 S - Seiri, Seiton, Seiso, Seiketsu, Shitsuke

Kaizen, Poka Yoke

Value Engineering


June-July 2006 - 17 -

4.12 CUSTOMERS

Our major customers are manufacturers of:

Two and three wheelers

Light commercial and heavy vehicles

Multi-utility vehicles and passenger cars

Tractor axles and transmission system

Special electrical switch gears

And many more in India and overseas.

4.14 SERVICES

Online tracking of customer orders and inventory

Mass produced precision machined parts

Value added services like- assemblies, heat treatment and surface treatment, etc.

Designing and manufacturing of tools and jigs

Value engineering

Concurrent engineering


June-July 2006 - 18 -

4.15 INFORMATION TECHNOLOGY:

ERP for Automotive industry is designed to streamline and improve disjointed business

practices -- enabling to manage multi-tiered networks of customers, suppliers, and partners

closely. This solution set facilitates seamless integration and collaboration across multiple

internal and external organizations. And it includes best practices that support critical

business processes -- providing full visibility into enterprise data and increasing speed and

flexibility worldwide.

All day to day transactions, expenses, purchase orders, release vendor schedules, company

level data, request for quotations, contracts, material received and to be received, are stored

in the system daily from different department of the company for the future which can be

retrieved whenever required. Following Fig. shows the ERP system of uma precision

limited.


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5. THEORATICAL BACKGROUND

1. Materials Management:

One area of operation s and logistics playing a major role in supply chain

management is that of materials management, which is concerned with decisions about

purchasing materials and services, inventories, production levels, staffing patterns,

schedules and distribution, either directly or indirectly.

Traditionally, organizations have divided the responsibility for materials

management among three departments: purchasing, production control, and distribution.

This approach requires a tremendous amount of co- ordination to achieve a competitive

supply system, since each of these departments report to different heads. Hence many firms

restructured to centralize most materials management tasks in one department called

materials management department. This approach brings together all tasks related to flow

of materials, from the purchase of raw material to the distribution of finished products or

services.

Purchasing is usually responsible for working with suppliers to ensure the desired

inward flow of materials and services. Purchasing also responsible for inventories of raw

materials and component. Distribution is normally responsible for the outward flow of

materials from the firm to its customers. It also may be responsible for finished goods

inventories and selection of transportation suppliers. Materials management is then

responsible for co-ordinating the efforts of purchasing and distribution.

2. MATERIAL REAQUIRMQNT PLANING:

Material requirement planning is a special technique to plan requirements of

materials for production. MRP helps in planning the ordering and usage of materials at

various levels of production and for monitoring the stock during these transactions. MRP

calculates the number of items required at every point of time to meet the master

production schedule & it co- ordinates to purchase department to make the required item

available as and when they are needed


June-July 2006 - 20 -

3. INPUTES TO MATERIAL REQUIRMENT PLANNING:

Aggregate requirement of finished product: The aggregate quantity represents

the gross requirement of a product over a given period. The gross requirement are obtained

from the following sources: period wise actual quantities taken from sales order on hand,

time period wise quantities forecasted from time series analysis & time period wise based

on feedback received from sales force.

Master production schedule: The master production schedule is a statement which

end items are to be produced, the quantity of each, and the dates they are to be completed.

It provides the initial input for the items needed.

Inventory Records: It is a major input for MRP system. When input calculation is

made to find out how many are needed, the quantities available must be considered.

There are two kinds of information needed. The first is called planning factor

includes information such as order quantities, lead times, safety stock and scrap. This

information is helpful for purchase department to plan what quantities to order and when to

order for timely deliveries.

The second kind of information required is the status of each item. The MRP

systems need to know how much is allocated, and how much is available for future

demand. This type of information is very dynamic and changes with every transaction that

takes place. These data is maintained in inventory record file, also called an item master

file. Each item has a record and all the records together form a file.

Bill of material (BOM): Bill of material is the document generated at design stage.

It gives the details of the structure of the product by dividing the final assembly into major

assemblies, major assemblies into subassemblies and subassemblies into parts /

components. The parts are listed in the sequence of assembly. Bill of material provides

details such as part name, part number, description, quantity required, material etc.


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Net requirement of items: The gross requirement obtained as above is adjusted by

available inventory of the product to obtain net requirements.

Thus, Net requirements = Gross requirements (-) Inventory available.

Adjust Requirement for scrap allowance: There may be some rejections during

the manufacturing, which leads to be accounted so that accurate numbers will be available

for assembly. This is usually estimating the percentages of loss and adding it to the net

requirements when the item is ordered.

4. FLOW CHART OF MRP

Master schedule

Demand forecast Customer order

Material requirement

plan

Plant capacity

If adequate

Finalize Material

Requirement plan

Mfg. lead

time

Bill of material

If inadequate

Revised master

schedule


June-July 2006 - 22 -

5. Purchasing interfaces: Purchasing is the link between the organizations and its

suppliers. It exchanges information with suppliers and functional areas. Fig shows the

interface of purchasing with other functional areas of the firm. Operating units constitute

the main sources of request for purchased materials and close co-operation between these

units and the purchasing department is vital if quality, quantity and delivery goals are to be

met. The purchasing department requires the assistances of the legal department in contract

negotiations, n drawing up bid specifications for non routine purchases and to help interpret

legislations on pricing, product liability and contract with suppliers.

Purchasing

Legal

Accounting

Data

Processing

Design Receiving

Operation

Supplier


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Accounting is responsible for handling payments to suppliers, data processing is

handled by the account departments, which keeps inventory records, checks invoices and

monitors vendor performance.

Design and engineering department usually prepare material specifications which

must be communicated to purchasing. Also, design and purchasing people closely to

determine whether changes in specifications, design or materials can reduce the cost of

purchased items.

Receiving checks incoming shipments of purchased items to determine whether quality,

quantity and timing objectives have been met and moves the goods to temporary storage.

Purchasing must be notified when shipments are delayed, accounting must be notified

when shipment are received so that payments can be made.

6. SCIENTIFIC PURCHASING:

Materials are the key resources in an industrial enterprise since no production is

possible without materials. Materials also form a major constituent of the cost of the

product and therefore proper control over their procurement, storage, issue, movement and

consumption is necessary. Materials management exactly does this.

Purchasing is the procuring of materials, tools, stores(or supplies) and services

required for the manufacturing of a product, maintenance of the machines and

uninterrupted running of the manufacturing plant in a manner that guarantees the

marketing of the company s product in the quantities desired, at a time promised and at the

competitive price consistent with the quality desired.

It is the essence of buying goods of right quality, in the right quantity, at the right time

and at the right price from the right source.


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These essentials of scientific procurement are though complimentary yet

achievement of one does not guarantee the other. The buyer may have a source capable of

giving quality product but he may not have enough capacity to meet quantity requirements

in time or the source may have the capability to supply goods of right quality & in the right

quantities but he may not supply at the right price or at the right time. But if the buyer has

right kind of sources, then he can get the goods of right quality, in the right quantities, at

the right time & at the right price. To conclude, for scientific purchasing, greater

emphasis has to be placed on locating, selecting, developing & retaining right kind of

suppliers.

7. PURCHASE AS A PROFIT CENTRE

Purchase department in almost all companies is the biggest spending dept. Almost

50 to 60% of the company s income is spent on materials. The very fact that the purchase

department is responsible for such a high percentage of the company s money highlights its

role in the profit making potential of the company. The purchase department is though a

cost centre, but considering its role to save company s money, it should be looked upon as

a profit centre. Every rupee saved in buying goes to the profit column of the balance sheet.

Hence the efficient performance of the purchasing function is vital for the efficient

functioning of the whole organization. Purchasing is no longer a clerical function, but a

dynamic discipline which can play a major role in the company s growth. The purchase

dept should employ different cost saving techniques & contribute to the corporate

profitability resulting in the growth of the economy.


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8. PURCHASING PARAMETERS:

RIGHT

ATTITUDE

SWOT

Analysis.

RIGHT MATERIAL

Value analysis

RIGHT TIME

Right reorder point, Lead

time analysis

RIGHTQUALITY

Rejections specifications

RIGHT QUANTITY

EOQ& Inventory models

RIGHTSOURCE

Vendor rating

purchase research

RIGHT PRICE

Negotiation learning curve

RIGHT CONTRACTS

Legal Aspects

RIGHT PLACE OF

DELIVERY


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STRUCTURE OF MATERIALS MANAGEMENT DEPARTMENT IN

UPL:

Material manager

(Pune plant)

Raw

material

Section

Brought

Out

Section

Consumable

Section

Sr.

purchase

engineer

Purchase

engineer

Sr.

purchase

engineer

Store asst.


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6. PURCHASING CYCLE IN UPL

6.1 ESTABLISHING THE NEED FOR PROCUREMENT

The need for procurement may arise from the following:

1. Material shortage report generated by the MIS system, work order-wise and buyer-

wise.

2. Advance information about long items.

3. Purchase indent of other items.

4. Specific requirement of design.

5. Requirements of other plant.

6.2 SCRUTINITY OF PUCHASE REQUIRMENT

The items are generally specified by part no and description in the requirements. They

are generally scrutinized to check the following:

1. Whether the description is correctly and clearly given.

2. Whether it signed by authorized signatories.

3. Earlier purchase history of items.

4. Price list.

5. List of approved suppliers.

6. Whether new sources are required to be developed.

All the above information can be obtained from purchase data bank in the ERP system.


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PURCHASE CYCLE

Establish

Procurement Need

Order

Preparation

Market research /

Source selection

Follow up Receiving &

Inspection

Invoicing &

Payment

Scrutiny of purchase

requirement


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6.3 MARKET RESEARCH AND SOURCE SELECTION

This step includes:

1. Floating enquiries for items whose prices fluctuate widely from tie to time.

2. For items purchased to commercial standards faxed quotations are obtained from

vendors.

3. For items that have not been purchased before new vendors are searched and

activities related to selection and approval is undertaken.

4. When the amount involved is less than Rs 1000 the buyer can opt for petty cash

purchase

The enquiries are floated top preferably three or more suppliers, exception based on

urgency, value of items and past experience of supplier.

6.4 ORDER PREPARATION

Once quotations are received, they are scrutinized. A synopsis of the quotations

(comparative statement) is prepared and analyzed. The lowest quotation as well as buyer s

judgment and previous experience is considered while finalizing the supplier. Negotiations

are then held with the supplier for finalization of price and commercial terms. The purchase

order document contains the relevant information to understand the clear requirements of

supply as pre specifications.

1. Part no. and description of items.

2. UPL drawing no. along with latest issue status.

3. Reference of UPL Std / Indian Std / international Std.

4. Requirement of predelivery report.


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PERIODIC ORDERING SYSTEM

Shortage

report

arrives

Determine

Re-order

quantity

Issue

replenishment

order

Receive

supply

Update

records

Demand

arrives

Check up

Stock on

hand

Is stock on

hand

>=demand

Fill Order

End

Yes

Back

Order

No


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FLOW CHART TO SELECT SUPPLIER

No

Yes

Yes

No

No

Yes

yes

No

Purchase indent

is this a regular item?

Is there an annual

contract?

Was last supplier satisfactory?

Should more

suppliers be

checked?

Place order

Evaluate performance

Make short list of possible

sources

Obtain Quotations

Prepare Comarativestatement

Select Supplier

Finalise terms of Contract


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5. Special quality / test inspection requirement.

6. Delivery terms.(Ex Our Factory / Ex Your Factory)

7. Payment terms.

8. Visit of customer at supplier s premise if contractually agreed with customer.

9. Special packing and dispatch instructions, if any.

10. Applicability of excise, ST, Octroi, discount, tooling cost, development costs,

penalty, etc.

11. Warrantee clause.

12. Special comments if any.

13. For a special characteristic items / the quality requirements like method of

inspection / any special processes of manufacturing to be indicated.

14. For capital items a progress report to be requested.

The final price is then placed before the pricing committee for approval. If its new

supplier, then approval of the supplier also to be done by the authorized person after

evaluation. A letter of intent is send to the supplier along with necessary document,

drawings, as advanced information, if required, to begin the processing the order. The

details of the purchase order are fed into the ERP (MIS) system. Finally the computerized

purchase order is sent to the supplier.

Determining the right price

A very important aspect of purchasing is to determine the right price. For this

purpose, the purchase managers refer to the past purchase records in the MIS system, price

list of supplier s as well as the quotations obtained. The buyer then weighs all the

information in light of his experience with individual suppliers and is own assessment of


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price movement during the time period in question. Reduction of price or whether any

terms of supplier can be altered to the buyer s advantage.

6.5 FOLLOW UP

Pre delivery follow up with the supplier is done to remind him of the due date and

obtain advance information about the expected delays. Telephone, fax and email are the

preferable methods used depending upon the criticality of items. A visit to the supplier s

works may also be required. Shortage chasing is done as soon as the due date is over.

Supply status is intimated to shop / assembly/ end user. For cash purchase of less than

Rs1000, a comparative statement is submitted to Finance every fortnight. If there are any

changes in order, that is also communicated to the supplier.

6.6 RECEIVING AND INSPECTION

Once the material is received from the supplier, it is physically verified with

respected to PO details. The challan is also verified and Goods Inward Note (GIN) is

prepared. The material is then inspected as per the acceptance criteria. Rejected material is

then sent back to the supplier by preparing Rejection Note. The accepted material goes to

the stores which then updates the records in the ERP (MIS) system.

6.7 INVOICING AND PAYMENT

The supplier s invoice is sent to the accounts department. A copy of GIN is also

sent accounts link up invoice with the GIN and purchase order details and verifies. The

price, sales tax, transport charges, discounts are verified against purchase order while

quantity is checked against GIN. The invoice is then passed for payment.


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7. CONSUMABLE STORE DEPARTMENT IN UPL

Store function concerned with receiving movement storage and issue of items, raw

material, brought parts, tools, spares, consumable stationary etc. required for production,

maintenance and operation of the plant and finished goods until its dispatch to customers.

Store therefore is the custodian of all goods that are received in the company until they are

consumed or sold and naturally it assume the responsibility of receiving, storage,

preservation, issue and accounting.

It is very important department in UPL. Consumable is related with indirect

materials required at the shop floor. Indirect material is defined as any inventory that does

not go into the final product but is used during the manufacturing process. Manufacturing

companies of all sizes depend on these indirect materials to keep their plants running

smoothly and meet production goals. This includes tools, machine parts, chemicals, shop

rags and other inventory items. These items play a key role in manufacturing the product

but are peripheral to the product being manufactured. This inventory is thought of as a cost

of doing business. Indirect material is a large cost of manufacturing that can be tracked and

controlled by consumable department. It serves all the needs of production, maintenance,

quality by providing the items like expandable tooling(drill bits, cutting tools, inserts

grinding wheels), reworkable tools (tools requiring sharpening, drill bits, white bits, saw

blades etc,), gages & calibration instruments, and so on.

Purchase and consumable store are goes hand in hand. Consumable department

purchase indented items as per requirement. Receive them, store with proper item code in

respective location. Consumable store is divided in to two parts, receipts and issues. It also

handle material requirement of other plants of uma precision limited.


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7.1. ITEM CODIFICATION:

It is an important factor concerning indenting, purchasing and issuing activities is

an accurate and logical identification of materials. Wrong identification results in wrong

purchase and / or issuance of a different item than what is indented. Codification systems

too are not perfect, but codes are shorter and as such minimize errors.

Codification is the systematic concise representation of equipment, raw material,

tools, spares, etc., in an abbreviated form employing alphabets, numerals, colours, symbols,

etc.

BENEFITS OF CODIFICATION:

1. Accurate and logical identification.

2. Avoidance of long and unwieldy description.

3. Prevention of duplication.

4. Product simplification.

5. Efficient purchasing

6. Minimization of clerical work.

7. Efficient store keeping.

8. Accurate and reliable recording and accounting.

9. Easier computerization.

10. Proper quality description of the item which assists in efficient inspection.


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1.1. THREE BASIC STAGES OF CODIFICATION:

1. Identification:

It is the process of assigning correct nomenclature to the items. The description

must take in to consideration the specifications and technical name of the item.

Identification system should be uniform for all items.E.g. A 20 Dia drill may be described

as Drill, H.S.S., Taper Shank

2. Classification:

IS the arrangement of items in to groups according to a predetermined pattern

(governed by common features of the items). The grouping of store items which may be

done on the basis of Description , As per suppliers , As per origin , Value , or

Function of the item.

a) Description classification refers to the grouping of items of similar description,

irrespective of the end use, in to one class. Bearing are put into one class, oil seals in to

another class, o- ring in third category, Belts in to fourth class. Tools in to another category

and so on.

3. Codification:

IT is the allocation of the specific codes to the items within the broad frame work of

the selected system. A codification system always tailored made to satisfy the specific need

of a firm. There are many standard systems out of which firms could choose but care

should be exercised in its use. The codes should have the following characteristics:

(A) Simplicity: The system must be simple in form it should permit its operation in

hands if non specialist personnel.

(B) Brevity: The code should use minimum possible number of digits.


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(C) Flexibility: The system should both identify and classify all the existing items and

should have all enough extra unsigned codes to absorb future items readily without

upsetting established sequence of numbers.

(D) Uniqueness: The system should ensure one and only code for each item. That is

each item should have a unique identification.

(E) Layout of codes: Layout of code should be easy to handle.

1.2 PRINCIPLE SYSTEM OF CODIFICATION

1. Alphabetical system:

The system employs alphabets as a code for classification as well as identification

of the items.

2. Alpha numeric system:

Alphanumerical system in the combination of alphabetical and is in improvement

over the two methods.

Each item is identified and is given a proper description.

Identical items are classified into groups and each group provided a suitable

heading.

Codes are assigned next to the group, which are usually the alphabets.

Individually items with in each group are assigned numbers based on block system

or decimal system.

E.g. Main Class: FN(fasteners) , Sub Class: 0000, Vocabulary Code : FN000044

: FN000045


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3. Numerical system:

Decimal code: the code under this system consists of a group of numbers separated

from each other by a decimal point, identifying the general category of items, sub category

and individual items.

The first category called general category divides the items in to main classification

such as raw materials, electrical items.

The second category called Sub category divides the main classification in to sub

classifications according to their nature, use or characteristics.

The third category called item category divides the sub category into individual

items within the subcategory.

The number of digits can be decided on the requirements of stores but their number

within the consecutive decimals is restricted to four to make the code convenient to handle.

For example: Cutting tools is the major category , this may be divided into subgroups like

inserts, milling cutters, grinding wheels, drills, reamers, taps, etc. And each sub group

divided in to centre drills, taper shank drills, extra long drills, stub drills, etc. the above

may be codified as:

Main Class Sub Class Particulars Item Code

Tools (01) Drills (001) centre drill D 2.5 01.001.001

Centre drill D25 01.001.002

Centre drill D42 01.001.003

S.S.drill 12 mm 01.001.004


June-July 2006 - 39 -

7.2. ACTIVITIES OF CONSUMABLE STORE:

1. RECEIPTS:

Receive material on gate take gate entry on chalan.

Preparing Goods inward note: (GIN)

Goods inward note is prepared when material is received in store. For that you

have to select the PO or item code of that particular material, check the rate and discount

check the physical quantity vs. chalan and original quantity, according to terms and

conditions in PO check tax terms and then prepare GIN.

GIN and material Shifted to Holding store:

Check physical quantity vs. chalan quantity

If quantities ok sign qty. checked.

If not ok generate short discrepancy note to supplier.

Check quality of material if found ok accept, if not ok prepare rejection note

&return material with proper excise supporting documents, if excisable.

Shift material to respective locations with item codification.

Maintaining a adequate inventory.


June-July 2006 - 40 -

2. ISSUES:

Receive material requisition slip signed by authorized person.

Check whether material is in stock.

If in stock issue and mention item code on requisition slip.

Collect all slips for the day and feed issues in ERP.

If material is not in stock mention those items in pending register

Purchase those items according to procedure.

Daily Preparing documents for management information: Company Level Data,

vendor challan register and total filing.

7. 3. PERPETUAL VERIFICATION OF MATERIALS IN STORES:

Under this, all items of the store are verified through counting, weighing, measuring

etc. at the end of every month. It is a continuous function rather than a year end system. It

helps to found out the items reached a minimum level and also find out non moving items.

7. 4. ABC ANALYSIS (Always better control)

ABC analysis is a basic analytical management tool it helps to keep always better

control over the materials. This is a selective control technique applied in various areas

such as inventory, criticality of items, obsolete stocks, purchasing order, and receipt of

materials, inspection, store keeping and verification of bills.

The materials can be divided in to three categories for selective management

control. The alphabets A, B, C stands for the three different classes. ABC analysis refers to

the annual consumption value of the items. It has been found out in many industries that a

small number of items account for a large proportion of the annual turnover of the


June-July 2006 - 41 -

inventory. These items have less than 10% of the total number will account for a

substantial portion of about 75% of a total consumption value, and these few items are

called A items which need careful attention of the materials manager. Similarly a large

part bottom items over 70% of total number can account for only 10% of the consumption

value and are known as C class. The items that that lie between the top and the bottom are

called B category items.

A Items

High Consumption Value

B Items

Moderate Value

C Items

Low Consumption Value

1) Very strict control Moderate control Loose control

2) No safety stocks (or very

low)

Low safety stocks High safety stocks

3) Frequent ordering Once in Three months Bulk Ordering once in six

months

4) Maximum follow up and

expediting

Periodic follow up Follow up and expediting in

exceptional cases

5) Minimization of waste

obsolete and surplus

Quarterly control over

surplus and obsolete items

Annual review over surplus

and obsolete items

6) Maximum efforts to

reduce lead time

Moderate efforts to reduce

lead time

Minimum efforts to reduce

lead-time.


June-July 2006 - 42 -

8. SOURCE SELECTIONS AND EVALUATION

The objective of right price, right quality, right time and right quantity cannot be

achieved unless there is a right source. Hence greater emphasis is given to locating,

selecting, developing and retaining the right kind of suppliers. The source selection and

evaluation in UPL is done as per ISO 9001-2000 Quality Manual.

8.1 Locating Potential Suppliers

There are various sources from which information on suppliers of different material is

available. These are

1. Trade directories and trade journals

2. Telephone directories.

3. Supplier catalogues.

4. Trade exhibitions.

5. E-sourcing

6. Company personal recommendations.

7. Public tenders.

As per the Quality Manual ISO 9001-2000 suppliers should be selected from the

following:

1. Established supplier.

2. UPL evaluated supplier.

3. ISO certified supplier.

4. Authorized dealers.


June-July 2006 - 43 -

8.2 New Vendor Development Process

There are various factors that go to approve a new supplier and all these factors have

to be evaluated with ref to buyer s needs before a supplier is finally approved. The process

is as follows:

1. Considering full Profile of the supplier s organization.

2. Technical / Commercial competency.

3. Assessments of supplier s quality system.

4. Clearance from design department.

5. Hading over document sheet to project manager for ordering.

6. Ordering to be done subsequently by material group.

7. Performance to be observed at least one and then include in the approved list if

necessary by giving supplier code.

If there is no transaction with supplier for three years or supplier re-locates manufacturing

unit, then fresh assessment of supplier is done.


June-July 2006 - 44 -

8.3 Vendor s Performance Evaluation and Rating

It is necessary to see whether suppliers are meeting performance standards of the

company. Hence performance evaluation is carried out every year and the supplier is given

a rating. The performance rating of the supplier is given after evaluation of the following

points.

I. Quality

1. Has the vendor supplied the quality that has been specified?

2. Have there been any complaints from the customers?

3. Is any rework to be done based on supplier error?

Supplied quality is compared with various parameters of accepted quality.

Vendor rating quality index = No of lots rejected

No of lots accepted

II. Price

1. Are vendor s prices reasonably fair?

2. Does he offer any discounts?

3. Are follow up costs too high?

Vendor rating price index = Lowest price bid

Price bid by vendor


June-July 2006 - 45 -

III. On Time Delivery

1. Total number of consignments delivered.

2. No of consignment delivered on time(gap between actual date and delivered date to

be considered )

3. Safe delivery of consignments against damages.

Vendor rating delivery index = Delivery on Scheduled

Total no of Deliveries

The suppliers are informed about there rating.

1. Suppliers having performance rating less than 50% are deleted from the supplier s

list unless justified by Head operations.

2. Suppliers between 50-85% are penalized by reducing share of business.

3. Supplier rating adjusted manually if there are complaints from shop.

Non-Approved Suppliers

These include:

1. Supplier delivering small items.

2. Supplier delivering non critical items < Rs 1000.

3. New sources under development with clearance from Design / Dept Head-

Materials

After techno-commercial evaluation.


June-July 2006 - 46 -

8.4 SUPPLIER RATING

Rating Grade

85% and above Good

Between 75.00 & 84.00% Satisfactory

Between 50.01& 74.99% must improve

Below 50% Poor

No business to be done with suppliers with poor rating.


June-July 2006 - 47 -

9. PROBLEMS ASSOCIATED WITH PURCHASING

1. Problem arises in purchasing due to sudden change in processes, new demand by

customer, sudden change in plans.

2. A major problem is that suppliers not paid on time due to which they loose

confidence with the buyers and end up making buyers pay in other ways.

3. In some cases suppliers are not reliable which results in late deliveries and quality

may also not be up to the mark.

4. Procurement and follow up costs are high if there are too many suppliers or if

suppliers are located far away.

5. If sufficient advance information is not given to the buyer s about procurement of

items, then the material may have to be procured at the eleventh hour at higher

costs.

6. There may be more than one buyer procuring similar items. If both the buyers do

not coordinate, it is likely that one will procure at a higher cost and the other at the

other cost.


June-July 2006 - 48 -

10. FINDINGS:

1. Company recruits handicap people in assembly line of various products and give

them equal opportunity to earn money.

2. Single material management handles the requirements of four plants of company.

Company has Good co- ordination among the four plants.

3. Working on Kaizens & moving towards total productive maintenance.

4. Production capacity of a company will be double with in one year.

LIMITATIONS

1. All the programs are going under ERP system so there are the limitations regarding

the analysis of the data without user of that company.

2. As material management is a vast topic it required a lot of time to understand

procurement control systems of company.

3. Non-availability of data because of the confidential matters.

4. Some time a respondent was busy.


June-July 2006 - 49 -

11. RECOMMENDATIONS FOR IMPROVEMENT

Objectives of improvement

1. To facilitate cost saving in purchase while still maintaining quality.

2. To reduce lead-time.

3. To improve delivery.

4. To develop long lasting relationship with suppliers.

(10.1) JUST IN TIME (JIT) METHODS

JIT is a philosophy of continuous improvement in which non- value added activities

(Wastes) are identified and removed for

Reducing Cost

Improving delivery

Improving delivery

Improving quality

Improving performance

1. Single Sourcing

JIT is rooted in simplifying everything. Dealing with none supplier, or at most three

suppliers if volume are large allows simplification of paperwork, physical handling,

complex transition processing, etc. things such as RFP s bids, quotes and other arm s

length activities waste time and resources. Also there is waste from late deliveries

(expediting), defective products, poor service and damaged goods. A single supplier should

involve pact that both parties will work to eliminate waste in supply chain.


June-July 2006 - 50 -

2. Supplier Certification

JIT cannot succeed without continual quality improvement. The idea of Supplier

Certification in JIT is to certify that your suppliers also believe in quality first and have

formal quality improvement processes and goals. Striving for zero defects is a joint strategy

between you and suppliers cannot be achieved when there are too many suppliers. Reduce

the supply base to allow more time to work with key suppliers on quality improvement.

3. True Partnership Focus

JIT dictates that suppliers became an integral part of manufacturing flow process

and this requires huge increase in interaction at all levels. Purchasing should not be the sole

communication point with the suppliers. Problem solving, process improvement and waste

elimination require cost sharing buyer with key supplier to successfully attack right things

at right time. But this require trust, a view that supplier are stack holder with you and long

term commitment to the relationship. The result of cost sharing must benefit both in these

environments to allow sustainability.

4. Joint Cost Reduction Objective of Design

Supplier involvement in the design process can of great help to engineering but the

supplier must be also commuted to target cost saving thus supplier chosen must not only

have some ideas, but also be clear how to meet engineering need thought out the process.

Purchasing should make sure that the design process receives the benefit of using supplier

resource so that the idea grows on engineering with every project completed

5. Joint strategies to meet customer expectations

JIT being with customer. To meet and exceed customer expectations require some

level of interaction between supplier and customer without this first hand contact and

knowledge, your key supplier can not contribute to strategies for meeting customer

expectations. When your market place requires target pricing of new product from your

supplier, they need to know every thing that can above customer requirement that still must


June-July 2006 - 51 -

be met with in the cost goals.

6. Outsourcing Of services

Out sourcing suggest an organization focused on few, well chosen core

competencies supported by long term outside relationship for many of its other activities

and resources. This definition avoid the quick fix, lowest cost mentality and actually

alludes to that which all strive in our purchasing activities

buying great values. Secondly,

pursue outsourcing in a manner that target more time for value added activities, rather than

puts people out of work. Purchasing should only take the lead to recommend outsourcing in

those activities that push the limit of internal resources. The idea here is not to just look for

goods and services to outsource, but to recognize where it is already being done by default

and get involved as a purchasing professional to help do it better!

7. Inventory Control

Functions of Inventory Control

a. To get right amount of stock at right at right time of requirement.

b. To minimize inventory and inventory cost.

c. To reduce material handling and handling costs.

d. To prevent loss through damage, obsolescence.

JIT methods can be effectively used as they emphasis on waste elimination.

I. Total Quality Assurance of Suppliers

If the suppliers are able to deliver goods of 100% quality all the time, there is no

need for quality checks at buyer s premises and material can straight away be taken to shop

floor for production. This eliminates cost for preparing GINs, inspection costs and costs

involved in rejection of goods. For this Total Quality control at supplier s end is vital and

has to be cent percent.


June-July 2006 - 52 -

II. Zero Inventories

In JIT, daily or at the most twice a week; deliveries are expected from suppliers

rather than traditional deliveries of large quantities. For this suppliers have to be geared to

actual requirement on shop floor. Deliveries from supplier should directly come to shop

floor instead of routing through stores. This will also eliminate cost of receipts and storage,

which is generally very high.

III. Reduced material handling and handling costs

If we make a flow chart of material from the time it is received to the time finished

product is sent out, we will notice that material has been handled a large number of times.

Handling does not add value to product and must be eliminated. A close study of the

handling systems will reveal the amount of waste hidden in material handling.E.g. Indirect

labour involved in material handling may be more than direct labour. Hence scientific

technique for material handling needs to be evolved.

IV. Worker Participation

The whole organization, right from directors to the shop floor worker must be

involved in cost reduction programs. Workers should be trained in multi trade so that they

are capable of doing several jobs as well as encouraged to contribute new ideas towards

work simplification, which can cut costs.

V. Partnership Focus

In JIT systems, the relationship between buyer and seller is that of Partnership

rather than two different companies with different interest. The suppliers factory is

considered as an extension of ones own factory. Also trend is on single supplier, or at most

three suppliers, if volumes are large. Hence by remoulding relationship, JIT can achieve

tremendous results.


June-July 2006 - 53 -

VI. Vendor Managed Inventory (VMI) for MRO supplies and non

critical items.

A new concept in inventory management is VMI. If the vendors take care of repair,

maintenance and office supplies, it will costs for obtaining and managing these inventories.

The costs arising from unavailability of these spares will be eliminated. The same can be

applicable in case of non-critical items.

(10.2) OTHER METHODS

1. COST SAVING ON PURCHASE DATA.

Create a pricing history variance report

Prepare a report of items that have fluctuating prices on past orders. This can be a

source of cost savings in areas where decision to buy are often made at the last minute.

Annual volume pricing contracts should bring down price compared to small one time buys

of each item.

Help your suppliers buy better

If you receive a volume discount for buying nuts and bolts for your operation, can

you have another supplier buy nuts and bolts on that contract in making a component for

you? Or if you steel sheets or copper tubes for your own fabrication uses can a fabrication

supplier buy from source when you occasionally subcontract some work to that fabrication

supplier? Cross reference lists of sub-components used by one supplier to your own

contract. This or electrical components and sheet metal purchases.


June-July 2006 - 54 -

2. COST SAVING IN FREIGHT

If the terms of supplier are freight pre-paid then as a purchaser you do not know

how much you are paying for product vs. freight and handling charge. If you think your

supplier has more clout with their freight buying volume, test such an assumption before

putting sources of freight services in their hands. The transportation function of the

company should take advantage of purchase person s breath of experience and together

they can work as a team to create additional savings and improved strategies.

It may appear difficult to justify adding freight responsibility to purchasing dept.

load. But it needs to be viewed as another expensive commodity requiring cost and quality

control.

3. Payment policy

If you do not pay your suppliers on time as per payment terms, you have a

credibility problem with the suppliers. It is necessary to create a partnership between

Purchase and Finance to look at process problems first. Agree that whatever policy is

determined for payment will be followed. Otherwise most suppliers end up making you pay

for it in other ways because they have to deal with cash flows too.

4. Purchasing Forecasts

Converting marketing forecast data to usable form

The obvious source of internal data that purchasing contents with is the marketing

forecast itself. Whereas a marketing forecast deals with end products purchasing must

convert marketing data to a forecast for supporting materials and components. MRP is not

helpful in this way because it changes continually for every minor production change. It

also generally has a limited planning horizon and projects future needs of individual items

rather than components groupings, or supplier workloads.


June-July 2006 - 55 -

Inflation forecasting using external data

Since inflation is built into every business s financial plan, the control of inflation is

critical to meeting profit targets. The purchasing must forecast overall inflation for the

business financial plan using correlated external data obtained from components,

commodities and pricing indexes. This data can be used as an inflation budget to trigger

supplier long-term agreements that keep costs below the forecast. Hence good, credible

forecasting can control pricing. As purchasing gets more involved in forecasting activities,

they will discover more opportunities to save money and in times of tight supply, save the

business.

5. Lead Time Analysis:

Preparing lead-time reports and analyzing them is an effective ways to estimate lead

time and devise methods to reduce the time. The items can be divided in to First time

orders, Repeat orders and Emergency orders. The report should not only contain total

lead time but time required for processing the order, delivery of order and receipts of

goods. This analysis will also help identify suppliers who trouble with late deliveries.

6. A, B, C Classification of Suppliers:

Similar to A, B, C classification of items the suppliers can be classified depending

upon criticality / monetary value of the items so that more concentration can be given to A

class compared to B and C.

7. Constituting Supplier Awards

On similar lines of worker awards an award can be given to best supplier

depending upon the performance in the project. This will serve as a moral booster for the

suppliers as well as lay foundation for a strong relationship.


June-July 2006 - 56 -

10. Supplier Relationship Management (SRM)

A very important aspect in the whole process of buyer seller transaction is the

management of relationships. The supplier should be an integrated part of the management

flow process. A true partnership mentality needs to be fostered by management and

practiced by both organizations. Purchasing needs to play the role of facilitator of direct

communication between supplier and customer and provide problem solving leadership.

The relationship should involve a pact that both buyer and supplier will work for the

elimination of waste in the supply chain.

SRM can be practiced by integrating business practices with software. It involves

consolidating and classifying procurement data to provide an understanding of supplier

relationships. The benefits of SRM stem from analyzing supplier relationship to develop

procurement strategies that reduce costs, help in supplier partnership decisions and provide

leverages over suppliers in negotiations.

Certain pre- requisites are necessary for building buyer-supplier relationships:

1. Mutual confidence and interest of both the parties, by avoiding unreasonable

demands, cancellations, delivery alterations, postponements and changes in

specifications.

2. Exhibiting general interest in mutual problems of procurement, market situation,

cost reduction, rejections, and transportations and forecasting.

3. Cooperation in prompt shipments, processing formalities, payment of invoices and

sharing relevant information.

4. Continuous improvement in ordering methods and supplying the services.

5. Intimate understanding and intelligent of each other s business interests.

6. Aiming for sustained and ethical relations, both in short as well as long term.


June-July 2006 - 57 -

11. CONCLUSION

By studying the material flow &procurement control system of an organization it

helps to understand working of material management department.

The concept of purchasing today is undergoing tremendous changes. Major focus is on cost

saving. Considering this view, scope can be examined for:

1. Reduction in variety.

2. Standardizing of machinery.

3. Bringing down inventory.

4. Value analysis of material

Various Programmes can be undertaken to reduce pricing of purchased items, key

processes, inputs, including cost of quality at supplier s end.

Change in purchasing concept

Traditional Concept

(Reactive purchasing)

Modern Concept

(Proactive purchasing)

Period Characterized by More suppliers Few suppliers

Pricing Cost plus Target Price

Supplier Relationship One Time Partnership

Quality Incoming inspection TQC/TQM

Inventory Stock JIT


June-July 2006 - 58 -

Training focus Little/No training Extensive training including

behavioral science

Problem stance Reactive Proactive

View Cost center Profit center

NEW TRENDS IN PURCHASING

1. E-procurement

through Internet / Electronic Data

Interchange.

2. Procurement cards - Payment instrument.

3. Collaborative purchasing

Working together to add

value.

4. Green purchasing

Purchasing Environmental friendly

materials.


June-July 2006 - 59 -

12. BIBLLIOGRAPHY:

1. Material & Logistics Management - L.C. JHAMB

2. Material Management - by Gopalkrishnan

3. Total Quality management- K. SHRIDHARA BHAT

4. Purchasing & Inventory Control - K. S. Menon

Website: www.umaprecision.com

http://www.umaprecision.com


June-July 2006 - 60 -

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Study of material flow and procurement control systems of material

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