1

PAPER CODE – MHA 202: MATERIALS MANAGEMENT

Total Hour - 30

1. Materials Management: 5L

1.1 Need, scope and advantages; material forecasting

1.2 Materials Requirement Planning and budgeting and controlling

1.3 Logistics; Principles, components, Importance in Healthcare units, logistic

supplies, services and users

1.4 Purchase cycle.

2. Inventory planning and control 4L

2.1 EOQ models – without shortage, with shortage, with price breaks; effect of

quantity discount.

2.2 ABC, FSN and VED classification; inventory control; perpetual, two-bin and

periodic inventory

3. Scheduling : Gantt Chart, Johnson’s Rule 3L

4. Purchase Management: 8L

4.1 Purchase policy ; systems; procedures; vendor selection; Negotiation

4.2 Vendor Development and evaluation; Make or buy Decision; Legal aspect of

Purchasing.

4.3 An overview on law of contract and sales of goods act, Drug Control Act.

Highlighting the general features of the Act (no Clause by Clause study)

5. Principles of storage and stores accounting – Types of storage- care and preservation

of materials and equipment, role of computers. 4L

6. Inspection and quality control: 6L

6.1 Types and criteria of inspection; statistical quality control; control charts.

6.2 Contract administration – model contract for different services, i.e., Laundry,

Dietary, Dispensary, Security and ambulance services. Annual Maintenance

Contract.

1. Materials Management: 5L

a. Need, scope and advantages; material forecasting

b. Materials Requirement Planning and budgeting and controlling

2

c. Logistics; Principles, components, Importance in Healthcare units, logistic

supplies, services and users

d. Purchase cycle.

Mr. Dean S. Ammer defines “Materials Management” as the “total control and thus combines those

managerial arts connected with control of goods at all stages in a firm’s operations”.

Materials management is a body of knowledge which helps the manager to improve the productivity of

capital by reducing the material cost, prevents large amount from capital turnover ratio.

Example:

I) Increase in profit by reducing material cost ( total turn over Rs. 130 crore)

Subject This year’s cost ( in Rs.,crore) Next year’s cost ( in Rs. Crore)

Over head cost 10.00 10.00

Material cost 80.00 78.40 (2% reduction in material cost)

Labour cost 18.00 18.00

Total cost 108.00 106.40

Profit 12.00 13.60

Turn over 120.00 120.00

By reducing 2% on material cost, we get 13.33% extra profit than previous year.

II) Increase in profit by reducing labour cost.

By reducing 2% in labour cost, we get only 3% extra profit in compare to the previous case. In this case

producer has to face tremendous labour problem which leads to stoppage of production.

Subject This year’s cost ( in Rs.,crore) Next year’s cost ( in Rs. Crore)

Over head cost 10.00 10.00

Material cost 80.00 80.00

Labour cost 18.00 17.64 (2%reduction in labour cost)

Total cost 108.00 107.64

Profit 12.00 12.36

Turn over 120.00 120.00

Implication: Reduction in labour cost may give rise other implication such as labour problem, slow

production rate, strike, agitation etc. which might increase the total production cost and reduced profit

margin.

Materials management, as the name signifies, means management of materials. it broadly covers purchases

of materials from outside sources, transporting the material in stock, maintaining an optimum level of

inventory of materials, issuing the materials as and when required and finally , keeping an overall account of

materials whether in process or in stores.

Purchasing, store keeping, inventory control, transportation, etc are the par of the material management

system.

So, we can define materials management as the function responsible for the coordinating of planning,

sourcing, purchasing, moving, storing and controlling materials in an optimum manner, so as to provide a

pre –decided service to the customer at a minimum cost.

If we analyze the material cycle or the process, we find that material, is involved every where.

3

Techniques of Materials Management (Spinal Column of a product industry):-

1.1 Importance of Materials Management:

Materials productivity has a significant and direct effect on company’s profitability (ROI) Rate of return

on investment is the ratio of profit to capital which in turn for the purpose of analysis may be split up in to its

basic constituents, profit margin turnover ratio.

Two basic ways to improve R.O.R are:

a) Increase profit keeping capital constant.

b) Reduce capital keeping profit constant.

a) Increasing profit keeping capital constant:

Profit is the life line of an organization

Profits give share holder its dividend

Profits give employees the wages.

Profit gives company to buy materials, machines, tools and other inputs.

Profits provide greater job opportunities.

Profits help the organization to improve quality of life and increase infrastructure.

By taking following measures an organization can control and improve profit.

i) increase units sold (S)

ii) increase units produced.(N)

iii) increase unit price (P)

iv) reduce unit cost (C)

Cost of holding

materials (Cost of interest + rent

of storing)

Material processed (Material cost+ labor

cost)

Materials sold

(Materials cost

+cost of

production+

Material

specified

Materials

bought Materials

received

Materials

stored

Materials

processed

Materials

inspected

Materials

shipped

Rate of Return on Investment

(ROR)

Profit

Margin

Capital Turn-over

Ratio

X

Fig: R.O.R and its constituents

P = Profit

C = Capital

S = Sales

4

i) Increase units Sold (S): Sales and production must be evenly balanced to ensure whatever is

produced is sold, failing which the company will end up with unsold stocks.

ii) Increased Production (N): Production can be increased either by adding another identical production

line or by better by improving productivity.

iii) Increased unit Price (P): Price is generally a function of demand and is controlled by the forces of

supply and demand. A company operating in a buyer’s market may find it impossible to make increase

price, because it makes them non competitive.

iv) Reduce the Cost (C): by reducing cost company can increase surplus (profit), because, cost consists of

three main constituents: material cost, labour cost, and overheads.

In some industries, 60-70% of the total production cost is due to materials. This makes the materials

management one of the biggest areas which is having tremendous scope for cost reduction. A well

controlled and coordinated materials management system may reduce cost up to 20%.

Research reveals that a rupee saving in material cost is almost equivalent to ten rupees of sale. More over,

sale is one time sale. Saving on other hand is a recurring benefit. Effective materials management,

therefore, has a tremendous effect on the profitability of the firm.

b) Reduce capital keeping profit constant:

Another alternative to increasing profit to improve ROR is to reduce capital. Capital can either be tied capital

or working capital which in a manufacturing firm is generally tied up in the proportion of 60:40.

The fixed capital –capital deployed in fixed assets like land, buildings, plant and machinery etc. –is fixed.

Over 80% of the working capital is blocked up in inventory. (Raw materials, Work –In- progress, finished

goods, spares, etc.) , which can be reduced if proper materials management techniques (JIT, MRP,

scientific inventory control).

1.2 Materials management Functions

1) Material planning and control.

2) Purchasing and sub contracting.

Profit

Sales – costs

Unit Sold

(S)

Unit Price

(P)

S × P

Unit Produced

(N)

Unit Cost

(C)

N × C

N (P–C)

5

3) Inventory control.

4) Store keeping and ware housing.

5) Codification, standardization and variety reduction.

6) Transportation and material handling.

7) Inspection and quality control.

8) Cost reduction of materials through value analysis.

9) Disposal of scrap obsolete materials.

1.3 Scope

1) Material planning and control: Based on sales forecast and production plans, the material planning

and control is done. This involves –

Calculating the individual requirement of parts.

Preparing material budget.

Forecasting the level of inventories,

Scheduling the orders and monitoring the performance of production and sales and relate the

performance of production and sales in order to supply materials at the right time to right place.

2) Purchasing: This includes -

Selection of sources of supply.

If required, develop source of supply.

Placement of purchase order.

Follow-up.

Develop and Maintain good relationship with supplier.

Approval of payment to supplier.

Evaluating and rating of supplier.

Material

planning

Purchasin

g

Inventory

control

Store keeping

Stores accountin

g

Transportation

Disposal of surplus material

Materials

economics

Waste management

FUNCTIONS OF MATERIALS

MANAGEMENT

6

3) Stores and inventory control: This involves -

Physical control of materials.

Preservation of stores.

Minimization of obsolescence and damage.

Handling the materials.

Identification and codification

Maintenance of stores records.

Proper location and stocking.

Physical verification of stocks and compare them with records.

Inventory controls cover following aspects -

Setting inventory levels.

ABC analysis.

Fixing EOQ.

Setting safety stock levels.

Lead time analysis and reporting.

1.3 Needs and Objectives of Materials Management

II) Primary Needs/ Objective :

1) Low price: It means that the materials purchased by the company should be at the lowest possible

cost but highest quality. So, that they can provide end product in lowest price.

2) High inventory turnover: It means that the average inventory locked up is low compared to sales.

Inventory means idle and therefore, the lower it is , the better will be profitability.

3) Low cost acquisition and possession: This means the materials are acquired and kept in stores

at a low cost.

4) Continuity of supply: Regular continuity of supply is the must to run uninterrupted production.

5) Consistency of quality: Quality should be up to the level and consistent.

6) Low pay roll cost: the materials department should be run at the lowest possible cost.

7) Favorable supplier relation: to ensure continuity of supply and consistency of quality, it is

necessary to have a favorable supplier / buyer relation.

8) Development of personnel: development and training of personnel engaged in materials functions

is necessary to make them seasoned with the present technology and trend.

9) Maintenance of records.

III) Secondary Needs / objectives:

1) Favorable reciprocal relationship with supplier dealer and department.

2) New materials and products – materials manager acts as an information centre about latest

modification of product, ingredients, supplier information, etc.

3) Make or buy decision and analysis: - he / she should decide whether a product is to be made by

company or, procured from some other company.

7

4) Standardization: - the required materials which are bought from outside should be standardized so

as to have fewer nos. of materials. This will help the total inventory.

5) Product improvement: - the materials department should help R&D dept. to improve the attributes,

ingredients of product and quality as well to increase profit level.

6) Interdepartmental harmony

7) Forecast: - material department has to prepare the material budget and forecast the payment.

8) Increase profitability.

1.4 Advantages / Benefits

1) Better Accountability: Through centralization of authority and responsibility for all aspects of materials

function, clear cut accountability is established. Various user departments can discuss their problems

with regard to material to one central point so that action can be taken immediately. It helps in evaluating

the performance of a materials management is an objective manner.

2) Better coordination: This result in better support and cooperation in the accomplishment of the

materials function. It creates an atmosphere of trust and generally better relations between the user

departments and the materials management.

3) Better performance: As all the inter-related functions are integrated organizationally, greater speed and

accuracy results in communication. Need for materials are promptly brought to the notice by materials

planning.

4) Adaptability to EDP: All information with regard to materials function is centralized under the integrated

materials management function. This has facilitated the collection, analysis of data leading to better

decision.

5) Miscellaneous advantage: Under a central materials manager, a team spirit is inculcated. This results

in better morale and cooperation. The opportunities for growth and development are better in an

integrated set-up. An individual under such a set-up is not confined to any one function alone, and he

gets over a period exposed to broader aspect of the materials function.

Procedures of Materials Management

1) MATERIAL

SPECIFICATION

2) BILLS OF

MATERIALS

3) MATERIAL REQUIREMENT

PLANNING

4) MATERIAL

PROCUREMENT

INSPECTION

(IF NECESSARY)

5) MATERIAL

TRANSPORTATION 6) MATERIAL

RECEIPT 7) MATARIAL INSPECTION

8) MATERIAL STORAGE AND

PRESERVATION

9) MATERIAL

ISSUE 10) MATERIALS

PROCESSING

11) PRODUCT INSPECTION FOR

QUALITY CONTROL

12) PRODUCT

DESPATCH

8

1) Materials specification:- it is joint effort of R&D dept. engineering dept. and production & materials

management dept.

2) Bills of Materials: - it is the responsibility of engineering, production and material dept.

From step no. (3) To step (9) are called INTEGRATED, MATERIALS MANAGEMENT and these are

responsibilities of materials management.

1.7 Needs for Integrated Materials Management

The material is an important factor of production; the functions of materials management as earlier stated

are as: materials planning, purchasing, receiving, stores, inventory control, scrap and surplus disposal.

When some of the above functions if separately handled normally, a conflict of interest arise. For example:

purchasing department, if allowed to operate independently, may take decision which may result in sub-

optimizing. similarly, under a separate set-up, the purchase department may treat discount without taking

into account its impact on the warehousing and carrying cost. The need of balancing the conflict objectives

from a total organization as a whole.

Hence, the material manager, who is responsible for all such interrelated function, is in a position to exercise

control and coordinate with an overview that ensures proper balance of the conflicting objectives of

individual function .

Integration also helps in the rapid transfer of data, through effective and informal communication channels.

Thus is crucial as the materials management functions usually involve handling a vast amount of data. Thus

integrating the various functions ensures that message channels are shortened and various functions

identify themselves to a common materials management department which, in turn, results in greater

coordination and better control.

MRP-I (Materials Requirement Planning), MRP-II (Manufacture Resource

Planning), ERP (Enterprise Resource Planning)

1.8.1 MRP-I (Materials Requirement Planning)

If the delivery schedule for the end product is known, then the size and timing of the requirements of the

various lower-level work in progress items, raw materials can be planned exactly by simple arithmetical

calculation. Such planning is known as materials requirement planning, popularly known as MRP-I in short.

In order to know the MRP-I computation, one need to know –

a. the product structure showing how the end-product is made up of certain assemblies, sub-

assemblies, down to the components, a bill of materials being derived there from:

b. the lead time to produce/ procure the different items at the various levels (from components to end-

product);

c. the demand or the delivery schedule of the end –product;

d. The current on hand stock of the various items, as also the scheduled receipt of the items being

planned.

Master production

schedule

Forecast for the finished product

Customer order for finished product

Product design and structure

Inventory on hand

Revise the Master Production

9

MRP is thus calculation of the requirement of the dependant demand item i.e., items whose demand is

dependant upon the demand for their respective higher level items, and a reconciliation of this requirement

with the production capacity available. The end product in a company would be the independent demand

items if the demand foe these is not easily computable based on the demand for other items else where.

The Above Picture Shows The Product Structure of End Product P. if 50 units of P are to be produced , what

are the requirements of the various lower level items ?

The tree diagram shows that:

i. In-order to produce one (1) unit of end product P, we require three of Q, one of R and two of S.

ii. Each Q requires two of R and two of T;

iii. Each S requires three of T and four of U.

In the product –structure tree, the figure in parentheses is the number (units) required of that item in order to

produce one unit of the higher level item.

Therefore, the number of R required to produce one of P are:

The number T required to produce one of P are:

Other computation done similarly:

Item No. Reqd. to produce No. Reqd. to produce

P

R (2)

Q (3)

T (2)

R (1) S (2)

T (3) U (4)

(1) + (3×2) = 7

R going into P R going into Q

(3×2) + (2×3) = 12

T going into Q T going into S

10

One P 50 P

Q 3 150

R 7 350

S 2 100

T 12 600

U 8 400

1.8.2 The MRP Technique – A Requirements Calculator

MRP is a technique of working backward fro the scheduled quantities and need dates for end items

specified in a master production schedule to determine the requirement for components needed to meet the

master production schedule.

MRP was originally perceived primarily as an inventory control tool, providing reports that specify how many

components should be ordered, when they should be ordered, and when they should be completed.

Limited use of the term MRP techniques which is sometimes referred to as an “order launch and hope”

approach to managing inventory – does not include the use of feedback for tracking the actual progress of

orders or for the readjustment of orders in response to actual performance.

1.8.3 Closed-Loop MRP – An Information System for Planning and Control:

When MRP is extended to include feedback from and control of vendor orders and production operations, it

is called closed –loop MRP. It is one of the tools when properly applied, can help managers achieve

effective manufacturing control.

This system can be used most advantageous under the following condition:

i. When usage (demand ) of the materials is discontinuous or highly unstable during the firm’s normal

operating cycle.

ii. When demand for the product / materials is directly dependent on the production of other specific

inventory items or, finished product.

iii. When the purchasing department and its supplier as well as the firm’s own manufacturing units,

process have the flexibility to handle order placement or delivery releases on a weekly basis.

Process: first we have to know how much quantities of which materials are required at what time to achieve

the planned production target.

The MRP starts from the production programme. The process of calculation of how much quantity of input

material is required to achieve the production program is called Bills of materials.

Due to the production lead time, the input materials may be required at different time intervals. These

adjustment is called phase forward planning.

The materials required as calculated above, may actually be already available in stock on hand or may be

receivable against a purchased order already released.

The net requirement is thus worked out by ‘netting’ the gross materials requirement with stock on hand and

pending purchase.

MRP attempts to minimize most inventory requirement and gear purchasing and production activities to the

timing and quantity usage demands for the final product assembly schedule.

11

1.8.4 Basically MRP I Performs Three Following Functions or, Functions Of MRP I:

1) Order planning and control: when to release orders and for what quantities.

2) Priority planning and control: how the expected date of availability compares to the need date for

each item.

3) Provision of a basis for planning capacity: requirement and development of broad business plan.

1.8.5 Basic Theory Of MRP I:

If the delivery schedule for the end product is known , then the size and timing of the requirement of the

various lower level work-in –process items and raw materials can be planned exactly by simple arithmetical

calculation. Such planning is known as Materials Requirement planning (MRP) calculation.

Current conditio

n

Production plan

Tentative

Master

Schedule

Master

schedule

MRP program

Requirement for

“buy” items

Requirement for “make”

items

Purchase

orders Capacity

requirement

planning

Vendor feed back

Detailed

production plan

Production activity

control & current

status

Inventory

records and projected

status

Product

structure file

Inventory

transaction (e.g., receipt, withdrawals,

order quantities)

Rough –cut capacity

check

forecast

Business

plan

Engineering data

.i.e. , Bills of materials,

routings, design

changes

12

1.8.6 Lack of Material Planning Causes

a. Ill-planned purchasing (over-ordering or under ordering).

b. Leads to un wanted emergency orders which are usually processed at high cost.

Factors influencing materials planning

1. External Factors

2. Internal Factors

a) National Economy

b) Price trends

c) Credit policy

d) Direct and indirect taxes

e) Foreign exchange

regulation

f) Import policy

g) International market

h) Business cycle

a) Corporate objective

b) Technology available

c) Market demand & Supply

d) Procurement lead time

e) Rejection Rates

f) Working capital available

g) Inventory norms

h) Storage facilities

i) Nearness to source of supply

j) Information data

k) Delegation of power

l) Communication system

m) Buyer-seller

relationship

n) Company’s financial position

o) Company’s corporate image

p) Management policy towards

13

c. Increases workload of the purchase department receiving and primary (inward) inspection. Thereby

increasing manpower requirement

1.8.7 Techniques of Materials Planning

It can be classified in to two groups.

1. Materials planning techniques for direct materials

2. Materials planning techniques for indirect materials

a. Materials planning techniques for direct materials may be further classified in to sub groups

a) Techniques for high value materials

b) Techniques for low value materials

Materials planning techniques (in nutshell)

Materials group techniques

1. Direct Materials

a) High value i. Bills of Materials/ Explosion Charts.

ii. Materials requirement planning

iii. Inventory control

b) low value i. Inventory control.

2. Indirect materials i. Past consumption analysis techniques.

ii. Exponential smoothening

iii. Inventory control

1.8.8 Condition For MRP-I / Inputs Of MRP-I

a. The final product is complex and is made up of several levels of assemblies and sub-assemblies

which have many common part and sub-assemblies.

b. The procurement lead time for components is relatively long.

c. The manufacturing cycle is long for the finished product.

d. The demand for the product is known.

1.8.9 Some terminology in MRP-I

Independent demand item: - The demand for the product is considered independent since orders may not

be necessarily related to others in terms of customer and quantity.

1. Dependent demand item: The demand of these products are related with the demand of next level

of product.

1.8.10 Inputs to the Materials Requirement Planning System

Inventory records: A major input to the MRP system is inventory. When a calculation is made to find

out how many are need, the quantities available must be considered.

There are two kinds of information needed. The first is called planning factors and includes

information such as order quantities, lead times, safety stock, and scrap. This information does not

change often; however, it is needed to plan what quantities to order and when to order for timely

deliveries.

14

The second kind of information necessary is on the status of each item. The MRP system needs to

know how much is available, hoe much is allocated, and how much is available for future demand.

This type of information is dynamic and changes with every transaction that takes place.

These data are maintained in an inventory record file, also called a part master file or item master

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

Master production schedule: It is the backbone of an MRP system. A master schedule gives the

product wise quantities to be purchased / produced over the planning horizon. master schedule is

prepared from inputs which comprise of :

Time period wise actual quantities taken from sales order in hand.

Time period wise quantities forecasted from time series analysis.

Time period wise quantities based on feed back from sales force.

Management decisions to alter quantities derived from above sources to smoothen out peaks and

valleys in the capacity utilization.

Bill-of- materials: it is also called product structure or , assembly parts list, describes how a product is

made from its components parts and assemblies. It contains the information to identify each item of the

assembly and the quantity required per assembly to which it is a part.

Bills of Material Structure

Bills of material structure refers to the overall design for the arrangement of bills of material files. Different

departments in a company use bills of material for a variety of purposes. Although each user has individual

preferences for the way the bill should be structured, the must be only one structure, and it should be

designed to satisfy most needs. However, there can be several formats, or ways, to present the bill.

Following are some important format for bills.

Description: TABLE

Part Number: 100

Part Number Description Quantity

Required

203 Wooden Leg 4

411 Wooden Ends 2

622 Wooden Sides 2

023 Table Top 1

722 Hardware Kit 1

A

X (3)

Y (2)

G (4)

T (2)

Y (1) Z (2)

T (3) U (4)

0 level

1st level

2nd level

3rd level

15

Fig: a Simplified bill of material

Product tree: Fig:b shows a product tree for the bill of material shown in Fig: a. The product tree is a

convenient way to think about bills of material, but it is seldom used except for teaching and testing. In this

text, it is used for that purpose.

Parent-component relationship: The product tree for the bill of material shown in Fig: a and b are called

single-level structures. An assembly is considered a parent, and the items that comprise it are called

component items. The figure above shows the parent-component relationship of the table. Unique part

numbers have also been assigned to each part. This makes identification of the part absolute.

Multilevel bill: Fig:c shows the same product as the single-level bill shown in Fig:a and Fig:b. However, the

single-level components have been expanded into their components.

Multilevel bills are formed as logical groupings of parts into subassemblies based on the way the product is

assembled. For example, a frame, chassis, doors, windows, and engine are required to construct an

automobile. Each of these forms a logical group of components and parts and, in turn, has its own bill of

material.

It is the responsibility of manufacturing engineering to decide how the product is to be made: the operations

to be performed, their sequence, and their grouping. The sub-assemblies created are the result of this.

Manufacturing has decided to assemble the sides, ends, and leg supports (part of the hardware kit) of the

table in Fig:b into a frame. The legs, leg bolts, and frame subassembly are to be assembled into the base.

The top is to be made from three boards glued together. Note that the original parts are all there, but they

have been grouped into subassemblies and each sub assembly has its own part number.

One convention used with multilevel bills of material is that the last items on the tree (legs, leg bolts, ends,

Legs (4)

203

Ends (2)

411

Sides (2)

622

Top (1)

023

Hardware Kit (1)

722

Table

100

PARENT

COMPONENT

Fig:b Product tree

Fig:c Multilevel bill

Base

200

Top 023

Legs (4)

203

Leg Bolts (4)

220

Frame (1)

300

Boards (3)

030

Glue

066

Sides (2)

622

Ends (2)

411

Leg

Supports (4)

533

Glue

066

Table

100

16

sides, glue, and boards) are all purchased items. Generally, a bill of material is not complete until all

branches of the product structure tree end in a purchased part.

Each level in the bill of material is assigned a number starting from the top and working down. The top level,

or end product level, is level zero, and its components are at level one.

Multiple bill: A multiple bill is used when companies usually make more than one product, and the same

components are often used in several products. This is particularly true with families of products. Using our

example of a table, this company makes two models. They are similar except the tops are different. Fig:d

shows the two bills of material. Because the boards used in the top are different, each top has a different

part number. The balance of the components are common to both tables.

Single-level bill: A single-level bill of material contains only the parent and its immediate components,

which is why it is called a single-level bill. The tables shown in Fig:d have six single-level bills, and these are

Base

200

Top

023

Legs (4)

203

Leg Bolts (4)

220

Frame

(1) 300

Boards (3)

030

Glue

066

Sides (2)

622

Ends (2)

411

Leg Supports

(4)

533

Glue

066

Table

100

Fig: d Multiple bills

Base

200

Top 025

Legs (4)

203

Leg Bolts (4)

220

Frame (1)

300

Boards (3)

035

Glue

066

Sides (2)

622

Ends (2)

411

Leg

Supports (4)

533

Glue

066

Table

150

17

shown in Fig:e. Note that many components are common to both tables.

The computer stores information describing the product structure as a single-level bill. A series of single-

level bills is needed to completely define a product. For example, the table needs four single-level bills, one

each for the table, base, top, and frame. These can be chained together to form a multilevel, or indented,

bill. Using this method, the information has to be stored only once. For example, the frame might be used on

other tables with different legs or tops.

There are several advantages to using single-level bills including the following:

Duplication of records is avoided. For instance, base 200 is used in both table 100 and table 150.

Rather than have two records of base 200 – one in the bill for table 100 and one in the bill for table

150 – only one record need be kept.

The number of records and, in computer systems, the file size is reduced by avoiding duplication of

records.

Maintaining bills of material is simplified. For example, if there is a change in base 200, the change

need be made in only one plane.

Indented bill: A multilevel bill of material can also be shown as an indented bill of material. This bill uses

indentations as a way of identifying parents from components. Fig:f shows an indented bill for the table in

Fig:c.

The components of the parent table are listed flush left and their components are indented. The components

of the base (legs, leg bolts, and frame) are indented immediately below their parent. The components of the

frame are further indented immediately below their parent. Thus, the components are linked to their parents

by indenting them as subentries and by listing them immediately below the parent.

Fig:e Single-level bills

Top 025

Table 150

Base 200

Top 023

Table 100

Base 200

Sides (2)

622

Ends (2) 411

Leg Supports

(4)

533

Glue

066

Frame (1) (300)

300

Base

200

Legs (4)

203

Leg Bolts (4)

220

Frame (1) 300

Boards (3)

030

Glue

066

Top 023

Boards (3)

035

Glue

066

Top

025

18

MANUFACTURING BILL OF MATERIAL

TABLE

Part Number Description Quantity Required

200 Base 1

203 Legs 4

220 Leg Bolts 4

300 Frame 1

622 Sides 2

411 Ends 2

533 Leg Supports 4

066 Glue

023 Top 1

030 Boards 3

066 Glue

Fig:f Indented bill of material

Summarized parts list: The bill of material shown in Fig:a is called a summarized parts list. It lists all the

parts needed to make one complete assembly. The parts list is produced by the product design engineer

and does not contain any information about the way the product is made or assembled.

Planning bill: A major use of bills of material is to plan production. Planning bills are an artificial grouping of

components for planning purposes. They are used to simplify forecasting, master production scheduling,

and material requirements planning. They do not represent buildable products but an average product.

Using the table example, suppose the manufactured tables with three different leg styles, three different

sides and ends, and three different tops. In total, they are making 3×3×3 = 27 different tables, each with its

own bill of material. For planning purposes, the 27 bills can be simplified by showing the percentage split for

each type of component on one bill. Fig:g shows how the product structure would look. The percentage

usage of components is obtained from a forecast or past usage. Note the percentage for each category of

component adds up to 100%.

Table

Common Parts 100%

Legs Sides Tops

Leg A

40%

Leg B

35%

Leg C

25%

Side A

55%

Side B

30%

Side C

15%

Top A

45%

Top B

30%

Top C

25%

Fig:g Planning bill

19

Where-Used and Pegging

Where-used report: Where-used reports give the same information as a bill of material but the where-used

report gives parents for a component whereas the bill gives the components for a parent. A component may

be used in making several parents. Wheels on an automobile, for example, might be used on several

models of cars. A listing of all the parents in which a component is used is called a where-used report. This

has several uses, such as in implementing an engineering change, or when materials are scarce, or in

costing a product.

Pegging report: A pegging report is similar to a where-used report. However, the pegging report shows

only those parents for which there is an existing requirement whereas the where-used report shows all

parents for a component. The pegging report shows the parents creating the demand for the components,

the quantities needed, and when they are needed. Pegging keeps track of the origin of the demand. Fig.h

shows an example of a product tree in which part C is used twice and a pegging report.

Pegged Requirements

Item

Number

Week

1 2 3 4 5

C 50 125 25 50 150

Source of Requirements

A 50 25 25 50 50

B 100 100

Users for Bills of Material

The bill of material is one of the most widely used documents in a manufacturing company. Some major

uses are as follows:

Product definition: The bill specifies the components needed to make the product.

Engineering change control: Product design engineers sometimes change the design of a product

and the components used. These changes must be recorded and controlled. The bill provides the

method for doing so.

Service parts: Replacement parts needed to repair a broken component are determined from the bill

of material.

A

C B

C D

20

Planning: Bills of material define what materials have to be scheduled to make the end product.

They define what components have to be purchased or made to satisfy the master production

schedule.

Order entry: When a product has a very large number of options (e.g. cars), the order-entry system

very often configures the end product bill of materials. The bill can also be used to price the product.

Manufacturing: The bill provides a list of the parts needed to make or assemble a product.

Costing: Product cost is usually broken down into direct material, direct labour, and overhead. The

bill provides not only a method of determining direct material but also a structure for recording direct

labour and distributing overhead.

This list is not complete, but it shows the extensive use made of the bill of materials in manufacturing. There

is scarcely a department of the company that will not use the bill at some time. Maintaining bills of material

and their accuracy is extremely important. Again, the computer is an excellent tool for centrally maintaining

bills and for updating them.

Level coding: Each Bills of materials is assigned a level code accruing to its linkage from the end

product.

Rule:

a) A finished product at level 0.

b) Components of level 0 parent and not common to any other sub components are assigned level 1.

c) Components of level 1’s parent should be at level 2.

d) Components of level n-1 parent should be at level n.

e) Components of particular level which are common the sub-components at some level are assigned

to the level according to its linkage to the sub- components.

1.8.11 Steps In Use Of MRP I

MRP is composed of a series of 12 steps.

Step 1: Determine the gross requirements of the finished products.

The gross requirement is the aggregate quantity take from three sources:

i) Period wise pending sales orders on hand.

ii) Period wise forecasted sales.

iii) Management decision to alter quantities derived under i) and ii) above to smoothen production.

Step2: Determine the net requirement of finished product.

The gross requirements obtained in step 1 are adjusted by the available inventory of the product to obtain

net requirements.

That is –

Net requirements= Gross requirements – Inventory available.

Step 3: Develop a master production schedule.

From the Net requirements, for each time period as determined in step 2, a master production schedule is

prepared. Master production schedule is the key to MRP- I.

A master production schedule expresses the overall plan of production. It spells out the different products to

the manufactured over the given time span.

Step 4: Explored the Bill of Materials and determine gross requirements of parts.

21

For each assembly, a structured Bill of Materials is available and it contains the information to identify each

item of the assembly and the quantity required per assembly of which it is a part.

The gross requirement of each part is ascertained by multiplying the net requirement of assembly on the

master schedule by the quantity required of the part per assembly as given in the Bill - of – Material. The

computer software is available which does the computation of requirement of parts on a level- by- level

basis. (i.e., on completion of 1st level, it does it for next level and so on.)

If the part is purchased item, the order would be placed and this would conclude the procedure. However,

the purchased quantity is adjusted for expected looses in scrap.

Step 5: Screen out B and C category of items.

Step 6: Determine the Net requirements of items.

The gross requirements of an item obtained in step 4 is adjusted for the “ Stock on hand” and “Stock on

order”. At times, it may be found that the item is over stocked and does not require to be replenished and at

other times, it need to be ordered/ manufactured.

Step 7: Adjust requirement for scrap allowance:

Depending upon criticality of the dimensions, their may be some rejection during manufacturing which

needs to be accounted for so that correct numbers will be available for assembly. This is usually done by

estimating the percentage of loss and adding it to the net requirement when the item is being ordered. In a

computerized MRP system the percentage loss is kept in the file so that it may be automatically added when

the tem is being ordered.

Step 8: Schedule planned orders.

Once the quantity of an item is determined, the next logical step is to schedule it. While scheduling ,

manufacturing cycle time is taken in to account and to that extent the item is offset for delivery. the offset

information on the items can be kept in a file record for ready reference.

Step 9: Explode the next level.

As mentioned in step 4, the entire assembly is not exploded at one time but it is done level by level, after all

previous steps have been completed. That is , each level of explosion is followed through step 5 to 7 and the

steps from 5 to 7 are repeated again until the entire assembly has been exploded through all levels and

quantities of items determined and time phased.

Step 10: Aggregate requirements and determine order quantities:

Some of the items may be common to a number of assemblies and at various levels. It will be, therefore,

wrong to place an order each time and item appears during explosion but wait until the demand is developed

after entire assembly of each product has been exploded and then aggregate the demand so that just one

order can be placed.

Step 11: Write and place planned orders.

After the requirement of each product has been determined, their purchase orders / work orders can be

printed in the form of a computer printout.

Step 12: Maintain schedules.

Writing the order is no assurance that the product will be delivered on time. Regular follow up is necessary.

Expediting may require to be done in some cases until the product is ready to be delivered to the customer.

22

Example 1

If 100 units of X are required in week 12 and if none of the components, sub-assemblies

and the end-products are either on hand or on order, compute the amounts and dates of

planned order releases for all the components and sub-assemblies. Assume that there is

no particular order size and therefore all the order quantities are lot for lot.

Solution:

The order release can be planned by counting Backwards on the lead time

As given in the problem, time taken to produce X is 12 week.

Week 12: 1unit of X ready for Dispatch.

Week 11: LT=2

Week 10: 1unit of X order released for production

Week 9: 2units of Q: order released

Week 8: LT=3 LT=3

Week 7: 1unit of P : order released

Week 6: 4 units of P : order released.

LT -3 LT 3

Week 5:

Week 4: 3 units of R and 2 units of S: order released

Week 3: 12 units of R and 8 units of S: order released

It is easy to convert to the desired dispatch quantity of 100 units of X by multiplying all the quantities by 100.

Week 12 11 10 9 8 7 6 5 4 3 2 1

Planned

order

Released

X

(100)

Q

(200)

for X

P(100)

for X

P(400)

for Q

R(300)for

P

S(200)

R(1200)

S(800)

LT=1

X, LT = 2

P (1), LT = 3

0 level

1st level

2nd level R (3), LT = 3 S (2), LT = 3

P (2), LT = 3

Q (2), LT = 1

R (3), LT = 3 S (2), LT = 3

23

for P

Bills of Materials (for 100 units of X)

Week Ready for shipment/production Planned order released

12 100 units X

11

10 200 units of Q for X

100 units of P for X

100 units X

9 400 units of P for Q 200 units of Q for X

8

7 300 units of R and 200 units of S for P

(X)

100 units of P for X

6 1200 units of R and 800 units of S for

P(Q)

400 units of P for Q

5

4 300 units of R and 200 units of S for P

(X)

3 1200 units of R and 800 units of S for P

(Q)

Steps of computing the MRP for releasing a production and procurement order.

1. Determine the longest ( critical )time required to make final product.

2. Determine the time of higher level items are required and in what quantity?

3. To determine the time when and in what quantity the next lower level item is required? This gives the

gross requirement.

4. To obtain the real or net requirement, the “on hand” and schedule to receive quantities of the item are

deducted from the gross requirement. If there is a sufficient quantity on hand or schedule to be received,

then there is no need to order for further quantity. Only when the ( on hand + scheduled receipt)- ( Gross

requirement) during any period shows a negative quantity, would there be the need for the additional

quantities or a lot size quantities one lead time earlier. Order releases are planned earlier.

24

Example 2

Relaxon Chair Co.(RCC) makes office chairs mainly with steel frames, plastic thread work

and two beautiful carved wooden arm rests. The later are procured from a wood turning

shop which supplies RCC with a lead time of five(5) weeks. And in lot size of 2000 arm-

rests.

As per RCC’s customer requirement , the delivery schedule of completed chair is :

Week No. 1 2 3 4 5 6 7 8 9

No. of

Chairs required

200 200 500 700 300

The wooden chairs handles are last item to go in to RCC’s and lead time for the final

assembly of the chairs can be taken as one (1) week. There are 50 completed chairs in

RCC’s finished goods ware house and 800 wooden handles in the plant’s store. Due to the

order placed earlier, 2000 wooden handles are scheduled to arrive at Week 4.

Draw a MRP for the wooden handles.

Solution:

Chair Assembly

Lot for lot; LT =1 week

Week No.

1 2 3 4 5 6 7 8 9

Requirement (Gross) - 200 200 - - - 500 700 300

Scheduled Receipts 200-50=

150

200 - - - 500 700 300

On hand (at the end of

The week)

50

50

-150

-200

-500

-700

-300

Planned order Released 150 200 500 700 300

In computing an MRP, we always start from the highest level product; in our case this is the complete chair.

Any MRP computation should involve: i) Requirements (gross) schedule, ii) the scheduled receipts, iii) on-

hand stock of the item, and therefore iv) plan for order release for production/ procurement. The MRP for

chair assembly is shown in the table above.

Explanation:

1. The chair assembly is assumed to be made in a free lot size, i.e., in one week 200 may be made,

while in another , 700. In MRP, whenever a problem makes no mention about the lot size, we should

assume a lot-for-lot production.

2. The ‘on hand’ figure gets negative in the week 2, because only 50 chairs are on hand and 200 are to

be shipped out. The negative figure is , of course, theoretical and is only used to trigger a planned

order release. Thus (-) 150 of week 2 triggers the planned production order release for 150 chair

assemblies arrive.

3. The scheduled receipts shown in the above table are all due to the planned order releases.

The MRP for wooden handles would follow the MRP for chair assemblies. The wooden handles

25

‘requirements’ are generated from the planned order release of the chair assembly. If the handles were to be

used in another kind of furniture also, then the planned order releases for that furniture would also have

generated further requirement for the wooden handles.

Solution:

We can set up an MRP table as follows:

1.9 MRP-II – Manufacturing Resource Planning

Introduction

Manufacturing organizations can be broadly divided into sales, logistics, production, engineering and

supporting functions. The development of Manufacturing Resource Planning (MRP II) links up all these

functions together with a coverage much greater than what is being focused by traditional MRP I (Material

Requirements Planning). Because of its broad and far-reaching scope, MRP II should not be regarded as a

simple system. Rather, it should be seen as a corporate way of life. According to APICS Dictionary MRP II

can be defined as `a method for the effective planning of all resources of a manufacturing company'.

Ideally, it addresses operational planning in units, financial planning in dollars, and has a simulation

capability to answer `what if' questions. It is made up of a variety of functions, each linked together;

Business Planning, Production Planning, Master Scheduling, Material Requirement Planning and Capacity

Requirement Planning. Output from these systems are integrated with financial reports such as the business

plan, purchase commitment report, shipping budget, inventory projection in dollars, etc. In general, MRP II

functions can be grouped into three macro elements, namely Top Management Planning, Operation

Planning and Execution [4]. Figure 1 shows the framework of MRP II built up by these macro elements. The

theory of MRP II has been well discussed in many literatures. Focuses are normally put on concept,

methodology, application and future development of MRP II. These problems can be classified into five

areas: software, engineering, internal, customer and vendor, and training was considered the major solution

Wooden Handles

Order Qty= 2000; LT

=5 weeks

Week No.

1 2 3 4 5 6 7 8 9

Requirement (150*2)

=300

(200 *2)

= 400

- - 500*2

= 1000

700*2

=

1400

300*2

= 600

Scheduled Receipts 2000 2000

On hand (at the

end of

The week)

800

(800-

300)

= 500

(500-

400)

= 100

100

2100 210

0

1100 -300

1700

1100 1100

Planned order

Released

2000

26

to these problems. Wallace identified five major factors that contribute to the success of MRP II projects;

they are summarized into the following:

1. People: The major obstacle to successful implementation comes from the people side. A study on human

variables of MRP II system implementation concluded that managers considering or beginning

implementation of an MRP II system should utilize the classical approach to organization change and

involve as many of the affected personnel as possible in (* Accepted 12 March 1998.248Int. J. Engng Ed.

Vol. 14, No. 4, p. 248±256,1998 TEMPUS Publications.) The planning and implementation stage. Also, the

channels of communication should be opened and education about the realistic benefit of MRP II should be

stressed. Involvement in implementation is a powerful determinant for satisfaction. Involvement in the early

stages of implementation helps to smooth the process and removes the fears of those less knowledgeable

about information system.

2. Training and Education: This area has always been overlooked by management which result in

inadequate and incomplete training. Since training and education also aim to change people's behavior,

inadequate education will lead to non-conformance to the objective of implementation.

3. Data: When inventory and bill-of-material (BOM) records can not be maintained at 95% to 98% accuracy,

bad data makes it impossible to complete the key elements of MRP II, such as master production schedule

(MPS).

4. Management Involvement: Most failures can be attributed to a lack of management involvement and

poor attitudes toward the system [20] in which the management is unable to maintain the implementation

project at the highest priority.

5. Timing: When the duration of implementation project is extended too long, e.g. more than two years, the

chance of failure increases significantly as people's attention can not be prolonged to such a long

implementation especially as the business environment is changing as well. In this paper, the authors

address the training and education in making a MRP II implementation successful. The training model is

developed in the Industrial Training Center of the Hong Kong Polytechnic university. It is a multi-discipline

IE T

echni

que

SPC

App

lica

tion

Tra

inin

g

Problem

Solving

GenericEducation

ClosedloopMRP

Data C

ollectio

nIC

V

isit Tour

Fig: Model for MRP II Training

27

training center for the provision of industrial training with structured program. It consists of 23 workshops

covering the majority of engineering disciplines including Manufacturing, Mechanical, Civil, Electronic and

Electrical, equipped with great varieties of facilities ranging from basic machinery to sophisticated

equipment. The training philosophy of the Industrial Center is to expose the students to genuine industry-

type atmosphere for training with `real work projects' that are (Fig. 1. Framework of a MRP II system.) Model

for Manufacturing Resources Planning 249 carefully selected from industry. In the design of the training

program, MRP II is considered as a company-wide system that drives all of the business functions of a

company that is involved in manufacturing a product. The MRP II system is an important means for

operational planning and

control for both engineers and mana

Business Planning

Sales Planning

Production Planning

Resources

OK?

Master Scheduling

Materials Planning

Capacity Planning

Planning

OK?

Purchasing

Shop Floor Control

Performance Measurement

Bills of

Resources

Bills of

Material

Inventory

Status

Routings

Manufacturing Resource Planning

Top Management

Planning

Operations Planning

Execution

Fig: Framework of a MRP II system

Objectives

Demands Monthly

Demands

F

E

E D

B

A C

K

Products

Material

Capacity

Weekly

Parts

Hours

Accountability

Daily

Yes

No

Yes

No

Sales Order Sales Forecast

MPS

Change

the MPS

Material net requirement

explosion

Inventory

status file

Sales Order /

Marketing

Inventory

Management

Material

Master Scheduling

No

28

1.10 ERP - Introduction

Just another IT industry acronym? Not quite. ERP or enterprise resource planning to give it its full

name is the term used to describe the automation of core business functions, including production,

accounting, distribution, supply chain and human resources. In other words, it's the use of

technology to integrate the information from all your key business functions and smooth its

flow around your organization.

Why should you be interested? Because, basically, a well-implemented and appropriate ERP

system can create significant efficiencies across your business, resulting in timely business

information, better customer relationships, a more cost-effective supply chain, improved internal

process and, ultimately, increased profitability.

Think of the different systems across your business at the moment, whether manual or

automated. A customer places an order. How often is this order entered into various systems in

different departments; from finance to distribution to sales and marketing? Not only is this time

consuming, but it also creates the opportunity for errors.

Can your finance department quickly query the system in the warehouse to find out if the order has

been dispatched and whether to raise an invoice? Can your marketing department rapidly identify

those customers who have recently ordered specific product lines in order to better target direct

marketing activities?

29

With an ERP system, the customer order information is entered once and then available throughout

the business. Every department is better placed to carry out its task and you have clear and more

timely information on which to base critical business decisions.

Enterprise Resource Planning is a term coined in the early 1990s. It began as a group of

applications or software focused on combining multiple systems into one integrated system where

data could be shared across the enterprise, presumably reducing redundant data entry and

processes. It was originally proposed for manufacturing and production planning.

In the mid 1990s, ERP solutions expanded to include ordering systems, financial and accounting

systems, asset management and human resource management systems.

Finally, in the late 1990s, the solutions were again broadened to include systems that made it

possible for Universities and other governmental entities to consider these solutions for their

business processes.

The need to undergo an Enterprise Resource Planning project is seen as an opportunity to not only

integrate data systems, but to also redefine processes in the interest of gaining efficiencies, as well

as promote professional growth for employees by introducing new skills and knowledge in the

areas of data management and procedures.

Perhaps your company is evaluating the need for an enterprise resource planning (ERP) system, or

considering investing in a new solution. Either way, understanding "ERP" and what it offers in

today's business world is critical to your software and vendor selection.

In today’s context what is ERP?

What exactly is ERP? When "ERP" (enterprise resource planning) is discussed today, it is rarely in

the context of planning how resources are to be expended. Rather, it refers to an enterprise view of

the business—in other words, a view of a company and all its parts as connected whole, rather than

small silos of activity.

ERP relates to the software infrastructure that holds the entire company together internally, on the

one hand, and supports the external business processes the company engages in, on the other.

• ERP applications address a business process.

• ERP applications are modular.

• ERP applications are integrated.

• ERP applications include a company's reach beyond its walls—to its suppliers, customers, and

partners.

• The entire ERP suite will address all areas (or the great majority) of a company's business

functions.

30

Frequently asked questions (FAQs) about ERP

Some common questions about ERP include the following:

1. What is a "business process"?

A business process crosses multiple functions in an enterprise. For example, you may have a

department called "accounting," or you may have a function called "payroll." Although each

function involves business processes, these functions themselves are not process based.

A business process is broader—for example, "order to cash" means everything in the path from the

customer order until you have the money in the bank. It is a more efficient way to think about

linkages and how they work in your organization.

2. Is a modular ERP application any different than anyone’s current stand-alone applications

today?

The beauty of an ERP application is that it is a suite that all works together—without this

capability, you can't have seamless business processes.

Modularity comes to play mainly in how you purchase and implement your ERP system. You may

not need all applications at once, or you may want to deploy one application at a time. They are

different from separate applications in that when more than one is implemented, they fit together

like Legos and work automatically.

3. Why do all care if their applications are integrated?

Stand-alone applications—sometimes referred to as "silos"—can't easily talk to one another. A

series of silos does not make a barn.

Aberdeen research shows that small and middle-market companies spend a great deal of time doing

the same task over and over—entering the same data in different programs. There are some

identifiable problems with this:

• It is a waste of time to reenter data over again.

• It is very likely to be entered incorrectly.

• It may look different in different programs (Why do I have two companies in my vendor list—

one is International Business Machines and one is IBM? Why do I have two versions of the

same customer—Robert Smith and Bob Smith—with the same address?)

• Data that results from very different disconnected applications is inconsistent, so attempts to

analyze it yields the proverbial "apples and oranges"—a decision-support fruit salad.

• With an integrated ERP suite, there is a "single version of the truth" that only needs to be

entered once to be propagated to all parts of the business that need it. All business processes, all

employees who touch the application, and all the executives who make decisions for the

company see the same version of reality, in real time, all the time.

31

4. Why should ERP application suite reach beyond my internal operations?

Your business is more than internal operations: to be successful, you need to efficiently manage

your own purchases of goods, services, and raw materials; foster and control your relationships

with your suppliers and your business partners; and create, manage, and retain your customer base.

All these relationships are more efficiently and economically managed with business-wide

applications. Look at that "order-to-cash" example; there are many steps that involve the customer,

external delivery services, and the bank—all external to your organization.

Advantages of ERP

In addition to the issues of disparate, un integrated solutions (the third point cited above), there are

some clear benefits to the "suite" approach to business management:

Scalability — ERP solutions are designed to grow with your company. Unlike some stand-

alone applications, they do not "top out" without transition paths to other solutions, leaving

you to start over from scratch with a new and different application.

Vendor management — Face it, managing a plethora of vendors with multiple 800

numbers for customer service is not easy. An integrated suite gives you one solution

supplier to work with.

Functionality — Access to the functionality required to run the business over time—at an

affordable price point. It may not be the cheapest choice at first—but it will usually be the

most economical in the long run as your business needs grow and change.

Reliable service and support — The ability to access affordable service and support is

critical. It is easier to support an integrated ERP environment than a hodgepodge of

different applications.

What is Logistics and Supply Chain Management?

"Logistics typically refers to activities that occur within the boundaries of a single organization and Supply

Chain refers to networks of companies that work together and coordinate their actions to deliver a product to

market. Also, traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management. Supply Chain Management (SCM) acknowledges all of traditional

logistics and also includes activities such as marketing, new product development, finance, and customer

service" - Michael Hugos

32

What is Logistics?

"Logistics is about getting the right product, to the right customer, in the right quantity, in the right

condition, at the right place, at the right time, and at the right cost (the 7 Rs)" - John J. Coyle et al

In the past, various tasks were under different departments, but now they are under the same department and

report to the same head as below,

What is Logistics Management?

"Logistics Management deals with the efficient and effective management of day-to-day activity in producing the company's finished goods and services" - Paul Schönsleben

33

What is the Difference Between Inbound Logistics and Outbound Logistics?

"Inbound Logistics refers to movement of goods and raw materials from suppliers to your company. In

contrast, Outbound Logistics refers to movement of finished goods from your company to customers"

To illustrate this term, we make a small graphic as below,

As you can see, purchasing function and warehouse (distribution center) communicates with suppliers and

sometimes called "supplier facing function". Production planning and inventory control function is the

center point of this chart. Customer service and transport function communicates with customers and

sometimes called "customer-facing functions.

What are the Transport and Logistics?

"Transport and Logistics refers to 2 types of activities, namely, traditional services such as air/sea/land transportation, warehousing, customs clearance and value-added services which including information

technology and consulting"

What is International Logistics? These are one of the most ambiguous groups of terms out there. They are used interchangeably with

international supply chain or international production and transportation activities. However, the most

concise definition is as below,

"International Logistics focuses on how to manage and control overseas activities effectively as a single business unit. Therefore, companies should try to harness the value of overseas product, services, marketing,

R&D and turn them into competitive advantage"

What is Third Party Logistics or 3PL?

The concept of 3PL appeared on the scene in the 1980s as the way to reduce costs and improve

services which can be defined as below, "Third Party Logistics or 3PL refers to the outsourcing of activities, ranging from a specific task, such as

trucking or marine cargo transport to broader activities serving the whole supply chain such as inventory

34

management, order processing and consulting."

In the past, many 3PL providers didn't have adequate expertise to operate in complex supply chain structure

and process. The result was the inception of another concept.

What is Fourth Party Logistics or 4PL?

The 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined as below,

"Fourth Party Logistics or 4PL refers to a party who works on behalf of the client to do contract negotiations

and management of performance of 3PL providers, including the design of the whole supply chain network and control of day-to-day operations"

You may wonder if a 4PL provider is really needed. According to the research by Nezar Al-Mugren from the University of Wisconsin-Stout, the top 3 reasons why customers would like to use 4PL providers are as

below,

- Lack of technology to integrate supply chain processes

- The increase in operating complexities

- The sharp increase of the operations in the global supply chains

What is Supply Chain?

"Supply Chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in

the hands of the ultimate consumer" - Martin Christopher

35

What is Supply Chain Management?

Each researcher defines supply chain management differently. However, we would like to provide the simple definition as below,

"Supply Chain Management (SCM) refers to the coordination of production, inventory, location, and

transportation among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served" -Michael Hugos

What is Supply Chain Network?

Many companies have the department that controls supply chain activity so they believe that SCM is a "function". Some companies think SCM is a kind of management system under IT (information system or

enterprise resource planning.) In fact, SCM is actually a "network" consists of many players as below,

A generic supply chain structure is as simple as Supplier, Manufacturer, Wholesaler and Retailer (it's more

complex in the real world but a simple illustration serves the purpose.)

The word "management" can be explained briefly as "planning, implementing, controlling". Supply Chain

Management (in supply chain education context) is then the planning, implementing and controlling the

networks.

What is Information Sharing?

Another important attribute of supply chain management is the flow of material, information, and finance (money). Even though there are 3 types of flow, the most important one is information flow aka information

sharing. Let's see the example of this through the simplified version of the bullwhip effect as below,

36

When customer demand data is not shared, each player in the same supply chain must make some sort of

speculation and this can become the management issues. According to the above graphic, the retailer has a

demand for 100 units, but each player tends to keep stock more and more at every step of the way. This results in higher costs for everyone in the same supply chain.

When information is shared via demand management from retailer down to supplier, everyone doesn't have

to keep stock that much. The result is a lower cost for everyone. This is sometimes called the extended supply chain or supply chain visibility.

Information sharing will also reduce the needs to use the digital transformation solution such as supply

chains systems, digital supply chain, predictive analytics or artificial intelligence.

The basic principles of logistics

37

Based on the definition most widely accepted today Prezenszki proposes the following to be the task of

logistics: ‘The task of logistics is to plan, organise, control, and inspect the flow of materials and information

within and between/among systems, and to ensure the hardware required for the execution of these tasks is

available.’ The purpose of logistics is that, accommodating relevant needs:

6 R’s of purchasing

i) Right Product:

ii) Right quality: Quality can be defined as the “power of accomplish or the capability of doing certain thing”

- in other words quality means the useful value of a specific thing for a specific purpose to fulfill.

- Quality can be specified in different meaning, i.e., dimension , power , tolerance, harness, etc.

- Quality should be correctly specified.

- Right quality means neither too high nor too low.

iii) Right quantity :- purchaser must buy the materials in right quantity to ensure that there is no stoppage

of production or, no extra stock piling. Right quantity is yet another important parameter in buying. Quantity

decisions are influenced by “replenishment method “and “buying methods.

Replenishment method such as “re-order level”, “two-bin system”, “review system: optional replenishment”

and “review system: compulsory replenishment” helps to provide broad guidelines.

Buying methods followed by the buyer has an influence on order quantity. For example re-order quantity

under:

Hand to mouth buying is too small.

Scheduled buying can be either economic order quantity, or smaller or larger than EOQ.

Forward buying is generally very large covering a long period of consumption.

Contract buying is received in staggered lots, each lot at times may equal to EOQ.

Besides the above mentioned factors, consumption, market conditions, lead time, source of supply, etc

influence the decision of right quantity.

iv) Right price: it is purchasers’ skill to determine the optimum price for a valued product. it does mean that

the lowest price but the price which minimizes the overall cost. Right price is not that easy to determine. The

technique of :

Negotiation: It is used when there are limited vendors, and /or time available to make purchase

is short, and /or items belong to fixed price category.

Tender system: It is followed in public sector organization to identify the lowest potential bidder.

Learning curve: It is employed to determine the price of the item with high labor content.

v) Right sources:- the right source must fulfill the following condition

- Must be fully equipped to manufacture and supply the items ordered.

38

- He must look after the interest and buyer interest.

- He must also assist the buyer in market research.

- Must be gentle in nature and improving himself to cope with the condition.

- He must be man of integrity.

vi) Right time: Time is very essential components in case of any business. Right time and lead time are

closely related. Right time implies that time at which the goods requested should be received while lead time

refers the time that elapses between the communication of the need for the item by indenter to purchase till

the item is actually received and is made available for consumption. Basic elements of lead time are:

Time required by the indenter to communicate requirement to purchase.

Time required by purchase to locate, select, develop qualified source of supply including

agreement on contractual terms.

Transit time for purchase order to reach supplier.

Time required by supplier to fill buyers order.

Time required by the supplier to route buyer’s order through his administrative channels.

Transportation time for the goods to reach buyers’ destination.

Time required by buyer’s receiving department to collect materials from transporter’s go down,

verify receipted quantities and prepare necessary documents.

Time required by the buyer’s inward inspection to verify the quality of goods.

Time required by the main stores to take possession of the goods, deposit them into appropriate

bins and update stock cards.

ii) Right term or Right Manner: It concerned with legal term and condition.

These are the so-called logistics principles or the 6R-principle (R: right), with further ‘R’-s added later on.

The addition of the right manner and with the right equipment brought about the 7R principle, and later,

depending on how important the information, the people or the energy were – apart from material – further

additions followed the original 6R-principle. Technical literature already uses the extension of the ‘right’

principle under the name of the 10R-rule, with special regard to use in military logistics.

6R’S OF

BUYING

Right source -Source selection

and source development -vendor rating

-purchase research

Right Quantity - EOQ

- Replenishment system

- Buying Method

Right Quality -Quality specification. - Source selection and

source development - Vendor quality rating.

Vendor up gradation /

self certification

- value analysis - Standardization

Right time

- Replenishment methods - Lead-time analysis

Right Price - Basic elements of price.

- Competitive bidding. - Negotiation. - Learning curve.

- Right place of delivery. - Right transportation. - Legal aspects.

- price negotiation. - payment methods

Right Term - Legal Aspects. - Other

considerations

39

Logistic principles also express the logistic mindset as logistics aims not at minimising cost, but at optimising

processes, taking account of several factors.

Healthcare Solutions > Healthcare Resources > Hospital Logistics

Share:|

The main task of all hospitals is the improvement of the patient’s state of health. The provision of the medical treatment

and patient care – core processes of the hospital, create demand for patient-related support services. These secondary

processes can be of medical or non-medical nature.

Additional services summarized in tertiary processes are not directly linked to patients, but are necessary for proper

operation of the healthcare facility.

Hospital Processes

Tasks of Hospital Logistics Hospital logistics is coordinated cross-departmental with the flow of goods and information as well as a part of patient

care. Examples of logistics tasks can be found in secondary and tertiary processes:

Logistics tasks in patient-related medical

secondary processes Patient logistics

Drug management

Laboratory logistics

Management of medical goods

Logistics of sterile goods

Information and documents

Disposal of hazardous waste

Logistics tasks in patient-related non-medical

secondary processes

40

Food management

Management of linens

Management of beds

Logistics tasks in patient remote tertiary processes

Management of administration

demands

Mail service

Disposal of non-hazardous

waste

Automated Hospital Material Transport In many processes of hospital logistics, material transport plays a decisive role. According to requirements, hospital

material transport is either scheduled (planned) or on-demand (un-scheduled).

Compared to industrial applications, the quality of material transport in healthcare facilities must be of the highest quality. Wrong or inaccurate deliveries could have fatal implications for patients, hospital employees, and visitors. .

Automated Drug Management The conventional drug management in hospitals is typically a manual process. The preparation of the individual patient

daily medication is managed by nurses on the wards. Therefore, hospitals operate many drug storages in several

departments. In addition, the preparation processes in the hospital pharmacy are characterized by manual handling.

Automated drug management in the hospital pharmacy (pharmacy automation) and on hospital wards supports and

increases patient safety.

Health care absorbs such a large proportion of public finances that it’s not surprising the health system hasn’t escaped cutbacks. For instance, the health sector accounts for about a third of the Quebec government’s budget and about 7.5%

of the province’s GDP.

There’s a pressing need to review health care practices to improve hospital operations and bolster their efficiency and

effectiveness. Improved operations should provide better cost control, while maintaining the quality of care delivered to

the public. Support processes are excellent targets because they don’t necessarily have a direct impact on the quality of

care provided. Hospital logistics is one such process, the goal of which is to efficiently deliver medical supplies and

pharmaceutical products to the final consumer, the patient.

Comparative analysis, or benchmarking, is an improvement process that compares practices used by several

organizations to identify best practices. Organizations use this management tool to identify both the problem areas in

their business processes and opportunities for improvement.

A benchmarking process targeting hospital logistics was recently initiated in five Quebec hospitals. The aim of the

study was to develop and test the validity of an analytical model and data collection tool tailored to hospital logistics.

With these tools, the costs of current hospital practices and their impact on the quality of care could be evaluated.

Eventually this could offer a clear set of benchmarked best practices for large hospitals.

Hospital logistics

A poorly understood and often unappreciated process, logistics accounts for a sizeable portion of a hospital’s operating

budget. Studies have shown that from 30% to 46% of hospital expenses are invested in various logistical activities, and

that almost half of the costs associated with supply chain processes could be eliminated through the use of best

practices.

In hospitals, logistics cover not just support services such as purchasing, stores and the pharmacy, but also health care

services such as patient care units and operating rooms. Many activities that could be carried out by support personnel

are often on the list of duties performed by health care personnel. The result is that the internal supply chain within a

hospital is often highly fragmented.

Logistics is a complex process. The people involved vary with the type of products in question: for example, stores

manage medical and office supplies; the pharmacy looks after pharmaceutical products; and food services manages the

procurement and processing of food products.

Two major management methods are applied by hospitals. Certain products are managed and stored in the hospital’s

stores (or pharmacy) before being distributed to specific departments: these are called inventory products. Other items

are ordered directly by specific departments from the purchasing department, which oversees the purchases as needed and delivers them upon receipt to the departments: these are non-inventory or direct purchase products. The latter are

generally not stored in the institution’s stores.

41

Pharmaceutical products, meanwhile, are divided under two main headings: general products and prescription drugs.

The inventory and non-inventory distinction doesn’t apply to pharmaceuticals because all requisitions must go through

the pharmacy.

Figure 1 summarizes the main players and their role in the replenishment of two critical items, medical supplies and

pharmaceutical products. These relationships may differ at certain institutions. The pharmacy and stores order their

products directly from suppliers in some cases. Yet, in other hospitals, ordering is taken care of by a purchasing

department.

Figure 1 also shows the people who store medical supplies and pharmaceutical products, and indicates the two types of

flows between them: the flow of materials and information. These two flows were studied in the project to benchmark

hospital logistics processes.

Benchmarking

To benchmark hospital performance, performance measures for material and information flows had to be established.

However, the information technology systems in place for support services in the health sector are very limited. In

Quebec, few hospitals have an integrated system with extensive information retrieval capabilities. Moreover, this

information is rarely standardized, which further complicates data collection and analysis. Given these limitations, a

strictly results-oriented comparison was not feasible, so a process-based approach was taken.

Three steps were taken to provide structure to the benchmarking process. First, the hospital logistics process was divided into several components to facilitate the analysis. Second, an analytical model and related data collection tool

was developed. The model identifies the performance measures used. And third, a data collection approach was

selected to get the project up and going.

Breaking down the process

The hospital logistics process was divided into three main sub-processes, namely Ordering and Managing Supplies,

Receiving Orders, and Replenishing User Departments. These sub-processes were also divided into various activities to

obtain a sufficient amount of detail without unduly complicating data collection. The processes associated with

inventory and non-inventory products are similar, with the exception of three activities not used in processing non-

42

inventory items. Table 1 presents the breakdown of the logistical processes, with the activities not used in processing

non-inventory items identified in italics.

Analytical model

The analysis hones in on two types of performance measures — efficiency and quality. Breaking down these processes into a number of specific activities offers a more detailed cost analysis. It is then feasible to assess a hospital’s

efficiency for each activity as well as the overall process. These costs become the primary point of comparison for

identifying hospitals with the best practices. Since labour accounts for about 60% of a hospital’s costs, the primary

element affecting cost calculations is the time spent by personnel in carrying out various logistical activities. A second

element, technology maintenance expenses, was also considered to build a more thorough picture of the situation.

The quality of the logistics process was also considered in the measurements of hospital performance. The health sector

stands out specifically because of the critical nature of the service levels associated with logistical activities: the lack of an item or a drug in the operating room could, for example, greatly compromise the work performed by health care

workers and threaten the health of a patient. The quality of support services must be maintained. Table 2 lists the

service quality performance measures used in this study.

43

The study then examined various contextual elements such as hospital budgets, number of beds and type of specialties, as well as process-related elements (the current administrative practices in the hospital).

The analytical model helps identify best practice hospitals while shedding light on why the institutions perform well.

Analyzing costs and quality through the practices employed by hospitals also leads to an understanding of the

effectiveness and efficiency of various hospital-specific practices. It should be noted that the methodology identifies

optimal practices for large hospitals, not residential and extended care centres.

Data collection

The data collection combined case studies of five hospitals, which provided an in-depth study of a limited number of

sites, and questionnaires, which delivered the advantage of reaching a large number of respondents at a reasonable cost,

but didn’t allow for an in-depth analysis of these hospitals. This hybrid method thus identifies the practices deployed by

institutions and determines their performance level.

The method doesn’t, however, explain the nuances among hospitals with the same practices, because such hospitals are

grouped together in the analysis. A second data collection phase specific to the most promising practices will therefore

be needed to identify the impacts of implementing these practices. This phase will be conducted on a much more

limited scale, since only the most promising hospitals will be visited.

In the current context, where health institutions must carefully manage public funds, where public accountability is

becoming more and more pressing, and where governments are trying to motivate hospitals by rewarding high

performing ones and penalizing those that are not performing as well, improving the logistics process through the

implementation of best practices has become a must. Identifying best practices by benchmarking the hospital logistics

process can help hospital managers find cures for the ailing health sector.

Logistics in hospitals

The concept of using logistics’ principles within UK hospitals is not new and the wide spread use of small bore

pneumatic tube systems to distribute pharmaceutical products and test tubes is evidence that the optimisation of

material movement, including the potential costs savings these systems generate, has been considered. However, the continuously increasing requirements imposed on existing developments mean that the ‘logistics’ components of the

44

operation are increasingly seen as a way to not only reduce costs but also improve the effectiveness of the day-to-day

processes, including the use of IT, and the service provided.

A further driver for the development of logistics concepts within hospitals is the use of the PFI procurements route.

Operators of these new developments now have a financial horizon of 25-30 years making longer pay-back periods that

may not be suitable to NHS trusts, on new processes or technology acceptable. They also have strong incentives to

ensure that the layout of any new development, however integrated to existing buildings, provides the most cost

effective solution for the delivery of FM services, whether in terms of space take up, shortest delivery routes,

maximization of lift usage, etc, and that the operational processes proposed follow corporate sustainability targets. This

paper looks at some of the logistics concepts that can be applied to the development of new hospitals and technologies

used to provide the service required. Topics include site planning and the relationship with internal logistics, how internal logistics can be reviewed as horizontal or vertical distribution concepts and the impact on building layout and

movement segregation. Automation and its use are described; covering small and large bore hole pneumatic tube

systems, automated guided vehicles, track vehicle units and automated storage and retrieval systems.

Site planning

The logistics strategies used to define delivery routes, separation of flows, use of automation, etc, must start with a

suitable strategy for the overall site planning. This should ensure that vehicles, used for goods and people, drop off at

the closest possible point of usage, whether the main entrance or FM storage or the A&E department, to reduce

travelling distances within the building. Any site planning should therefore start with the rationalisation of site

entrances, ensuring that road access leads towards these entrances and suitable car parking is provided close to each

entrance.

Site access and car parking seem to be issues regularly raised by hospital staff; either because of the lack of car parking,

complexity of road infrastructure and the impact on way finding, unsatisfactory blue light access or the mixture of staff

access with FM deliveries, patients, visitors and blue light. Some recent PFI projects have provided the opportunity to

re-assess site planning in terms of providing clear access and parking by creating visitor ‘front of house’ and staff and

FM ‘back of house’ areas. If this separation can be matched by the provision of alternative access roads then this

solution ensures that the front of the hospital is not seen as a pool of cars (as 70 to 80% of car parking is typically

allocated to staff which would be at the back) and traffic can be controlled around the site with vehicle flows being

separated before the entrance of the site. The suitable location of barriers also ensures that rat-runs around the site are

avoided.

The rationalisation of entrances to the buildings and site access also impacts on the level of double handling that may exist. In this context double handling is used to describe the process of offloading from a delivery vehicle and re-

loading the goods onto a smaller vehicle, to be offloaded again at another entrance, etc. By the rationalisation of

entrances, it is intended that not only visitors be directed to a single point of entry, but also FM deliveries be taken to a

single FM industrial zone.

This industrial zone could include a catering distribution point, pharmacy bulk storage and manufacturing, security hub,

telephone operators, porters, waste rooms, gas storage, etc. From this central FM zone, ideally, all goods would be

broken down and re-packed into containers ready for their end point of use, therefore avoiding any middle processing

or storage spaces. In some instances, the goods should be delivered in a format already suitable to be taken directly to

other departments, such as linen cages.

Rationalisation of roads?

Internal logistics

The outcome of a logistics review of internal routes should be to ensure that goods and people can reach their final

destination in the shortest and most direct possible route but still maintain any required segregation, such as between

the public and patients in beds going to and from theatres. Visitors would therefore enter the main reception and then

be directed towards main departments such as the day treatment centre, women and children’s unit, wards and A&E.

Each with clear signage and a clear identity to facilitate way finding.

Goods would be taken directly to the point of use from the central FM building through FM corridors and service lifts

that provide direct access into the support spaces of each department without, for example, having to be taken through

wards. It is obvious that in some instances it will not be possible to affect the layout of existing hospitals to such an

extent that all double handling and cross-overs are removed and, in fact there may times when they are required as part of the normal operation, particularly if the central FM area is used to then distribute to a number of other buildings

possibly on other sites.

Within the building, there are two principle methods of setting out the distribution routes and achieving the required

movement segregation: horizontally and vertically. Horizontal segregation is based on providing separate corridors for

45

the different types of activities; so for example, if the intention was to segregate between front of house (visitors and

the general public) and back of house activities (FM, patients in beds and staff) then two corridors could be provided

linking into each of the departments. This is illustrated on the sketch below.

Horizontal segregation is in fact the hardest to achieve, not necessarily because it is difficult to ensure the corridors do not cross but, because the corridors would run the length of the building in several locations, it would be much harder

to integrate this strategy with the requirements for daylight. There is also a risk of simply creating too much circulation

space.

Vertical segregation makes use of lifts to bring the different flows of goods and people into appropriate spaces on each

floor. It is still necessary to provide the horizontal access routes to access these lifts, but the corridors are only

duplicated on one floor and also possible to have them at different levels. This is by far the easiest to integrate with the

requirement for daylight, but has a considerable impact on the number of lifts that need to be provided.

Vertical segregation is therefore not particularly suited to large sprawling developments with only two or three floors,

but can easily be fitted when several departments such as wards are located above each other with identical access

points. The use of vertical segregation is shown on the following sketch.

In practice the chosen solution is most likely to be a combination of both strategies to suite the site layout and access, and any existing buildings. In smaller hospitals, it may also be that there is in fact very little choice in terms of the solutions that can be put forward. The sketch below makes use of vertical distribution for FM deliveries with a back of house corridor at ground floor, whereas the public is taken to a central core of lifts and distributed on each individual floor. The central

46

lift core ensures that lift usage is maximised, which can reduce the number of lifts required compared to the vertical solution.

The choice of distribution strategy has a fundamental impact on where service spaces are located. For the horizontal distribution, FM spaces are located on each individual floor, as in the example given above, and link into each department on each floor across the corridor on that floor. In the vertical distribution, FM spaces are centralised on level A and are located remotely from the areas they serve. This should not have an impact on the level of service provided and response times, but changes the interaction between ward/department staff and FM support staff. The vertical distribution option should also reduce the FM space required as functions are centralised. There are clearly a number of alternatives as to what spaces can be centralised and others that should be physically close to the various departments and each needs to be reviewed to ensure the most suitable solution is selected. Automation Various types of automation have been used in the UK healthcare industry for several years, but the NHS has shied away from some types because of the payback periods involved and capital investment. The use of different procurement routes such as PFI, where a contractor has say a 25 year contract to run the building, bring new opportunities to look at automation and understand the benefits. The descriptions below give a very broad-brush view of payback periods and need to be estimated for each specific project. However the other drivers for using automation should not be underestimated, these are:

Improvement of service provision

Better use of existing staff

Reduction in the wear and tear of the building

24 hour availability The improvements in service provision are typically centred on increased speed of response and flexibility. A single test tube can be transported several hundred meters within minutes and without a second thought to the need for manpower, with results coming straight back once ready. Similarly dirty linen and waste can be collected during the night when the hospital is quite and re-scheduled within minutes without having to re-organise staffing. The shift of goods portering functions from man based to automated also means that porters’ interface can be moved from dealing with deliveries to patients. This not only moves resources to dealing with patients and the public, but also creates a much more rewarding working environment. A benefit of automation that is harder to quantify is the reduction in wear and tear. The movement of trolleys, cages, etc around corridors and in lifts creates considerable damage to finishes and transferring these movements to automated solutions can considerably reduce the impact of FM activities. Other benefits are the reduction in lift usage and subsequent reduction in wear and tear of the mechanical drives, car finishes, etc. Below is a short description of different types of automation that can be used for the distribution of goods. Small bore hole pneumatic tube systems These systems are commonly used in the UK and abroad. They basically consist of a PVC tube network that links a number of the hospital departments and into which carriers can be inserted for the distribution of pharmaceutical goods, specimens, Xrays, documents, etc. The movement of the carriers is achieved by one or more fans pressurising various runs of the tube network and either blowing or sucking air to move the

47

carrier. The tubes are typically 110mm, 160mm, 200mm or 300mm in diameter depending on what needs to be distributed, however the smaller system is the most common in the UK. The design of pneumatic tubes is well understood, however hospitals sometimes complain about the waiting time of a carrier before it is actually sent. This is normally caused by bottlenecks in the system, usually at the bridge between two or more zones, or simply because there is insufficient spare capacity on the system. The capacity is limited by the number of fans (or zones) available, as one fan is able to push or pull one item at a time, two fans can move two items at a time and so on. Therefore if the fans are busy, any new carrier has to wait until the system has cleared any backlog and is free again. Most manufacturers now produce linear transfer stations, also called linear coupler servers, that can move carriers from one tube network to another and also store them when the network is very busy. As a rule of thumb, these should be considered if three or more zones are required. It is also normal to design a network to run at 50 to 70% of its capacity, which should ensure maximum waiting times of 5 to 10 minutes. A simple system will cost approximately £3,750 per station. So for a hospital with say 16 stations (i.e. 10 wards, pharmacy, pathology unit, A&E, theatres, etc) on two zones, the cost will be in the region of £60,000. If it is used to replace three daily bulk deliveries from each station taking 15minutes each, the system is saving 12 man-hours a day, which means a possible pay back period of 2 years. This is extremely crude and the pneumatic tube system should hopefully provide a much better service than the equivalent of three bulk deliveries every day. Payback periods are however reasonably easy to calculate and short enough to justify the usage of these systems in most large NHS developments. Integration of this system with an automated pharmacy dispensing unit & optimisation of the use of the dispensing system? Large bore hole pneumatic tube systems These systems are very similar to the ones described above but are, as the name suggests, larger and can therefore transport bulkier items. They are typically used to transport dirty linen and waste from various departments to central collection points that can be up to a mile away, and are therefore particularly suitable to either very large sites or high buildings. There is, as far as we are aware, not a single system in operation in a UK hospital despite this being reasonably old technology regularly used in airports and high-rise residential buildings. Arup are involved with two installations in Ireland and feedback from the users is so far very positive. These systems are considerable more expensive than their smaller counterparts and, for example, a unit taking waste and linen from 16 areas (i.e. two networks running in parallel) to a central collection point with around a mile of pipe-work will be in the region of £450,000 to £500,000. If the FM team are expected to collect 3 waste containers and two linen cages from each area twice a day, then with a 15 minute travel time the system is saving approximately 40 man hours a day. The payback period is therefore much longer than the small diameter pneumatic systems, around 5 years in this example, which may be too long term for NHS trusts to consider their usage. Such payback periods would however be perfectly reasonable with longer service agreements, such as on PFI projects, and it is anticipated that new procurement routes will encourage their use within new developments. Automated Guided Vehicles AGVs are small robotic platforms approximately 400mm wide, 1500mm long and 300mm high that can lift and carry a variety of containers to pre-set destinations. They are programmed to carry out particular tasks at defined times, such as collecting waste containers and delivering catering boxes, and use the same corridors as staff, as they are fitted with anti-collision protection to ensure they do not collide with other moving objects or people. There are several types of guidance systems but the least obtrusive to install into existing buildings use laser technology that can locate walls and obstructions, which enables them to determine where they are and where they are going. AGVs will also call for a lift and request a floor ensuring that any point accessible through corridors and lifts can be reached. Doors also need to be fitted with actuators to ensure the unit can open them when approaching.

48

There are, as far as we are aware, no AGVs currently used in hospitals in the UK, although they are common in hospitals in the US, Germany, etc, and are used in many other industries such as manufacturing and aviation. Their main drawback is the payback period, which typically ranges between 5 to 7 years. Manufacturers do quote amortisation periods as low as 3 years, but these estimates clearly need to be done project by project. As a guide, the CAPEX for a large system using 20 vehicles to distribute around an 800 to 900-bed hospital will be around £2 to £2.5m including containers. Another important factor is the ease with which they can be introduced to existing developments. As noted previously, they can be mixed with staff and are able to control lifts, but routes need to be clearly defined and they may not be ideal in developments where buildings are at different levels accessed via stairs and corridors are consistently blocked by doors. A further item that needs to be resolved early on is the type of container that will be moved. AGVs can usually deal with the weights involved in FM deliveries but having a wide variety of containers can be an issue. The AGV has a preset dimension and the choice of containers needs to be suitable to fit under the AGV so that it can be moved. Most AGVs can be modified to take other containers than those specified by the manufacturer but there is limited flexibility. The rationalisation of container sizes is probably a good thing in any logistics review, but the affects need to be understood throughout the supply chain (i.e. why have clean linen delivered in cages if it needs to be transferred to something else once at the hospital?). Monorails and track vehicle systems Track systems exist in many different formats ranging from the smaller units used for document handling and hospital distribution (typically around 30kg) to the systems used in manufacturing that can handle loads up to 500kg (some industrial units will move higher loads). The smaller track systems are slower than pneumatic tube systems and generally more cumbersome because of the space requirements. Their main advantage is their capacity to transport goods of different sizes in one container horizontally and vertically, making them suitable for constant flows of larger deliveries. For individual projects, the choice will come down to either the monorail or the pneumatic tube systems and different diameters of pipe need to be reviewed to compare like for like. It may be that a mixed solution is the most suitable with the monorail used to deliver the larger containers between particular departments. The larger monorail systems are marketed as being suitable to distribute FM containers for catering and linen. These systems need to be planned in at the early stages of design because they take up considerable space and do interfere with people movement if high ceilings are not available. As with the smaller systems they need to be reviewed against AGVs when looking at automation options, however their impact on the building infrastructure is a considerable disadvantage. Pharmaceutical storage and dispensing systems There are typically three different types of storage and retrieval systems: mini loaders, vertical carousels and dispensers. A mini loader is a small version of the Automated Storage and Retrieval Systems (ASRS) found in distribution centres and warehouses. Systems vary between manufacturers but typically products are stored and retrieved by a two-axis robot mounted on a rail system that operates between two rows of shelving. The tight shelving means that product density is maximized and use of the robot ensures fast picking (450 to 900 products / hour). The automated storage software will also deal with channel allocation, stock management (including expiry date) and lot tracking. Vertical carousels consist of vertical shelving units that rotate around a conveyor belt to ensure that the shelf with the product required is located at the picking face. They usually come with various module heights to suite the quantity of items than need to be stored. Pick-to-Light displays highlight the item that is requested so that the operator does not have to check all the labels available on one shelf. As with the mini loader, software is available for full stock control. Dispensers use the same principle as the mini loader but items are stored vertically within a sealed container. One unit should be able to dispense approximately 300 units every hour, with a storage capacity dependent on the height available. They are usually smaller than the min loaders and therefore suite slightly different applications. Again they are able to provide full stock control. The choice of storage and dispensing system needs to be based on the required storage, the number of dispensing points to be covered and the handling speed. Once these parameters have been defined, it should be easy to make a comparison between the various options.

49

Meaning of Purchase Cycle

Purchasing activity plays a vital rile in all the firms in general and in the manufacturing firms in particular.

Purchasing, is not merely “buying to satisfy the indentor’s requirements”, but “buying goods of right quality,

in the right quantities, at the right time and at the right price”.

Purchase cycle consists of following eight major activities (Fig 2.3)

1. Establishing and communicating the need for procurement.

2. Scrutiny of the purchase indents.

3. Market study and selection of sources of supply

4. Order preparation

5. Follow up

6. Receiving and inspection

7. Storage and Record keeping

8. Invoicing and Payment.

Elements of Procurement Cycle / Steps of purchasing cycle

1. Establishing and communicating need for Procurement

The need for purchase originates in one of the firm’s operating departments or its inventory control section. The demand may be for raw materials, such as steel; or it may be for semi-finished goods such as castings, forgings, semi-matched parts; or it may be for bought out parts; or for cutting tools such as drills, reamers, cutters, etc.; or it may be for supplies or for spares. The need is communicated to the purchase department through a formal document called “Purchase Indent” or a “Bill of Material” a) Purchase indent: Purchase indent, also called purchase requisition, is a formal request made to the purchase department to purchase materials or services specified, time when required etc. A purchase indent originates either from the firm’s inventory control section, production control department, or from one of the operating departments.

1. ESTABLISHING THE NEED FOR PROCUREMENT

1. Recognising the need for procurement 2. calculate the requirements 3. jotting down the specifications 4. informing requirements to purchase

(i) Purchase indents / Bill-of-material

2. SCRUTINY OF PURCHASE INDENT

1. Completeness 2. Appropriateness

Establishing the

need for procurement

Scrutiny of the

purchase indent

Purchase market

research

Order

preparation

Follow up with

supplier

Receiving and

Inspection

Storage and record

keeping Invoicing and

payment

Fig: 2.3 Major activities of purchase cycle

50

5. FOLLOW UP

1. Pre-delivery follow up 2. Shortage chasing

(a) Reminders (b) Personal visits (c) Telephones (d) emails (e) Faxes / Telexes (f) Posting of personnel at suppliers’ works

6. RECEIVING & INSPECTION

1. Receiving dispatch details (RR/LR) and logging them into the consignment register

2. Collection of material 3. Inspection for physical damages to the packages and

number of packages 4. Entering consignment details into GR register 5. Uncrating of goods 6. Quantity certification 7. Raising of GRR 8. Intimating receipt of materials to the indentor 9. Inspection of goods

7. STORAGE & RECORD KEEPING

1. Movement of materials to concerned store / rejection store

2. Quantity certification 3. Application of protective coating / marking 4. Storage of materials into appropriate racks 5. Posting of receipt into stock card.

8. INVOICING & PAYMENT

1. Receiving GRRs in Accounts department 2. Receiving suppliers’ bills

51

The indent alternatively rose either by plant engineer, or by maintenance engineer, or by office

manager, or by other responsible persons authorized to request these items.

Organization permitted different person to sign the purchase indents for different kinds of items are

issued by the top management.

Stock items (items of regular use): for these items the purchase indents will be given by inventory

section or stores are generally. When the stock level drops to or nears the re-order level, an indent

is sent from stores to the purchasing department to replenish the stock.

The buying department may also receive indents for capital goods, the purchase of which has

already been approved by the management.

Non-standard items: The indents for these items are filled in by the operating departments. The

requests for items may come from planning department. Indents are raised by all indenting

departments. It should have three copies. Original is sent to the purchase, second goes to the

stores, and third copy remains with the originating department.

Purchase indents from inventory section or the store is sent directly to the purchase department.

Purchase indents from all other persons must be approved by the authorized signatory and

should be routed through inventory section or stores to see whether required items are

carried in the stores.

b) Bill-of-material:

Bill-of-material, also called parts list of building list,

Bill of material is prepared by the engineering department, production and material dept.

The final assembly is broken into major assemblies. Major assemblies are divided into parts. The

individual parts comprising each assembly are arranged, as far as practical, in the manner in which

each part is assembled.

The main advantages of bill-of-material are:

i) It eliminates the unnecessary clerical activities regarding purchasing of goods. This saved time and

energy.

ii) It can minimise clerical error.

iii) It can reduce wastage of materials and also reduces unnecessary inventory cost.

2. Scrutinising Purchase Indents

52

A purchase indent may describe the items either by its brand name, or by commercial

standard, or by its performance standards. Sometimes the indents may be forwarded

sample of the item.

Purchase departments must scrutinize the accuracy and completeness of quality

description.

The scrutiny of the indents is a routine activity of the purchase department. The indent is scrutinized to see

whether –

i) It should be signed by the authorized signatories to avoid irresponsible and unethical purchases;

ii) It should be coming through stores department to certify non-availability and stock history of the item in

stores;

iii) Quantity and quality specification of the item should be correctly and clearly written.

iv) The description of the required item should be clearly given;

v) quality specification of the item may be correctly and clearly written

Each purchase indent after scrutiny is recorded in the purchase indent register and then given to the concerned buyer. The second copy is initialed, dated and returned back to its indentor.

3 Identification, Selection, development of Sources of Supply or Survey

After the scrutiny of the indents the next stage is market survey and selection of the sources of

supply.

This stage involves differentiate and sorting of items into item groups, review of available

information, and selecting potential source(s) of supply who can supply goods -

i) of the right quality;

ii) at the right price; and

iii) Meet buyer’s quantity requirements, and make reliable delivery promises.

Buyers can select suppliers by virtue of their experiences and data collected from their

various internal sources such as catalogues and price lists, etc.

In general, the work involved in market search and source selection is as under:

i) For the items purchased to commercial standards, telephonic quotations are obtained from vendors and

verbal order is given to a supplier whose terms are most suitable.

ii) For highly price fluctuating products and items an inquiry is sent to probable sources and quotations are

received. A comparative statement is prepared from the quotations received from the suppliers. Then

company select one or more than one suppliers according to their suitability.

iii) For the regular use items buyers send design specification along with blue print or sample and delivery

schedules are released to the suppliers

iv) For non-stock items, the sources are selected as per previous points depending upon the nature of the

item

v) For capital equipment, enquires are either mailed to the machine tool manufactures or the enquiries

are advertised (open tender) in the paper of this country. Company can float global tender by advertised

the enquiries in the news paper of other country.

53

vi) If lesser amount is involved and the item is easily available, the buyer may buy with petty cash.

vii) For new items, the buying department have to explore information to identify sources and undertake

the activity of selection and development of suppliers.

.

4. Order Preparation

After selection of source of supply, the next step is to authorize the selected suppler to supply

material, which is done by placing the purchase order.

A purchase order is a formal document prepared by the buying department on behalf of the

company to authorize (request) the supply of the goods and services in the quantities, at the time

and at the price specified there in the document.

A purchase order is a legal document and serves as an evidence of the contract between the buyer

and the seller.

After getting the orders typed, the buyer has to check for its correctness and sign it. Once the purchase

order has been signed, it requires to be entered in the purchase register. The individual copies of the

purchase order, materials required urgently are purchased on verbal or telephonic orders which are covered

immediately by written purchase orders.

A written purchase order serves the following objectives:

i) It gives full details of the materials to be supplied to avoid ambiguities.

ii) It serves as a future reference for placement of orders.

iii) It helps buyer’s accounts department to link goods-receipt-reports with supplier’s invoices.

iv) It helps buyer’s receiving department to verify that the materials received are in accordance with

those ordered.

The copies of the purchase order go to the supplier, the accounts department, the receiving department, the

indenting department, the reference file, and the follow-up section.

The placement of an order cannot be considered complete until the acknowledgement of the purchase order

is received from the vendor.

5. Follow-up with Suppliers

The follow up function now-a-days has become the foremost function of the buyers. Basic rules of follow-up

are:

i) Follow-up should be based on market condition and buyer’s experience with the vendor’s

delivery performance.

ii) Buyer should keep a constant himself up-to-date with latest progress on each order.

iii) Mode of follow-up should be based importance of the item, reliability or otherwise of the

supplier, number of suppliers, location and so on.

Purchase follow-up is made in two stages: pre-delivery follow-up and shortage chasing.

Pre-delivery follow-up is intended to remind the supplier of the due date and obtain advance information of

expected delays. Pre-delivery follow-up enables buyer –

54

If the supplier is expected to fail in his delivery commitment; buyer has to develop alternate

arrangements to ensure that delivery should be on time. In this case buyer may identify another

source of supply to make delivery on schedule. Typical methods used are:

i) Phone call to local suppliers;

ii) Letters to outside supplier typed and signed by the buyer;

iii) Regular visits –to new suppliers to review progress

iv) Delivery confirmation letters from supplier intimating that the delivery shall be made on

promised date. It is one sort of guarantee card;

Shortage chasing is the universally accepted most vital part of purchase follow-up. purpose:

First to obtain the shortage materials as soon as possible and

Second to intimate suppliers that delivery should be made on time, if not then shortage

chasing will be done by company. It prevents future recurrences.

The approach depends upon the type of supplier:

i) In the time of vendor evaluation buyer may warn supplier about the delivery and shortage of

supply.

ii) Supplier’s delivery ratings should be communicated on periodical basis. Suppliers with A and B

ratings should be encouraged. Those with C and D rating should be warned to improve on their

delivery performance.

iii) New sources should be developed and schedule on existing suppliers who are in C and D position

should be gradually rejected to pressurize them to improve.

iv) Meeting between the senior representatives should be arranged to discuss the problems.

Example: the follow-up system in operation can be done in following manner

Once the date is marked on the follow-up copy, the staff has to segregate all order copies

and puts them into date compartments.

The buyers are asked to adopt the following method for follow-up:

i) Telephone or email the party;

ii) Faxes: when urgency exists

iii) A personal visit should be made to local supplier in case of extreme urgency and in case of failure

to get the supplier on phone;

iv) Telephone and also write a reminder on a printed form indicating the delivery required, the

quantity pending and so on;

v) Written letters, duly typed and signed by the higher authorities must be issued to distant supplier;

6. Receiving and Inspection

After receiving the purchase order the supplier fills up the buyer’s requirements and

arranges delivery of the materials according to instructions regarding quantities, time, route,

mode of transport, etc.

In a small company “Receipt” or “Receiving” department/section will receive the materials

and inspect. In a large company, receiving materials is looked after by the stores

department.

The activities involved are as under:

55

(a) Receiving:

Materials in the receiving department are received against a specific document depending upon mode of dispatch and geographical location of the supplier.

Materials from local supplier

Responsibility of delivery of materials depends on the terms of contract. Materials to be delivered by

the suppliers

The original copy of the delivery challan is retained by the receipt department. The duplicate copy is

stamped “Subject to physical count and inspection” and is signed by the receipt clerk and is handed

over to the supplier’s representative.

Different methods of receiving Materials from outside supplier:

i) Post parcel: Post parcel is the convenient method of receipt of materials from outstation

suppliers. No information is received from postal authority regarding receipt of materials but

postman personally delivers the parcel. Only light weight materials such as samples, spares, and

cutting tools are sent by the post parcel.

ii) Road transport:

If the materials are sent through road transport, the receipt of the transporter, called “Lorry

receipt”. It is sent by the supplier.

The lorry receipt is numbered and contains description of the items packed in the boxes, the

number of Containers.

freight paid or to be paid and the type of delivery has to be mentioned.

If the delivery is mentioned as “Door delivery”, the transporter has to deliver the goods at the

buyer’s works.

iii) Rail transport: This is similar to road transport except the following differences:

the railway receipt is received by the buyer in duplicate;

the railway does not inform the consignee of the arrival of the material;

the materials require to be collected by the consignee.

iv) Air: Air consignment (AC) note must be sent as soon as material is booked. The receipt

department on the receipt of A.C. note visits airlines office to collect materials.

Since, it takes a long time for clearing, a register is maintained to keep a proper control on the documents.

The register mentioned above serves many purposes:

It enables clearing department to do follow up with the transport agency.

It enables buyer to know the time when the materials to be received.

It enables clearing department to plan their administrative work load as well as achieve optimum

utilisation transport facilities.

(b) Verification and logging of delivery challan of materials:

When materials are received with supplier’s delivery challan, receiving department takes out the copy of the relevant purchase order and verifies to ensure:

i) Right materials

ii) They have supplied materials as per delivery schedule.

iii) Right quantity.

56

iv) Purchase order number, part name, part number, broad purchase category etc. are mentioned

clearly and correctly.

v) Right time.

After having satisfied, the receipt clerk makes the entry of the receipt materials into a register called “Goods

Receipt Register”.

(c) Preparation of Goods-Receipt-Reports (GRR):

Goods receipt register cannot be made available to different departments.

Other departments have to be informed. That’s why information from the goods-

receipt-register is transformed on “Goods Receipt Report” (GRR). It is also known

as “Goods Inward Note” (GIN), or Receipt-cum-Inspection Advice (RCIA), or

Materials Inward Note (MIN) etc.

The need for preparing a separate document such as GRR arises because of the following reasons:

i) Only one copy of the delivery challan is received. But, concerned department should be informed.

ii) Preparation of GRR helps to combine information on delivery challan and results of inspection.

(d) Communication of receipt of material:

Moreover, the personnel who are engaged in receiving may not know whether a particular

material is required urgently.

Therefore, they have to inform the concerned departments as soon as materials are

received. First communication can be made on intercom. But, after that written

communication should be done.

Physical count of the received material:

Materials received should be verified for quantities.

The receipt clerk has to attach receipt tag containing all details about the delivery challan to the part or to the package. This tag also contains challan numbers, description of materials, code numbers of materials, name of the suppliers, number of packages received, quantity received and date of receipt.

The verification method of quantities may be one or more of the following types:

i) Counting by number (quantity).

ii) Weighing.

iii) Measurement of length.

After quantity verification material is kept ready for quality verification by the inward inspection department.

If the verified quantity is less than claimed quantity then authority should issues Discrepancy Note.

(e) Inspection of goods

All supplies are subjected to inspection and testing.

Critical items: These are inspected at vendor’s plant prior to deliveries by the vendor.

All remaining items are inspected by the inward inspection at the buyer’s premises to conform the following

criteria

Dimensions;

57

Materials specifications, and

Performance.

7. Storage and record keeping

After inspection The goods are segregated in to accepted and rejected categories.

Only fully accepted quantity is forwarded to the stores. The quantity is physically verified

and entered into the ledger or bin cards and only thereafter the issue is allowed.

8. Invoicing & Payment

Receipt of supplier’s invoice:

When the supplier supplies goods, he immediately prepares invoices. Sometimes, both buyer and supplier

have discussion and supplier agrees to raise invoices after the receipt of goods-receipt-reports. Such a

system has a number of benefits namely:

i) Reconciliation statements are very easy to prepare

ii) Invoices indicates the exact quantity of materials accepted by the buyer.

iii) Paper work is cleared faster and payment wise there is no dispute.

iv) Raising of credit or debit notes can be avoided for discrepancies in quantities or

rejection.

Scrutiny of invoice:

Supplier’s invoices on receipt are sent to the accounts department. The personnel of this department again

scrutinize the invoice in accordance with GRR.

Journal entries:

Verified invoices are entered in a purchase register, called “purchase journal”. A purchase journal is a

register wherein invoices are entered supplier wise.

Payment:

The purchase journal is reviewed periodically and the cashier is informed of the invoices which are due for

payment. Cheques are drawn to effect payment on due dates

2. Inventory planning and control 4L

a. EOQ models – without shortage, with shortage, with price breaks; effect of

quantity discount.

b. ABC, FSN and VED classification; inventory control; perpetual, two-bin and

periodic inventory Factors that influence inventory management decisions, which include:

Types of inventory based on the flow of material.

Supply and demand patterns

Functions performed by inventory

Objectives of inventory management

Inventory costs

58

§ 4.1.1 Types of Inventories

A manufacturing firm generally carries the following types of inventories:

1. Raw materials: Raw materials are those basic un-fabricated materials which have not

undergone any operation since they are received from the suppliers, e.g., round bars, angles,

channels, pipes, etc.

2. Bought out parts: These parts refer to those finished parts, subassemblies which are

purchased from outside as per the company’s specifications.

3. Work-in-process inventories (WIP): These refer to the items or materials in partially

completed condition of manufacturing e.g., semi-finished products at the various stages of

manufacture.

4. Finished goods inventories: These refer to the completed products ready for dispatch.

5. Maintenance, repair and operating stores: Normally these inventories refer to these items

which do not form the part of the final product but are consumed in the production process,

e.g., machine spares, oil, grease.

6. Tools inventory: Includes both standard tools and special tools.

7. Miscellaneous inventories: Miscellaneous inventories – office stationeries and other

consumable stores.

§ 4.1.2 Functions of Inventory

In batch manufacturing, the basic purpose of inventories is to develop supply and demand. Inventory serves

as a buffer between:

Customer demand and finished goods

Finished goods and component availability

Requirement for an operation and the output from the preceding operation

Parts and materials to begin production and the suppliers of materials

Based on this, inventories can also be classified as

I. Fluctuation inventories

II. Anticipation inventories

III. Lot size inventories, and

IV. Transportation inventories.

Fluctuation Inventory

Fluctuation Inventory is held to cover random unpredictable fluctuations in supply and demand or lead time.

if demand or lead time is greater than forecast, a stock out will occur.

Safety stock is carried out to protect against this possibility. Its purpose is to prevent disruptions of in

manufacturing or deliveries to customer. Safety stock is also called buffer stock or reverse stock.

Anticipation Inventory

Anticipation Inventories are built up in anticipation of future demand. For example, they are created ahead

of a peak selling season, a promotion programme, vacation shutdown, or possibly the threat of strike. They

are built up to help level production and to reduce the costs of changing rates.

59

Lot –Size Inventory

Items purchased or manufactured in quantities greater than needed immediately create lot-size inventories.

This is to take quantity discounts, to reduce shipping, clerical and setup costs, and incases where it is

impossible to make or purchase items at the same rate they will be used or sold. Lot-size inventory is

sometimes called cycle-stock. It is portion of inventory that depletes gradually as customers’ orders came in

and is replenished cyclically when suppliers’ orders are received.

Transportation Inventory

Transportation inventories exist because of time needed to move goods from one location to another location

such as from a plant to a distribution centre or a customer. They are sometimes called pipeline or movement

inventories. The average amount of inventory in transit is

I = TA/ 365

where I is the average annual inventory in transit

T is transit time in days

A is the annual demand.

The transit inventory does not depend upon the shipment size but on the transit time and the annual demand.

The only way to reduce the inventory in transit, and its cost, is to reduce the transit time.

§ 4.1.3 Objectives of Inventory Management

A firm wishing to maximize profit will have at least the following objectives:

• Maximize customer service

• Low cost plant operation

• Minimum inventory management

Customer Service

In broad terms, customer service is the ability of a company to satisfy the needs of customers. In inventory

management, the term is used to describe the availability of items when needed and is a measure of

inventory management effectiveness.

There are many different ways to measure customer service, each with its strengths and weaknesses, but

there is no one best measurement. Some measures are percentage of orders shipped on schedule, percentage

of line items shipped on schedule, and order days out of stock.

Inventories help to maximize customer service by protecting against uncertainty. If we could forecast

exactly what customers want and when, we could plan to meet demand with no uncertainty. However,

demand and the lead time to get an item are often uncertain, possibly resulting in stock outs and customer

dissatisfaction. For these reasons, it may be necessary to carry extra inventory to protect against uncertainty.

Operating Efficiency

Inventories help make a manufacturing operation more productive in four ways:

1. Inventories allow operations with different rates of production to operate separately and more

economically. If two or more operations in a sequence have different rates of output and are to be

operated efficiently, inventories must build up between them.

2. Production planning for seasonal products in which demand is non uniform throughout the year. One

strategy was to level production and build anticipation inventory for sale in the peak periods. This would

result in the following:

• Lower overtime costs

• Lower hiring and firing costs

60

• Lower training costs

• Lower subcontracting costs

• Lower capacity required

By leveling production, manufacturing can continually produce an amount equal to the average demand. The

advantage of this strategy is that the costs of changing production levels are avoided.

3. Inventories allow manufacturing to run longer production runs, which result in the following:

Lower setup costs per item. The cost to make a lot or batch depends upon the setup costs and the run

costs. The setup costs are fixed, but the run costs vary with number produced. If larger lots are run,

the set up costs are absorbed over a larger number, and the average (unit) cost is lower.

An increase in production capacity due to production resources being used a greater portion of the

time for processing as opposed to setup. Time on a work centre is taken up by setup and by runtime.

Output occurs only when an item is being worked on and not when set up is taking place. If larger

quantities are produced at one time, there are fewer setups required to produce a given annual output

and thus more time is available for producing goods. This is most important with bottleneck

resources. Time lost on set up on these resources is lost throughput (total production) and lost

capacity.

4. Inventories allow manufacturing to purchase in larger quantities, which results in lower ordering costs per

unit and quantity discounts. But all of this is at a price.

The problem is to balance inventory investment with the following:

1. Customer service. The lower the inventory, the higher the likelihood of a stock-out and the lower

the level of customer service. The higher the inventory level, the higher customer service will be.

2. Costs associated with changing production levels. Excess equipment capacity, overtime, hiring,

training, and layoff costs will all be higher if production fluctuates with demand.

3. Cost of placing orders. Lower inventories can be achieved by ordering smaller quantities more

often, but this practice results in higher annual ordering costs.

4. Transportation costs. Goods moved in small quantities cost more to move per unit than those move

in large quantities. However, moving large lots implies higher inventory.

§ 4.1.4 Reasons For Keeping Inventories

1. To stabilize production: The demand for an item fluctuates because of the number of factors, e.g.,

seasonality, production schedule etc. The inventories (raw materials and components) should be made

available to the production as per the demand failing which results in stock out and the production stoppage

takes place for want of materials. Hence, the inventory is kept to take care of this fluctuation so that the

production is smooth.

2. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying and to

gain the price advantage the materials are bought in bulk even though it is not required immediately. Thus,

inventory is maintained to gain economy in purchasing

3. To meet the demand during the replenishment period: The lead time for procurement of materials

depends upon many factors like location of the source, demand supply condition, etc. So inventory is

maintained to meet the demand during the procurement (replenishment) period.

4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the delivery schedules at

100 per cent service level, means they cannot afford to miss the delivery schedule which may result in loss

of sales. To avoid this the organizations have to maintain inventory.

61

5. To keep pace with changing market conditions: The organizations have to anticipate the changing

market sentiments and they have to stock materials in anticipation of non-availability of materials or sudden

increase in prices.

6. Sometimes the organizations have to stock materials due to other reasons like suppliers minimum quantity

condition, seasonal availability of materials or sudden increase in prices.

§ 4.1.5 Costs Associated With Inventory

1. Purchase (or production) cost: The value of an item is its unit purchasing (production) cost. This cost

becomes significant when availing the price discounts. This cost is expressed as Rs./unit.

2. Capital cost: The amount invested in an item, (capital cost) is an amount of capital not available for other

purchases. If the money were invested somewhere else, a return on the investment is expected. A charge to

inventory expenses is make to account for this un-received return. The amount of the charge reflects the

percentage return expected from other investment.

3. Ordering cost: It is also known by the name procurement cost or replenishment cost or acquisition cost.

Cost of ordering is the amount of money expended to get an item into inventory. This takes into account all

the costs incurred from calling the quotations to the point at which the items are taken to stock.

There are two types of cost – Fixed costs and variable costs.

Fixes costs do not depend on the number of orders whereas variable costs change with respect to the number

of order placed. The salaries and wages of permanent employees involved in purchase function and control

of inventory, purchasing, incoming inspection, accounting for purchase orders constitute the major part of

the fixed costs. The cost of placing an order varies from one organization to another. They are generally

classified under the following heads:

i) Purchasing: The clerical and administrative cost associated with the purchasing, the cost of

requisitioning material, placing the order, follow-up, receiving and evaluating quotations.

ii) Inspection: The cost of checking material after they are received by the supplier for quantity

and quality and maintaining records of the receipts.

iii) Accounting: The cost of checking supply against each order, making payments and

maintaining records of purchases.

iv) Transportations costs.

4. Inventory carrying cost (holding costs): These are the costs associated with holding a given level of

inventory on hand and this cost vary in direct proportion to the amount of holding and period of holding the

stock in stores. The holding costs include.

i) Storage costs (rent, heating, lighting, etc.)

ii) Handling costs: Costs associated with moving the items such as cost of labour, equipment

for handling.

iii) Depreciation, taxes and insurance.

iv) Costs on record keeping.

v) Product deterioration and obsolescence.

vi) Spoilage, breakage, pilferage and loss due to perishable nature.

5. Shortage cost: When there is a demand for the product and the item needed is not in stock, then we incur

a shortage cost or cost associated with stock out. The shortage costs include:

i) Backorder costs.

ii) Loss of future sales.

iii) Loss of customer goodwill.

62

iv) Extra cost associated with urgent, small quantity ordering costs.

v) Loss of profit contribution by lost sales revenue.

The unsatisfied demand can be satisfied at a later stage (by means of back orders) or unfulfilled demand is

lost completely (no back ordering, the shortage costs become proportional to only the shortage quantity).

§ 4.1.6 Inventory Control- Terminology

1. Demand: It is the number of items (products) required per unit of time. The demand may be either

deterministic or probabilistic in nature.

2. Order cycle: The time period between two successive orders is called order cycle.

3. Lead time: The length of time between placing an order and receipt of items is called lead time.

4. Safey stock: It is also called buffer stock or minimum stock. It is the stock or inventory needed to account

for delays in materials supply and to account for sudden increase in demand due to rush orders.

5. Inventory turnover: If the company maintains inventories equal to 3 months consumptions. It means that

inventory turnover is 4 times a year, i.e., the entire inventory is used up and replaced 4 times a year.

6. Re-order level (ROL): It is the point at which the replenishment action is initiated. When the stock level

reaches R.O.L., the order is placed for the item..

7. Re-order quantity: This is the quantity of material (items) to be ordered at the re-order level. Normally

this quantity equals the economic order quantity.

§ 4.1.7 Inventory Cost Relationships

There are two major costs associated with inventory. Procurement cost (ordering cost) and inventory

carrying cost. Annul procurement cost varies with the number of order. This implies that the procurement

cost will be high, if the item is procured frequently in small lots. The procurement cost is expressed as

Rs./Order.

The annual inventory carrying cost (Products of average inventory x Carrying cost) is directly proportional

to the quantity in stock. The inventory carrying cost decreases, if the quantity orders per order is small. The

two costs are diametrically opposite to each other. The right quantity to be orders is one that strikes a

balance between the two opposing costs. This quantity is referred to as “Economic order quantity” (EOQ).

The cost relationships are shown in the following figure.

Annual total cost

Annual inventory

carrying cost

Annual ordering cost

Cost

(Economic Order Quantity

Order Quantity

Fig: Inventory carrying cost.

Q*

63

§ 4.1.8 Inventory Models

One of the basic problem of inventory management is to find out the order quantity so that it is most

economical from overall operational point of view. Here the problem lies in minimizing the two conflicting

costs, i.e., ordering cost and inventory carrying cost. Inventory models helps to find out the order quantity

which minimizes the total costs (sum of ordering costs and inventory carrying costs). Inventory models are

classified as shown in following figure.

Model-I

Economic Order Quantity With Instantaneous Stock Replenishment (Basic Inventory Model)

Assumptions

a. Demand is deterministic, constant and it is known.

b. Stock replenishment is instantaneous (lead time to zero)

c. Price of the materials is fixed (quantity discounts are not allowed)

d. Ordering cost does not vary with order quantity.

Graphical representation of the model is shown in following figure.

Let D be the annual demand (units per year)

Co = Ordering cost (Rs./order)

Ch = Inventory carrying costs (Rs./unit/unit time)

Cp = Price per unit

Q = Order quantity

Q* = Economic order quantity

N = Number of orders placed per annum

Inventory Models

Probabilistic Deterministic

(Models assuming certainty)

Fixed Qty.

System

Fixed Period

System

Fixed Qty.

System

Fixed Period

System

Fig: Inventory models

Time

Consumption rate

Average

Inventory

Fig: Basic inventory model.

Max. In

ve

nto

ry

Qua

ntity

64

Tc = Total cost per annum.

Annual ordering cost = No. of orders × Ordering cost/order

cost/orderOrderingquantityOrder

demandAnnual

oCQ

D … (1)

Annual inventory carrying cost

= Average Inventory investment x inventory carrying cost.

costcarryinginventory2

oryMin.InventoryMax.Invent

2

hQC … (2)

Annual total cost (Tc)

= Annual ordering cost + Annual inventory cost.

2

ho QC

Q

DC … (3)

To determine Economic order quantity (EOQ), differentiate, Annual Total cost.

equation (3) with respect to Q and set the first derivative equal to zero.

02

.2

ho C

Q

CD

dQ

dTc

h

o

C

DCQ

2* … (4)

Q* is economic order quantity.

Note: If the inventory carrying cost is expressed as a percentage of annual average inventory investment,

then

* 2 o

P

DCQ

C I

where, it is expressed as a percentage of annual inventory investment.

The optimal number of orders placed per annum

*

*

quantityorderEconomic

demandAnnual

Q

DN

Optimal time interval between two orders.

*

*

N

yearaindaysworkingofNumberT

Minimum total yearly inventory cost is given by

2

*

*

hocm

CQ

Q

DCT

Substituting for Q* from equation (4)

2

.2

2

. ho

h

o

ocm

C

Ch

CD

C

DC

CDT

65

hocm CDCT .2

Example 1

ABC toys buys a special spring worth Rs. 14,400.00 each year. It has

now entered into a contract with the manufacturer to supply springs in

staged lots against the purchase order to be raised by M/s. ABC toys

covering annual requirement. The procurement cost and inventory

carrying cost of the buyer are as under:

Cost of replenishing the stock of an item once: 24 per occasion

inventory carrying cost as percentage of average

inventory investment : 12%

How frequency should springs be received by ABC toys and what

should be the value of each consignment?

Solution:

Economic order quantity *Q [when the consumption is specified in terms of monetary figure]

h

*

C

DGQ

2

D Annual usage of the item (Rs.) = Rs. 14,400.00

oC Procurement cost per order = Rs. 24.00

/

ph ICC (Unit cost × Inventory carrying cost).

This type of problem hC is expressed only by I (inventory carrying cost per annum).

120.I

1. What do you mean by Integrated Materials Management? Which

aspects are considered for effectiveness in materials management?

2. What is economic order quantity? Describe step by step the

development of EOQ formula.

3. What is the importance of EOQ in inventory control? What are the

limitations of EOQ concept?

4. Explain the relevant costs for inventory decisions. How are these costs

sought to be controlled with the O.R. techniques?

SKILL TEST

66

002400120

24400142..Rs

.

,Q*

And number of receipts per year =* *

Annual Usage 14,4006

2400

D

Q Q

Example 2

Impellers are procured by a water pumps manufacturer from a local firm and are

consumed at an average rate of 500 per month. If the procurement cost Rs.36.00

per order and the cost of holding it in stock is Rs. 120.00 per unit per unit.

Determine the quantity that should be procured at a time to optimize the costs

involved. If the consumption of the above item increases to 40 numbers per day

and its actual inventory cost is 0.02 per unit per day, what will be the revised

EOQ?

Solution:

(a) Economic order quantity when inventory carrying cost is specified in ‘Rs’ per unit:

h

*

c

DGQ

2

D Annual consumption 12500 months 0006,

0C Procurement cost per order 0036..Rs

hC Holding cost per unit per year 201..Rs

Economic order Quantity 600201

3660002

.Q*

months

(b) Revised Economic Order Quantity:

Assuming 300 working days in a year, and

1200030040 D

00360 ..RsC

300020 .Ch [Since 0.2 is the inventory carrying cost per day]

006..Rs

3796

36120002

*Q

Example 3

A diesel engine manufacturer buys an item in lots of 500 units which is a three

month require3ment. The cost per unit is Rs. 90.00 and the ordering cost is Rs.

180.00per batch order. The inventory carrying cost is estimated at 20% of the

average inventory investment.

(a) What is the arrival total cost of the existing inventory policy?

(b) How much money cab be saved by using economic order quantity?

Solution:

67

(a) Annual total cost of existing inventory policy

ATC Ordinary cost + Inventory carrying cost

hC

QC

Q

D

2

00

0

ICQ

CQ

Dp

2

00

0

D Annual Requirement 20004500 nos.

0C Ordinary Cost per order

00180..Rs

pC Cost per unit 0090..Rs

I Inventory carrying cost per annum 200.

20090 ..RsICC ph

0Q Order quantity per order

200902

500180

500

2000.ATC

0052204500720 .

(b) Economic Order Quantity * 02 2 2000 180200

90 0.2

h

D CQ

C

Annual total cost (Economic Order Quantity Purchase)

00360018001800

20902002

1180

200

2000

..Rs

.

Annual saving if economic order quantity purchases are made in place of quantity purchases, Rs.

5200.00 – Rs.3000.00 = Rs. 1600.00

Example 4

The Jaiswal Pump Co uses 60,000 values per year and the usage is fairly constant

at 5,000 values per month. Each value costs the company Rs. 1.50. The carrying

cost for the company has been estimated at 15% of the average inventory

investment. The cost to place an order and process the delivery is Rs. 30.00

(a) Calculate economic order quantity

(b) What is the stock turnover rate ignoring safety stocks if EOQ is ordered

frequently;

(c) What will be the effect on total cost if stock turnover rate is reduced to one

third by infrequent ordering?

Solution:

(a) Economic Order Quantity h

*

C

DGQ

2

D Annual consumption = 60,000

68

0C Ordinary Cost per order = Rs. 30.00

hC Holding cost per unit per year = 150501 ..IC p

4000150501

30000602

..

,Q*

values

(b) Stock turnover rate refers to the frequency of replacement of stock of an item over a period of

item, say a year. In the absence of safety stock it may be expressed as follows:

*Q

Dn n Stock turnover ratio

154000

00060

,

(c) Increase in cost when stock turnover rate is reduced to one third

/n (changed Stock turnover rate) = 5

3

15

then Order quantity 000125

000601 ,

,Q*

Annual total Cost [considering stock turnover rate is 15] =

00900450450150512

400030

4000

60000

20 ..Rs..IC

QC

Q

Dp

*

*

Annual Total Cost [consider stock turnover Rate is 5]

511502

1200030

12000

60000

26 1

1

..*ICQ

Q

DP

*

*

001500001350150 ..

It can be concluded that annual total cost will increase by Rs. 600.00(Rs.1500.00-Rs.900.00)

when the stock turnover rate is reduced.

Model-II

Economic Order Quantity When Stock Replenishment Is Non-Instantaneoius (Production Model)

This model is applicable when inventory continuously builds up over a period of time after placing an order

or when the units are manufactured and used (or sold) at a constant rate. Because this model is specially

suitable for the manufacturing environment where there is a simultaneous production and consumption, it is

called “Production Model”.

Time

Fig: Production Inventory model.

tc tp

T

Max inventory level

Consumption Stock build

up

Sto

ck level (Q

uantity

)

69

Assumptions

a) The item is sold or consumed at the constant demand rate which is known.

b) Set up cost is fixed and it does not change with lot size.

c) The increase in inventory is not instantaneous but it is gradual.

Production inventory model is represented in the above figure

Let p be the production rate.

d is the demand or consumption rate.

Replenishment of inventory under this system build-up during the period tp and consumption takes place

during the entire cycle T.

Note: All other symbols are same as in Model-I.

Inventory under this situation, builds at the rate of (p-d) units and inventory is maximum at the end of

production period tp.

Maximum inventory at the end of production run = (p-d) x tp

Average inventory 2

)( ptdp

Now, the quantity produced during production period (Q) = p tp

p

Qt

P

Substituting for tp

Average inventory = p

Qdp

2).(

p

dQ1

2

Annual inventory carrying cost = Average inventory x Inventory carrying cost

hC

p

dQ

1

2

Annual set-up cost = No. of set-ups × Set-up cost/set-up o

DC

Q

Total annual cost (Tc) h

o Cp

dQ

Q

CD

1

2

. … (1)

To determine, the economic Batch (Lot) size (EBQ) differentiate equation (3) with respect to Q, set the first

derivative equal to zero.

0.

12

12

Q

CDC

p

d

dQ

dT oh

c

h

o

Cpd

DCQ

)/1(

2*

where Q* is economic batch quantity.

Note: If the inventory carrying cost is expressed as a percentage of annual inventory investment, then

70

* 2

1

o

h

DCQ

dC I

p

(where I is expressed in)

Optimal total cost is given by

2 (1 / )cm o hT DC C d p= -

Optimal number of production runs *

*

Annualdemand

EconomicBatch Qty(EBQ)

DN

Q= =

Example 5

A contractor has to supply 10,000 bearings to an automobile

manufacturer. He finds that, when he starts production run, he can

produce 25,000 bearings per day. The cost of holding a bearing in stock

for a year is Rs.2.00 and the set up cost of a production run is Rs.

1800.00. How frequency should production run be made?

Solution:

In the usual rotation, we are given:

Annual Demand, 000003030000010 ,,,D units

[Assuming 300 working days in the year]

Set up cost, 18000 .RsC per run

Demand Rate, 00010,d bearings /day

Production Rate, 00025,p bearings /day

Holding cost .RsCh /year

(i) Optimum order Quantity, *Q for each production run is

pdC

DCQ

h

*

1

12 0

94868

00025

000101

1

2

180000000302

,

,

,,

(ii) Frequency of production run is given by

48900010

94868.

,d

QT

** days

Thus the production run can be made after every 9.48 days.

1. Obtain the economic order economic order quantity with finite rate of

replenishment and the minimum cost.

SKILL TEST

71

Example 6

The details of a part to be machined as follows:

Annual requirement =2400 pieces. Machine rate = 10 pieces/shift

No. of working days in the year 320 shifts

Cost of machining a component 100.Rs per piece

Inventory carrying cost/annum %12 of value

Set up cost per production run 00400..Rs

Find the optimum run size for machine

Hints: 2400D pieces/year 004000 ..RsC per production run

10320P or 3200 piece per year

0012100

121003 ..RsCC ph per year

800*Q Pieces

Example 7

A manufacturing company uses an EOQ approach in planning its

production of gears. The following information is available. Each gear

costs Rs.250.00 per unit, annual demand is 60,000 gears, set up costs

are Rs. 4,000 per set up and inventory carrying cost per month is

established at 2% of the average inventory value, when in production,

these gears can be produced at the rate of 400 units per day and this

company works for 300 days in a year. Determine the economic lot size,

the number of production runs per year and the total inventory costs.

Solution:

00060,D gears/year 00250..RsCp per gear

0040000 ..RsC per setup

006024000250 ..Rs...RsICC ph per unit

200300

00060

,d gears per day [consumption Rate]

400P gears per day [Replenishment rate]

(i) 4000

1

12

pdC

DGQ

h

*

(ii) The number of production runs per year is given by

150004

00060

,

,

Q

DN

*

* production runs per annum

(iii) TC (optimal)

72

000201

400

200160400000060212 0

,,.Rs

,p

dCDC h

[Attenuation way, 00020112

0 ,,.Rsp

dC

Q

Q

DCQTC h

*

*

*

]

Model –III

Inventory Model when shortages are permitted

Assumptions

i) Ch is the holding cost per quantity unit per unit time

ii) Cs is the shortage cost per quantity unit per unit time.

iii) R quantity per unit time is the demand rate.

iv) tp is the scheduling time period which is constant

v) qp is the fixed lot size (qp = Rtp)

vi) Z is the order level to which the inventory is raised in the beginning of each scheduling period.

Shortages, if any, have to be made up. Here Z is the variable.

vii) Production rate is infinite

viii) Lead time is zero.

Determine:

(a) Optimum order level Z

(b) Minimum average cost.

Solution:

In the model, we can easily observe that the inventory carrying cost Cn as well as shortage cost Cs will be

resolved only when 0 pZ q£ £

In the above figure, the area (DBC) represents the failure to meet the demand rate and the area (AOB)

shows the inventory.

Since qp is the lot size sufficient to meet the demand for time tp, but ( qp) amount of stock is planned in

order to meet the demand for time R

Z (R is the demand rate), shortage of amount (qp – Z) will arise for

the entire remaining period (tp - RZ ) . Thus, holding cost per unit time becomes

A

Z

qp

tp

qp–Z

C

D Z/R B O

STOCK

SHORTAGE

(tp–Z/R)

Fig: Graphical representation of EOQ model with shortages.

73

2( ) 1 1

Since2 2

n hp p

p p p

C Z CG OAB ZZ q Rt

t t R q

D é ùé ù= = ´ ´ = =ë ûê ú

ë û ... (i)

and shortage cost per unit time is

ZqR

Zt

t

CDCBD

t

C

t

BDCCpp

p

s

p

s

p

2.

2

1)(2

ZqZRtRt

Cpp

p

s 2

2

2

sp

p

Cq Z

Rqé ù= -ë û ... (ii)

Now, adding equation (I) and equation (II), we get total average cost,

C(Z)=

221 1

( )2 2

n sp

p p

Z C Cq Z

q q+ - ... (iii)

(Cost Equation)

To obtain the optimum order level Z, we differentiate C(Z) with respect to Z and set the derivative equal to

zero, this we get,

0)1)((22

1)2(

22

1 zq

q

Cz

C

dz

dcp

p

s

p

n

which gives us ,

. (Optimumorder level)( ) ( )

s Sp p

h S h S

C Cz q Rt

C C C C= =

+ + ... (iv)

Condition for minimum cost is also satisfied, because,

02

2

p

S

p

h

Z q

C

q

C

d

Cd>

Substituting the value of Z from equation (W ) in equation (III), we get

Cmin=

22

2

1

2

1

Sn

pS

p

p

S

Sn

pS

p

n

CC

qCq

q

C

CC

qC

q

C

[ ]min

1. . Minimumcos

2 ( ) 2( )

S h n Sp p

n S n S

C C C CC q Rt t

C C C C= =

+ + ... (v)

Optimum order level (z) p

sh

s qCC

C

Total cost (optimum) p

sh

ns qCC

CC

2

1

Annual Total cost

p

sp

p

h

p q

Czq

q

CzC

q

DATC

22

02

1

2

1

Differentiating the ATC function w.r.t q and setting the fist derivative to zero,

74

02

1

2

1

2

12

2

2

2

0 p

s

s

p

h

p q

CzC

q

Cz

q

DCATC

dq

d

or, shh

p

CCzCzCq 2

120

2

1 22

02

or,

s

sh

s

pC

CCz

C

DCq 202 2

Putting the value of hs

ps

CC

qCz

s

sh

sh

ps

s

pC

CC

CC

qC

C

DCq

2

22

02 2

sh

sp

s

pCC

Cq

C

DCq 202 2

or, ssh

sp

C

DC

CC

Cq 02 2

1

or, ssh

hp

C

DC

CC

Cq 02 2

or,

sh

hs

p CCC.C

DCq 02 2

sh

hs

p CCCC

DCq 02

total cost (min) p

sh

hs qCC

CC

2

1

[Considering inventory carrying cost & shortage cost only]

Annual total cost

s

p

p

p

hD

p

Cq

zq

q

CzC

q

D

22

2

1

2

1

Substituting the value of z&qp we get

hs

sh

CC

CCDCATC 02

Example 8

A dealer supplies you the following information with regard to a product

dealt in by him:

Annual demand: 10,000 units: Ordering cost: Rs. 10.00 per order. Price:

Rs. 20.00 per unit. The dealer is considering the possibility of allowing

some back order (stock out) to occur. He has estimated that the annual

1. Determine economic lot size formula when shortage costs are allowed.

SKILL TEST

75

cost of back ordering will be 25% of the value of inventory.

(i) What should be the optimum number of units of the product he

should buy in one lot

(ii) What quantity of the product should be allowed to be back – ordered,

if any?

(iii) What would be the maximum quantity of inventory at any time of the

year?

(iv) Would you recommend allowing back-ordering? If so, what would be

the annual cost saving by adopting the policy of back – ordering?

Solution:

00010,D units, 00100 ..RsC per order

%Ch 20 of 0040020 ..Rs..Rs per unit per year

%Cs 25 of 0020..Rs 005..Rs per unit per year

(i) Economic Order Quantity (When stock out are not permitted)

62234

100001022 0 .,

C

DCQ

h

*

units

Economic Order Quantity (When Back-ordering is permitted)

300

45

4510000102

2 0

,

CC

CCDCq

hs

shp

(ii) Stock level

16745

3005

hs

ps

CC

qCz

Optimum quantity of the product to be back ordered is given by

300 167 133pq z

Total cost ICQ

CQ

Dp

*

*

20

[Considering optimum order quantity]

4894

244723447

20202

622310

6223

10000

.

..

..

.

Total cost [considering shortage]

76

67666

41479318533333

5300

167300

2

1

300

4167

2

110

300

00010

2

1

2

1

22

22

0

.

...

,

Cq

zq

q

CzC

q

Ds

p

p

p

h

p

The dealer should accept the proposal for back-ordering as this will result in a saving of

76227676664389 ..Rs.. per year

Example 9

Automotive gears manufacturers a wide variety of gears for the replacement

market. Since variety is large, it allows orders to accumulate before undertaking

manufacturer of any gear. The firm estimates the back orders costs on this

average of Rs. 5.00 per unit for record keeping.

(a) How many units should the firm produce in each production run of a gear for

which following data available :

Annual consumption = 18,000

Manufacturing cost per unit = Rs. 48.00

Set up cost per production run = Rs. 480.00

Inventory carrying cost as a percentage of average inventory = 18% investment.

(b) Determine the units that can be back ordered as the shortage cost indicated.

(c) How much will the company loss if no stockouts are permitted?

Solution:

(a) Economic order Quantity when back orders are permitted :

hs

shp

CC

CCDCq

02

D Annual demand 00018.

0C ordering cost/set up cost 00480..Rs

hC Inventory Holding cost

ICp

18048 .

005.RsCs

2 18,000 480 48 0.18 52336

48 0.18 5

(b) Stock level

856180485

52336

.CC

qCz

hs

ps

Number of units back ordered 14808562336 .zqp

(c) Loss per year if no stock outs are permitted

Annual Total costs (considering shortage)

77

22

0

2 2

1 1

2 2

856 48 0.18 1480 518000 1 1480

2336 2 2336 2 2336

3699 1355 2344 .7398.00

phs

p p p

q zz CDC C

q q q

Rs

*Q (Optimum order quantity) [NO stock out]

141418048

4801800022 0

.C

DC

h

Annual Total cost (considering NO Stock out)

*

0* 2

18000 1414480 48 0.18

1414 2

6110 6108 .12218

h

D QC C

Q

Rs

Each cost per annum because of policy of no stock out

12218 7398 .4820.00Rs

Model-IV

Inventory Model with Price Discounts

When items are bought in large quantities, the supplier often gives discounts. However, if the material is

purchased to take advantage of discount, the average inventory level and so the inventory carrying costs will

increase.

Benefits for the purchaser from large orders are, lower cost per unit, lower shipping and transportation cost,

reduced handling cost and reduction in ordering costs due to less number of orders.

These benefits are to be compared with the increase in carrying costs. As the order size increases, more

space should be provided to stock the items.

A decision is, therefore, to be taken whether the buyer should stick to economic order quantity or increase

the same to take advantage that, at large quantities, the production costs per price are lower (economics of

scale) and, hence, part of the savings can be passed on to the customer.

Price-discount Model

Let D be the annual consumption (Demand)

C1 is the price per unit (Basic price)

C2 is the discounted priced per unit.

Co is the ordering cost.

I is inventory carrying cost expressed as a percentage of average inventory investment.

QB be the priced break quantity. (Quantity at which the price changes)

Start

Calculate Q2 and compare with QB

(Price break Qty.)

If Q2 > QB

Yes

78

Procedure (Decision Rules)

1. Calculate Q2 (Economic order Qty. at discounted price(C2)

IC

CDQ o

2

2

2

Compare Q2 with QB(Price break quantity)

If Q2 QB Order quantity Q2.

If Q2 < QB

Compute Q1 (Economic order Qty. at basic price C1) and calculate –

Annual Total cost at Q1 and QB

Annual Total cost at Q1(TcQ1) = D.C1+2

. 1

1

IQC

Q

CD o

Annual Total cost at Q1 (TCQB) = D.C2+2

. 2 ICQ

Q

CD B

B

o

If TCQB<TCQ1 select QB, otherwise purchase Q1. (If annual Total cost at price break quantity (QB) is less

than annual total cost Q1, order quantity QB means of a flow chart as shown in above figure.

Example 10

A chemical firm buys 2500 units annually of a particular item from a vender

at a cost of Rs. 3.00 per unit. It has now received a revised price schedule

from the vendor which is as follows:

1. Formulate and solve a mathematical model for all units’

discounts when shortages are not allowed to obtain the optimal

value of the order quantity.

SKILL TEST

79

Order Quantity Price/Unit

Less than 500 units Rs.3.00

Between 500 and 1250 units Rs.2.90

1250 units or more Rs.2.85

The cost of placing an order and executing the delivery the delivery once =

Rs. 25.00.Inventory carrying cost as a percentage of average inventory

investment =20%.

Determine economic order quantity of the item.

Solution:

D Annual consumption 2500 units

0C Procurement cost/ order 0025..Rs

I Inventory carrying cost 200.

8523

9022

0031

..RsC

..RsC

..RsC

p

p

p

The above prices are valid for quantities shown below:

Price Range of Purchase

Quantity

1pC 0 500q

2pC 500 1250q

3pC 1250q

Step 1: Calculate EOQ at each price level

Price Range of

Purchase

Quantity(q)

EOQ Quantity to be

purchased at the

indicated price

3.00 0 500q< <

( )2 2 2500 250 456

1 3 0.2

DC

C Ip

´ ´= =

´ ´

456

2.90 500 1250q£ < 2 2500 25464

2.9 0.2

´ ´=

´

500

2.80 1250 q£ 2 2500 25468

2.8 0.2

´ ´=

´

1250

Step 2: Determine the quantity to be purchased at each price level, which equals either EOQ as

price-quantity.

Step 3: Annual Total cost calculation

ATC [considering unit price Rs.3.00 and units to be purchased 456]

80

/

;..

Cq

DI

qCD

*

*

p

7774

1371377500

25456

250020003

2

4563002500

201

ATC [considering unit price Rs.2.90 and units to be purchased 500]

7520

1251457250

25500

250092

2

500922500

..

ATC [considering unit price Rs.2.80 and units to be purchased 1250]

7531

503567125

251250

250020852

2

12508522500

...

From the annual total cost figures calculated above, we find that the cosat incurred is the least

when the quantity purchased is 500 nos.

Economic Purchase Quantity 500 nos.

Example 11

A shopkeeper has a uniform demand of an item @ 50 items per month. He buys

from supplier at a cost of Rs.6.00 per item and the cost of ordering is Rs.10.00 ach

time. If the stock holding costs are 20% per year of stock value, how frequently

should he replinesh his stock?

Suppose the supplier offers a 5% discount on orders between 200 and 999 items

and a 10% discount on orders exceeding or equal to 1000, can the shopkeeper

reduce his cost by taking advantage of either of these discounts?

Solution:

6001250 D items per year

00100 ..RsC per order ; 200.I 006..RsCp per item.

100206

106002

.QEOQ *

units

with discount price we write,

Range quantity Unit Purchasing

cost

0 200q . 006..Rs

200 1000q 759506 ..Rs..Rs

1000 q 459006 ..Rs..Rs

Using the lowest unit price of Rs. 5.40, we get

81

41052045

1060022 .

..QEOQ *

But it is not feasible because the unit price of Rs.5.40 is not available for an order size of 105 units

Now with the unit price of Rs. 5.70

1022075

1060022

..QEOQ * This again is not feasible.

With the unit price of Rs.6.00, 1003 *QEOQ units

Annual total cost calculation

( )600 100

100 600 6 10 6 0.2 3600 60 60 .3720.00100 2

ATC Rs= ´ + ´ + ´ ´ = + + =

( )600

200 600 5.7 10 5.7 0.2 3420 30 114 .3564200

ATC Rs= ´ + ´ + ´ = + + +

( )600 1000

1000 600 5.4 10 5.4 0.2 3240 6 540 ..3781000 2

ATC Rs= ´ + ´ + ´ ´ = + + =

Since 1000200100200 ATCATC&ATCATC

The optimum inventory cost is associated to 200q units of ordering quantity. Hence, the

discounting facility of 5% only is availed by the shop keeper for selecting the order size of 200

units.

Example 12

A particular item has demand of 3,000 units per year. The cost of one procurement

is Rs.100 and the holding cost per unit is Rs.2.40 per year. The replacement is

instantaneous and no shortages are allowed. Determine

(i) the economic lot size (ii) the number of orders per year (iii) the time between

orders; and (iv) the total cost per year if the cost of one unit is Rs.1.

Solution:

Annual Demand (A) = 3000/year.

Ordering cost per order (Co) = Rs.100/order.

Holding cost per unit per year = Rs.2.40.

(i)

50040.2

100300022

EOQQuantityOrderEconomic

* xx

C

CAQ

h

o

(ii)

6500

3000

yearperordersofNumber

*

* Q

AN

82

(iii) Time between orders, *

* 5000.167 Year.

3000

Qt

A= = =

(iv) 120040.2100300022

,costinventoryvariableyearlyMinimum*

hoCACTVC

* *Total Cost( ) Unit Cost annual ConsumptionQ TVC= ´ +

= 1 3000 + 1200 = 4200/-

Example 13

The production department for a company requires 7,200 Kg of raw material for

manufacturing a particular items per year. It has been estimated that the cost of

placing an order is Rs.72 and the cost of carrying inventory is 25 per cent of the

investment in the inventories. The price is Rs. 20 per Kg. The purchase manager

wishes to determine an ordering policy for raw material

Solution:

Annual Demand = 7200 Kg/Year

Ordering cost/order = Rs. 72

Holding cost = Rs. 20 × 0.25 = Rs. 5 per Kg/Year.

(i) Optimum lot size,

* 2 2 7200 72

455.37 /5h

A CoQ Kg order

C

(ii) Optimum order cycle time,

.063.0200,7

37.455** Year

D

Qt

(iii) Minimum yearly variable inventory cost,

.84.276,2.572720022* yearperRsCACTVC hO

demandannualCostUnit** TVCTC

= 2,276.84+ 20/Kg × 7200 Kg.

= Rs. 1,46,726.84

Example 14

You have to supply your customers 100 units of a certain product every Monday.

You obtain the product from a local supplier at Rs. 60 per unit. The cost of

ordering and transportation from the supplier are Rs.150 per order. The cost of

carrying inventory is estimated at 15% per year of the cost of the product carried.

Determine

i) Find the lot size which will minimize the cost of the system.

ii) Determine the optimal cost.

Solution:

Demand = 100 units/week

83

Ordering cost per order = Rs. 150

holding cost = 15% per year of the cost of the product

carried. = ]weeks52year1[52

6015.0

= Rs. 0.17 per unit per week.

(i) Economic Order Quantity (Q*)

units.42017.0

15010022*

h

O

C

ACQ

(ii) Optimal cost, hOCAC2DimondcostUnit

6072.17.0150100210060 Rs

Example 15

One of the items in the manufacture of steering gear box at Bwn works

is a steering nut which it buys from a company located at Mumbai. Each

steering nut costs the company Rs. 50.00. The inventory carrying

charges and the procurement cost have been estimated at 20% of the

average inventory investment and Rs. 40.00 per order respectively.

(a) Calculate economic order quantity of the nut arranging annual

production program being fixed at 5000 gear boxes.

(b) “If the actual cost to place an order and execute the delivery and

inventory carrying cost are Rs. 50.00 and 16%, the optimal policy would

change”. How much is the company losing per year because of

imperfect cost information?

Hints:

2001 *Q nos

2502 *Q nos

0020501 ..RsQATC *

0020002 ..RsQATC *

Example 16

Economic Order Quantity of an item which costs Rs. 4.00 each is half of its

annual consumption. If the procurement cost is Rs. 36 per order and the

i9nventory carrying cost is 1.5% per month, find the economic order quantity.

Hints: 0042

..RsC;D

Q p

*

18012015000360 ..I..RsC per annum

1804

36222 0

.

Q

C

DCQ

*

h

*

84

200*Q

Example 17

Economic order quantity of an item “X” is three times of item “Y”. If the

annual usage of item “Y” is Rs. 800.00, what would be the annual usage

of item “X”?

Hints:

7200

22 00

x

y

x

*

y

*

x

h

y*

y

h

x*

x

DD

D

Q

Q

C

CDQ

C

C.DQ

Example 18

Manager (inventory Control) at Shalimar works has collected the following data on

one item:

(i) Minimum total inventory costs per month Rs. 4,000.00

(ii) Inventory holding costs per unit per year = Rs. 4.00

(iii) No. of orders per year

(iv) Price per unit = Rs. 25.00

Calculate annual demand of the item, procurement cost per order, inventory

carrying cost as a percentage of average inventory investment and economic

order quantity (EOR)

Solution:

Minimum total inventory costs per annum = Minimum annual total cost per annum 000004 .,.Rs

Minimum annual total cost results when annual inventory carrying cost equals annual percentage

cost and order quantity is equal to EOQ.

Annual procurement cost 2

1 [ Annual total cost]=

2

1(Rs.4,000.00)=Rs.2000.00

(i) Procurement cost per order 0C

Annual procurement cost 0CQ

D*

or, 02000 10 C= ´

0 .200.00C Rs=

(ii) Economic Order quantity *Q

Annual inventory carrying cost h

* CQ 2

1

or, 42

12000 *Q

or, 1000*Q

85

(iii) Inventory carrying cost

Inventory holding cost per unit per annum ICC ph

or, I254

or, %.I 1616025

4

(iv) Annual demand of the item

*Q

D No. of orders = 10

or, 00010101000 ,D

Example 19

Dutta Machine tools Ltd. requires annually 4000 pieces of a bought out

component which costs Rs. 3.00 each. It has been estimated to cost rs.

60.00 to place an order and extents delivery.

(a) If the carrying cost is 25% of the value of inventory held, what would

be the optimum size of each order? How many orders are placed per

year?

(b) Calculate annual total cost from effecting economic lot size

purchases.

(c) If the order quantity is raised by 35% above the quantity calculated

under (a), what would be the effect on the annual total cost?

(d) If the order quantity is lowered by 25% below the quantity calculated

under (a), what would be the effect on the annual total cost?

(e) Comment on the costs obtained under (a), (b) and (c).

Hints:

a) 00800.Q*

b) Rs. 600.00

c) Rs. 615.00

d) Rs. 625.00

Example 20

A contractor undertakes to supply diesel engines to a truck manufacturer at a rate of 25 per

day. He finds that the cost of holding a completed engine in stock is Rs.1.6 per month.

Production of engine is in batches and each time a new batch is tested, there are set-up with of

Rs.10,000. How frequently should be batches be started and what will be minimum average

inventory cost and production time if production rate is 40 engines/day.

Assume 300 working days in a year.

Solution:

Production rate (p) = 40 per day.

Demand rate (d) = 25 per day.

Annual Demand (D) = 25300=7500 per annum.

86

Set up cost (Co) = 10,000.

Inventory carrying cost (Ch) = Rs.1.612 per year.

Economic manufacturing quantity (EBQ)

)

1(

2

pdC

DCEBQ

h

O

)40

251(126.1

000,1075002

= 4564.35 = 4565

No. of production run per year,

.2642.14565

7500*

* ordersQ

DN

Frequency of production run (Time between two runs)

*

7500

4565**

D

Qt

.5.0

2

11*

* yrsN

t

Total annual inventory cost,

)1(2

pdCDT hcm

= Rs. 32,863.35/annum

Example 21

A manufacturing company purchase 2000 units of a particular material per quarter

costing Rs.30 per unit. The cost of placing an order to supplier is Rs.120. The

inventory carrying cost is 10% per annum on average inventory investment.

However, the purchase manager of the company gets an offer of 2% discount on

materials costs for bulk purchases of 6000 units or more at a time. Give your

recommendation as whether the purchase manager should accept the discount

offer or not.

Solution:

Annual Demand = 20004 = 8000 per year

Ordering cost / order = Rs. 120/under

Inventory carrying cost = Rs. 30 0.10

Case –I 80010.030

12080002)( *

QEOQ

120800

800010.030

2

800308000)800( C

= 2,40,000 + 1200 + 1200

= 2,42,400/-

Case-II Present Policy

87

1202000

800010.030

2

2000308000)2000( C

= 2,40,000 + 3000 + 480 = 2,43,480/-

Case-III If the manager decides to place an order for a minimum quantity of 8000 unit to avail a discount

of 2% , the cost per item becomes, Rs. 30 0.98 = Rs. 29.4

1208000

800010.04.29

2

80004.298000)8000( C

= 2,35,200 + 11,760 + 120 = 2,47,080/-

Purchase manager incurs lose, Rs. (2,47,080 – 2,43,480) = Rs.3600 if of 8000 units at a time over the

present policy of placing an order.

Example 22

A company consumes 12000 units of a particular item, the company has a production capacity

of 60 units/day, the cost of each unit produced by the company is Rs.8. The set up and tooling

up cost is Rs.96 per set up. The carrying charges are 15 per cent of cost per unit. Determine -

(i) Economic quantity to be manufactured in each batch

(ii) How frequently should the production runs be made

(iii)Determine the production period.

Solution:

Annual consumption (D) = 12000 units

Production rate (P) = 60 units/day

Set up costs (CO) = Rs. 96 per order.

Consumption rate (d) = 12,000

40per day.300

=

Inventory charges/unit/annum (Ch) = 8 0.15 = Rs.1.2 per unit per annum.

(i) Economic manufacturing quantity

2400)

60401(2.1

96000,122

)1(

2

pdC

CDEBQ

h

o

(ii) Frequency of production run

=AnnualConsumption 12,000

52400

D

EBQ Q= = =

(iii) Production Time, * 2400

40days60

p

QT

P= = =

Example 23

A purchase manager has decided t4o place order for a minimum

quantity of 500 units of a particular item in order to get a discount of

10%. From the records, it was found in the last year 8 orders each of size

200 units have been placed. It is given that ordering cost = Rs.500 per

order, inventory carrying cost = 40% of the inventory value, and the cost

per unit = Rs.400. Is the purchase manager justified in his decision?

88

What is the effect of his decision to the company?

Solution:

Annual demand = 8 200 = 1600 per year

Ordering cost (CO) = Rs.500 per order

Inventory carrying cost = 400 0.4 per unit per year

Case – I Optimum Order quantity (Q*)

1004.0400

500160022

h

O

C

CA

Total Inventory cost as per EOQ approach ((Q*) = [(Annual demand cost per unit) + (Average Inventory

inventory carrying cost ) + (No. of orders ordering cost/under]

500100

16004.0400

2

1004001600)( * QC

= Rs. 6,56,000

Case-II total cost as per present policy (i.e. for order site of 200 units)

500

200

16004.0400

2

2004001600)200( C

= Rs. 6,60,000

Case – III Proposed Inventory Cost

If the manager decides to place an order for a minimum quantity of 500 unit to avail a discount of 10% , the

cost per item becomes Rs. 400 0.9 = Rs. 360/-.

500

500

1600)4.0360(

2

5003601600)500( C

= 5,76,000 + 36,000 + 1600

= 6,13,600/-

From case (I), (II) and (III) above, it is quite clear that if the manager decides to place an order for a

minimum quantity of 500 items, he will save Rs.(6,60,000 – 6,13,600)=Rs.46,400 over the present policy of

placing an order of size 200 units. Also, he will save Rs. (6,56,000 – 6,13,600) = Rs. 42,400 over the policy

of placing an order of economic size 100 units.

Hence the purchase manager’s decision is justified and Rs. 46,400 will be saved.

Safety Stock

The economic order quantity formula is developed based on the assumption that the demand is known and

certain and that the lead time is constant and does not vary. In actual practical situations, there is an

uncertainty with respect to both demand as well as lead time. The total forecasted demand may be more or

less than actual demand and the lead time may vary from the estimated time. In order to minimize the effect

of this uncertainty due to demand and lead time, a firm maintains safety stock, reserve stock or buffer stock.

The safety stock is defined as “the additional stock of material to be maintained in order to meet the

unanticipated increase in demand arising out of uncontrollable factors.”

Because it is difficult to predict the exact amount of safety stock to be maintained, by using statistical

methods and simulation, it is possible to determine the level of safety stock to be maintained.

89

Determination of Safety Stock

If the level of safety stock maintained is high, it locks up the capital and there is a possibility of risk of obsolescence.

On the other hand, if it is low, there is a risk of stock out because of which they may be stoppage of production. When

the variation in lead time is predominant. The safety stock can be computed as:

Safety stock=(Maximum Lead time – Normal lead time) x Consumption rate.

The service level of inventory thus depends upon the level of safety stocks. Larger the safety stocks, there is

lesser risk of stock out and, hence, higher service level. Sometimes higher service levels are not desirable as

they result in increase of costs, thus, fixing up a safety stock level is critical. Using the past date regarding

the demand and lead time data, reliability of suppliers and service level desired by the management, safety

stock can be determined with accuracy.

The inventory pattern with safety stock and variation in demand and lead time is shown in Fig. a. and Fig. b.

§ 4.2 Inventory Control System

The inventory systems are developed to cope with the situations where the demand or lead time or both will

fluctuate. The basic approach to all stock control methods is to establish a re-order level which, when

reached would indicate the signal for the replenishment action. Thus the replenishment of the inventory

means determining the quantity to be ordered and the time of ordering.

Basically, there are two types of replenishment systems.

(i) Fixed quantity system (Q-system)

(ii) Fixed period system (P-system)

§ 4.2.1 Fixed Order Quantity System

This is also called perpetual inventory system or Q-system. In this system, the order quantity is fixed and

ordering time varies according to the fluctuation is demand.

Fig: b Inventory pattern with safety stock and lead-time.

Re-order level ELT

Time

Quantity

Safety stock

ALT

ALT

ELT

–Actual lead times

–Expected lead times

Time

Expected demand

Re-order point

Safety stock

Actual demand

Load time

Sto

ck level

Fig: a

90

The characteristics of this system are:

(i) Re-order quantity is fixed and normally it equals Economic order quantity (EOQ).

(ii) Depending upon the demand, the time interval of ordering varies.

(iii) Replenishment action is initiated when stock level falls to Re-order level (ROL).

(iv) Safety stock is maintained to account for increase in demand during lead time.

Parameters to Operate the System

1. Re-order level (ROL)

This equals the sum of safety stock and lead time consumption.

R.O.L. = m + L C

Where m = is the minimum or safety stock.

L – Lead time (days/weeks/months)

C – consumption rate (per day/per week/per Month)

2. Re-order quantity (Q)

This normally equals Economic order quantity (EOQ)

3. Maximum stock level (M)

It equals the safety stock + order quantity.

M = m + Qo

where Qo is order quantity

m = Safety stock

M = Max. stock

4. Average inventory

Average inventory = ½ (Min. stock + Max. stock)

= ½ (m + M)

= ½ (m+m+Qo)

= m + Qo

The system is represented graphically as in Fig. c.

Advantages

1. Simple and cheaper to operate.

2. Stock control will be accurate as the replenishment action is initiated soon after the stock reaches R.O.L.

3. Suitable for low value items.

Q

Time

Sto

ck level

O1 O2

Maximum

level

Lead-time

consumption

Safety stock

O1, O2–order points

R.O.L.

Fig: c Fixed order quantity system.

91

4. Appropriate for variety of inventory maintained within the organization.

Limitations

(i) In this inventory system, there will be a load on the re- ordering system if many items reach R.O.L. at the

same time.

(ii) The stock levels records and usage rate data are to be maintained.

Application of Q-System – TWO Bin System

Two bin system operates on R.O.L. system and it physically segregates the stock of entire items into two

bins.

The second bin contains quantity equal to R.O.L.

i.e., (m + LC) and it is means to satisfy demand during the replenishment period.

The first bin contains the quantity (Order quantity) = (Q-LC) to satisfy demand between the receipt of

materials and placing the next order. LC is the lead time consumption.

The working of the system

To begin with, the stock from the first bin is consumed. The emptying of first bin indicates that the stock has

reached R.O.L. and the replenishment action is initiated.

The quantity in the second bin are thus consumed during the replenishment period.

This system reduces the work involved in record keeping and entering (clerical) errors.

§ 4.2.2 Periodic Review System

It is also called fixed period system or P-system.

This system has a fixed ordering interval but the size of the order quantity may vary with changes in

demand.

In this system, the inventory position is verified at prefixed interval, (weekly/monthly/ quarterly), then

depending upon the situation replenishment action is initiated.

The characteristics of the system are:

1. Order interval is fixed for individual item or group of items.

2. Stock is reviewed at periodic interval and the quantity (Q) which will bring the inventory to

maximum level is orders.

The periodic review system is shown in Fig. 22.10.

Parameters to Operate the System

1. Maximum level (M)

It is sufficient to satisfy demand during review period and lead time.

Max. level (M) = Min. stock + Consumption during review period and lead time.

M = m + C (R + L)

2. Re-order Quantity.

(i) when lead time is less than review period.

Q = Maximum stock – stock actually held at the time of review.

Sto

ck level

LT

P2

P1

Ord

er

qu

antity

Ord

er

qu

antity

Order quantity

P3 P1,P2, P3……

Review points

92

(ii) when lead time is more than review period

Q = Max. Stock – (Stock on hand + Stock on order)

This system is suitable for high value items which require stick control on stock levels.

Comparison between Fixed Quantity(Q) and Fixed Period(P) System

Q-system P-System

1. The Quantity to be ordered each

time is fixed and normally it is equal

to EOQ.

1. The period of ordering the inventory

is fixed and the order quantity

depends on the stock on hand.

2. It is suitable for the low unit cost, high

volume items.

2. Suitable for high unit cost and less

in number items.

3. Normally preferred when supplier puts

minimum quantity restriction.

3. Preferred when supplier delivers at

fixed periods.

Selective Control of Inventory

Selective control refers to the variation in method of control from item to item on some selective basis.

These are many criteria used for this purpose. They are:

Based on the cost of the product/item

Lead time

Usage rate

Procurement difficulties, critically, frequency of usage

The selective control is more effective and is directed to more significant groups of items. In this system, the

items are categorized in a few groups depending upon the selected criteria such as value, usage and

frequency of consumption. Such grouping helps the organization for scientific inventory control. The

various types of classifications are shown in following Table.

Table: Types of Classifications

Classification Criteria

1. A.B.C. Analysis. 1. Annual usage value of items.

2. H.M.L. Analysis (High, Low, Medium). 2. Unit price of the material (it does

not depend upon consumption).

3. V.E.D. Analysis (Vital, Essential,

Desirable).

3. Criticality of the item (material

critically).

4. S.D.E. Analysis (Scarce, Difficult,

Easy).

4. Procurement difficulties.

5. F.S.N. Analysis (Fast, Slow, Non- 5. Issues from stores.

93

moving).

6. G.O.L.F. (Govt., Ordinary, Local,

Foreign).

6. Source of material.

7. (Seasonal, Off Seasonal). 7. Seasonality of items

8. X.Y.Z. Analysis. 8. Inventory value of items used.

Always Better Control (A B C) Analysis

‘ABC’ Analysis is a basic tool which helps the management to place their efforts where the results would be

useful to the greatest possible extent. The first important step in inventory management is to have a selective

approach to fix-up inventory levels, order quantities, and the extent to which the control can be exercised.

The selective approach mainly depends on the annual consumption of various items.

For example, the items like nuts and bolts (though being equally important) cost less than the items like

engines. But we cannot safely stock the items like engines because of their heavy cost, while the items like

nut-bolts can be easily stocked. Thus, less control is required for stocking the items like nut-bolts etc. But,

more emphasis should be given to control the stocking of big items like engines. The investment of such

items is substantial, and record keeping is expensive.

ABC (Always Better Control) analysis is a very effective tool for such selective control. This technique

involves the classification of inventory items into three categories A, B and C in descending order of annual

consumption and annual monetary value of each item. Based on ABC analysis, an average pattern of

percentages of items and percentages of their annual consumption value may be planned as below:

Category Percentage of items (%) Percentage of Annual Usage (%)

A 10 80

B 20 15

C 0 5

In practice it is experienced that bulks of items in an inventory have low usage value.

Annual usage value = (annual requirement) per unit cost.

Thus for better and more economic control of items in inventory, the items should be classified according to

their significance or priority for recording. So for effective inventory control a decision has to be made that

– which items are little things and which need more careful control. The items of an inventory can be

classified according to the following characteristics.

(i) Items which are functionally critical to the operations, no matter how little they cost.

(ii) Items those are important because their usage value is very high.

(iii) Items having average usage value.

(iv) Items which have low usage value.

The ‘ABC’ analysis is based on Pareto’s Law that – a few high usage value items constitute a major part of

the capital invested in inventories, where as bulk of items in inventory having low usage value constitute

insignificant part of the capital.

This concept is based upon selective control. If there are large numbers of items to be analyzed, then

sampling technique may be used for ABC analysis.

In ABC analysis, the items are classified in three main categories based on their respective usage value:

94

(i) Category ‘A’ items. More costly and valuable items are classified as ‘A’. Such items have large

investment but not much a number, e.g., say 10% of items account for 75% of total capital invested in

inventory. So, more careful and closer control is needed for such items.

The items of this category should be ordered frequently but in small number. A periodic review policy

should be followed to minimize the shortage percentage of such items and top inventory staff should control

these items. These items have high carrying cost and frequent orders of smaller size for these items can

result in enormous savings.

(ii) Category ‘B’ items. The items having average consumption value are classified as ‘B’. Nearly 15% of

the items in an inventory account for 15% for the total investment. These items have less importance than

‘A’ class items, but are much costly to pay more attention on their use. These items cannot be overlooked

and required lesser degree of control than those in category ‘A’. Statistical sampling is generally useful to

control them.

(iii) Category ‘C’ items. The items having low consumption value are put in category ‘C’. Nearly 75% of

inventory items account only for 10% of the total invested capital. Such items can be stoked at an operative

place where people can help themselves with any requisition formality. These items can be charged to an

over head account. In fact, loose control of ‘C’ items increase their investment cost and expenditure on

shelf-wear, obsolescence and wasteful use, but this will not be so much offset for the saving in recording

costs.

Important points for ABC analysis:

(i) Whenever the items can be substituted for each other they should be preferably considered as one

item.

(ii) More emphasis should be given to the value of consumption and not to the cost per unit of item.

(iii) While classifying an A, B or C, all the items consumed by an organization should be considered

together, instead of considering like: spares, raw materials, semi-finished, and finished items, and then

classifying as A, B or C.

(iv) If required, there may be more than three classes and period of consumption need necessarily be one

year.

The comparison of items in A, B and C categories can be presented in the following tabular for

Class ‘A’ Items Class ‘B’ Items Class ‘C’ Items

1

Close control is required.

Moderate control is

required.

Loose control is

required.

2 Size of order is based on

calculated requirement.

Size of order is based on

their consumption.

Size of order is based

on the level of

inventory.

3

Procured from many

sources.

Procured from two or

three sources.

Procured from two

sources.

4 Requires keeping records

of receipt and

consumption

Also, requires keeping

records of receipt and

consumption.

No need of keeping

any records.

5 More effort is made to

reduce lead-time.

Moderate effort is made

to reduce lead-time.

Minimum effort is

made to reduce lead-

time.

6 Close checks on schedule

revision is required.

Some checks on changes

are required on need

No checks are

required against any

95

need

7 Frequent ordering is

required.

Less frequent ordering is

required.

Bulk ordering is

required.

8 Continual expending.

Expending for

prospective shortages.

No expending.

9 Accurate forecasts. Less accurate forecasts. Approximate

forecasts.

10 Low safety stock for less

than two weeks.

Large safety stock up to

two to three months.

Large safety stock for

more than three

months.

11 Have high consumption

value.

Have average

consumption value.

Have low

consumption value.

With ‘ABC control technique, it is also possible to reduce the investment in inventories as seen in the

following example.

Step-by-Step Procedure for ‘ABC’ Analysis:

Following are the steps for classification of items into ‘A’, ‘B’ or ‘C’ category.

Step 1. Determine the number of units sold or used in the past one year ( = 12 months) period.

Step 2. Determine the unit cost standard for each item.

Step 3. Compute the annual usage value (in Rs.) of each item consumed by multiplying the annual

consumption (of units) by its unit price.

Step 4. Arrange the items in a descending order according to their respective usage value computed in Step

3.

Step 5. Prepare a table showing unit cost, annual consumption and annual usage value for teach item.

Step 6. Calculate the cumulative sum of the number of items and the usage value for each item obtained in

step 3.

Step 7. Find the percentage of the values obtained in step 6 with respect to the grand total of the

corresponding columns.

Step 8. Draw a graph by taking % of items on X-axis and the corresponding usage value % on Y-axis.

After plotting various points on the graph we draw a smooth curve as shown in Fig. 21.11(a).

Step 9. Mark the points X and Y where the slope of the curve changes sharply (such points are called the

points of inflexion).

Step 10. Finally, the usage value and the % of items corresponding to these points determine the

classification of items as A, B or C.

This classification can also be represented graphically as shown in fig. below.

Limitations of ABC Analysis

(i) ABC analysis does not permit precise consideration of all relevant problem of inventory control. For

example, a never-ending problem in inventory management is that of adequately handling thousands

of low-value ’C’ items. Low value purchases frequently require more items, and consequently reduce

the time allowance available and purchasing personnel for value analysis, vendor analysis, vendor

investigation, and other ‘B’ items.

96

(ii) If ABC analysis is not undated and reviewed periodically, the real purpose of control may be defeated.

For example, ‘C’ items like diesel oil in a firm, will become most high-value items during power

crisis, and therefore should require more attention.

(iii) The period consumption value (not the unit value) is the basis for ABC classification. Hence ABC

classification can lead to overlooking the needs of spare parts whose criticality is high but

consumption value is low.

B C

A

Fig: (a)

PE

RC

EN

TA

GE

OF

US

AG

E V

ALU

E

PERCENTAGE OF ITEMS

10 20 30 40 50 60 70 80 90 100

0

10

20

30

40

50

60

70

80

90

100

ITEM CLASS VALUE

C

B

A

CLASSIFICATION OF ITEMS

Fig: (b)

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

97

Example 1

The following information is known about a group of items. Classify the

material in A, B, C, classification.

Model/Number Annual Consumption in

pieces

Unit Price (in

paice)

501 30,000 10

502 2,80,000 15

503 3,000 10

504 1,10,000 5

505 4,000 5

506 2,20,000 10

507 15,000 5

508 80,000 5

509 60,000 15

510 8,000 10

[C.A. (May) 80 ]

Solution:

The number of items sold in the past 12 months as well as the unit cost standard for each item are

given in the problem. Now multiplying annual consumption of each item by its ;unit cost and then

ranking the items in the descending order of the usage values thus obtained, the following table is

obtained:

Model

Number

Annual

Consumption

(in pieces)

Unit

price

(in

Paise)

Usage value

(in Rs.)

Ranking

(1) (2) (3) (4) = (3)×(2) (5)

501

502

503

504

505

506

507

508

509

510

30,000

2,80,000

3,000

1,10,000

4,000

2,20,000

15,000

80,000

60,000

8,000

10

15

10

5

5

10

5

5

15

10

3,00

42,000

300

5,500

200

22,000

750

4,000

9,000

800

6

1

9

4

10

2

8

5

3

7

Now compute the cumulative total number of items and their usage values and convert the

accumulated total items percentage of the grand total. The following ABC classification is thus

obtained.

98

Rank

(1)

Model

No.

(2)

% of

items

(3)

Cumulative

Usage Value

(Rs.)

(4)

Cumulative

%

In (Rs.)

(5)

Category

(6)

1

2

3

502

506

509

10

20

30

42,000

64,000

73,000

48.0

73.0

83.0

A

4

5

6

7

504

508

501

510

40

50

60

70

78,500

82,500

85,500

86,300

90.0

94.0

98.0

98.6

B

8

9

10

507

503

505

80

90

100

87,050

86,350

87,550

94.4

99.6

100

C

The cut-off points are determined from the following graph.

Fig:

CU

MU

LA

TIV

E %

OF

US

AG

E V

AL

UE

CUMULATIVE % OF ITEMS (q)

10 20 30 40 50 60 70 80 90

100

0

10

20

30

40

50

60

70

80

90

100

509

506

501 505

C

B

A

73

83

98

CLASS C Rs. (100–98)=2%

q=40%

CLASS B

Rs. (98–73)=25%

q=40%

CLASS

A Rs. 73% q=20%

99

Example 2

Perform ABC analysis on the following sample of items in an inventory:

Item

name

Annual

consumption

Price per unit (in

piase)

A

B

C

D

E

F

G

H

I

J

300

2,800

30

1,100

40

220

1,500

800

600

80

10

15

10

5

5

100

5

5

15

10

Solution:

Step 1: The usage value of the items can be calculated in the following tabular form by multiplying

the annual consumption and their corresponding unit price.

Items : A B C D E F G H I J

Usage value (Rs.)

:

30 420 3 55 2 220 75 40 90 8

Step 2: The usage values are ranked in descending order and the cumulative percentages of the

number of items and usage values are determined.

Item

(1)

Usage value in

descending

order

(2)

Cumulative

number of

items

(3)

% of

number of

items

(4)

Cumulative

usage

value

(5)

% of

cumulative

usage value

(6)

B

F

I

G

D

H

A

J

C

E

420

220

90

75

55

40

30

8

3

2

1

2

3

4

5

6

7

8

9

10

10

20

30

40

50

60

70

80

90

100

420

640

730

805

860

900

930

938

941

943

44.50

67.79

77.41

85.37

91.20

95.44

98.62

99.47

99.79

100.00

VED Analysis

VED analysis represents classification of items based on their criticality. The analysis classified the items

into three groups called Vital, Essential and Desirable.

“Vital” category encompasses those items for want of which production would come to halt. “Essential” group

100

includes items whose stockouts cost is very high. And “Desirable” group comprises of items, which do not cause any

immediate loss of production, or their stockout entail nominal expenditure and cause minor disruptions for a short

duration.

VED (Vital-Essential-Desirable) analysis is carried out to identify critical times. An item which usage wise

belongs to C-category may be critical from production point of view if its stockout can cause heavy

production loss.

An item may be vital for a number of reasons, namely

If the non-availability of the item can cause serious production losses.

Lead time for procurement is very large.

It is non-standard item and is procured to buyer’s design.

The sources of supply is only one and is located far off from the buyer’s plant.

Steps involved in making VED analysis are as under:

(i) Identify the factors to be considered for VED analysis. The commonly considered factors are: effect

on production (i.e. stock out cost in the event of its non-availability), lead time, nature of the item and

sources of supply.

(ii) Assign points/weightages to the factors according to their importance to the company. Typical

examples of the weightages to the above four factors may be 30, 30, 20 and 20 points.

(iii) Divide each factor into three degrees and allocate points to each degree. Usually, the first degree is

assigned points equal to the weightage of its factor, second degree is allocated points equal to twice

the weightage of the factor and third degree is assigned points equal to thrice the weightage of the

factor.

(iv) Prepare categorization plain (Table 14.5) which provides the basis of classification of items into vital,

essential and desirable categories.

(v) Evaluate items one by one against each factor and assign points to the item depending upon the

extent of presence of the factor in the item.

(vi) Place the items into V, E and D categories depending upon the points scored by them (Table 14.6)

and basis of classification set under step (iv).

Table: Typical VED analysis categorization plan

Factor First degree Second degree Third degree

1. Stock out cost

in the event of

non-availability

(30)

Above Rs. x (30)

Between Rs. x

to y (60)

Above Rs. y (90)

2. Lead time for

procurement (30)

1-4 weeks (30) 4-8 weeks (60) Over 8 weeks

(90)

3. Nature of the

item (20)

Produced to

commercial

standard, or off the

shelf availability

(20)

Produced to

suppliers’

design (40)

Produced to

buyer’s design

or proprietary

items (60)

4. Sources of

supply (20)

Local (2) Outstation (40) Imported, quota

items i.e.

controlled supply

(60)

101

Table: Typical categorization plan

Points Classification

100 – 160

161 – 230

231 – 300

Desirable

Essential

Vital

VED analysis is best suited for spares inventory. In fact, it is advantageous to use more than one method,

e.g., ABC and VED analysis together would be helpful for inventory control of spares.

S-D-E Analysis

S-D-E analysis is based on the problems of procurement namely

Non-availability

Scarcity

Longer lead time

Geographical location of suppliers, and

Reliability of suppliers, etc.

S-D-E analysis classifies the items into three groups called “Scarce”, “difficult” and “Easy”. The

information so developed is then used to decide purchasing strategies.

“Scare” classification comprises of items which are in short supply, imported or canalized through

government agencies. Such items are best to procure limited number of times a year in lieu of

effort and expenditure involved in the procedure for import.

“Difficult” classification includes those items which are available indigenously but are not easy to

procure. Also items which come from long distance and for which reliable sources do not exist fall

into this category. Even the items which are difficult to manufacture and only one or two

manufacturers are available belong to this group. Suppliers of such items require several weeks

of advance notice.

“Easy” classification covers those items, which are readily available. Items where supply exceeds

demand and others which are locally available fall into this group.

S-D-E analysis is employed by the purchase department:

(i) To decide on the method of buying:

e.g., Forward buying method may be followed for some of the items in the “Scarce” group;

“schedule buying” and “contract buying” for “Easy” group.

(ii) To fix responsibility of buyers:

e.g., Senior buyers may be given the responsibility of “S” and “D” groups while items in “E” group

may be handled by junior buyers or even directly by the storekeeper.

G-NG-LF Analysis / GOLF Analysis

G-NG-Lf analysis (or GOLF analysis) like S-D-E analysis based on the nature of the suppliers

which determine quality, lead time, terms of payment, continuity or otherwise of supply and

administrative work involved. The analysis classified the items into four groups namely G-NG-L

and F.

“G” group covers items procured from “Government” suppliers such as the STC, the MMTC and

102

the public sector undertakings. Transactions with this category of suppliers involve long lead time

and payments in advance or against delivery.

G” (O in GOLF analysis) group comprises of items procured from “Non-Government” (or Ordinary)

suppliers. Transactions with this category of suppliers involve moderate delivery time and

availability of credit, usually in the range of 30 to 60 days.

“L” group contains items bought from “Local suppliers”. The items bought from local suppliers are

those which are cash purchased or purchased on blanket orders.

“F” group contains those items which purchased from “Foreign” suppliers. The transactions with

such suppliers:

Involve a lot of administrative and procedural work.

Necessitate search of foreign suppliers.

Require opening of letter of credit.

Require making of arrangement for shipping and port clearance.

S-OS Analysis

S-OS analysis is based on seasonality of the items and it classifies the items into two groups S

(seasonal) and OS (i.e. Off Seasonal) and OS (i.e. Off Seasonal). The analysis identifies items

which are:

(i) Seasonal and are available only for a limited period. For example agriculture produce like

raw mangoes, raw materials for cigarette and paper industries, etc. are available for a

limited time and therefore such items are procured to last the full year.

(ii) Seasonal but are available throughout the year. Their prices, however, are lower during

the harvest time. The quantity of such items requires to be fixed after comparing the cost

savings due to lower prices. If purchased during season against higher cost of carrying

inventories if purchased throughout the year.

(iii) Non-seasonal items whose quantity is decided on different considerations.

M-N-G Analysis

M-N-G analysis based on stock turn over rate and it classifies the items into M (Moving items), N

(Non-moving items) and G (Ghost items).

M (moving items) a.c. those items, which are consumed from, time to time. N (Non-moving items)

are those, which are not consumed in the last one year. G (Ghost items) are those items which

had all balance, both in the beginning and at the end of the last financial year and there were an

transactions (receipt or issues) during the year.

Analysis mainly helps to identify non-existing items for which the store keeps bin-cards or waste

computer memory or waste computer stationary while preparing stores ledger. Stores department

even might have even earmarked space for those non-existent items.

All pending / open purchase orders (if any) of such items should be cancelled.

F-S-N Analysis

F-S-N analysis is based on the consumption figures of the items. The items under this analysis

are classified into three groups: F(fast moving) , S (Slow moving) and N (non-moving).

To conduct the analysis, the last date of receipt or the last date of issue whichever is letter is taken

into account and the period, usually in terms of number of months, that has elapsed since the last

movement is recorded.

103

Such an analysis helps to identify:

(I) Active items which require to be reviewed regularly.

(II) Surplus items whose stocks are higher than their rate of consumption; and

(III) Non-moving items which are not being consumed. The last two categories are reviewed

further to decide on disposal action to deplete their stocks and thereby release company’s

productive capital.

Further detailed analysis is made of the third category in regards to their year-wise stocks

and items can be sub-classified as non-moving for 2 years, non-moving for 3 years, non-

moving for 5 years and so on.

X-Y-Z Analysis

X-Y-Z analysis is based on value of the stocks on hand (i.e. inventory investment), Items whose

inventory values are high are called X items while those whose inventory values are low are called

Z items. And Y items are those which have moderate inventory stocks.

Usually X-Y-Z analysis is used in conjunction with either ABC analysis or MHL analysis.

XYZ analysis when combined with ABC analysis is used as under:

Class of

items

A B C

X Efforts to be made to

reduce stocks to Z

category

Efforts to be made to

convert them to Y

category

Steps to be taken

to dispose off

surplus stocks

Y Efforts to be made to

convert these to Z

category

Control may be

further tightened

Z Stock levels may be

reviewed twice a year

X Y Z analysis when combined with F S N analysis helps to formulate more specific strategies as

under.

Class of

items

F S N

X Tighten control Deplete stocks to very

low level

Dispose off

immediately at

optimum price

Y

*

Deplete the stock further

at good price

Dispose off as

early as possible

Z Liberalize control

(to reduce clerical

cost)

*

Dispose off as

early as possible

even at lower

prices

* Items are within control. No further action is necessary.

XYZ, therefore, helps to identify a few items which account for large amount of money locked up in

stock and take steps for their liquidation/reduction.

XYZ when combined with FSN analysis helps to classify non-moving items into XN, YN and ZN

group and thereby identify a handful of non-moving items which account for bulk of non-moving

stock. These can be studied individually in details to take decision on their disposal or retention.

104

We may summarize the four selective control techniques with their basis of classification

and main uses:

Selective

Control

Technique

Basis of

Classification

Main users

ABC Consumption value Controlling raw material

components and work-in-progress

inventories

VED Critically of items Determining the inventory levels of

spare parts.

XYZ Value of items in

storage

Reviewing the inventories and

other uses.

FNSO

Consumption rate

(or movement) of

items

Controlling obsolescence.

SUMMARY SELECTIVE CONTROL OF INVENTORIES / CLASSIFICATION/ ABC,VED, GOLF, FSN ….ANALYSIS

Selective treatment of inventories is based on the following basic philosophy of business :- “neither one can control everything nor one should try to do so (even if one can). Uniform control is rarely effective . Effectiveness results when important aspects of a problem are pursued more rigorously than others. A major portion of managerial time should be spent in performing more important jobs. Less important tasks- those involving routine decisions and which involves less risk – should be delegated to a lower level . this law can effectively be applied in inventory function so to identify items which are more important than others. The classification enables managerial time being spent according to the importance of the item. Selective control is essential since uniform control of all items:-

1. is expensive 2. gives diffused effect.

Selective control means variations in method of control from item to item based on selective basis. The criterion used for the purpose may be cost of item, criticality, availability, consumption, etc. various classification are employed to render selective treatment to different types of materials, each classification emphasizes on a particular aspect. For example ABC analysis emphasizes on usage value (i.e., consumption of the item in terms of money), VED analysis considers criticality, SDE analysis is based on procurement difficulty or availability.

Analysis criteria Classification

1. COST

a) ABC (annual usage value of an item expressed in monetary value. i.e., annual quantity * price /unit) ABC stands for Always Better Control.

a) HML ( it is based on unit cost of materials). HML stands for –

H- High unit cost. M-Medium unit cost. L-Lower unit cost.

c) XYZ ( it is based on stock value)

2. CRITICALITY VED items ( it is based on criticality in usage) VED stands for – V- Vital E- Essential D-desired

105

3. PROCUREMENT DIFFICULTIES/ AVAILABILITY /SEASONALITY

SDE (it is based on procurement difficulties and availability) SDE stands for S- Scare item , which is not easily available in the country. D- Difficult items. E- Easy available items.

S-OS analysis. S-Seasonal. OS- Off –seasonal

4. SOURCE OF PROCUREMENT GOLF analysis ( it is based on source of procurement or supplier) G- Government. O- Ordinary L- Local F – Foreign

5. CONSUMPTION FSN analysis ( it is based on movement of the item) F- Fast moving goods. S- Slow moving N- Not moving item

ABC (ALWAYS BETTER CONTROL) ANALYSIS ABC analysis is basic analytical management tool which enables management to place the effort where the result will be greatest. This techniques, popularly known as Always Better Control. Characteristics of ABC items:- A – no. of items less than 5-10% of total items but, consumption value to procure these materials 70 -75% of total amount of procurement. These items require detailed and rigid control and need to be stocked in similar quantities. These items should be procured frequently, the quantity per occasion being small. B – These items are generally 10-15% of the total items and represent 15-20% of the total expenditure on the materials. These are intermediate items. The control on these items need not be a as detailed and rigid as applied to A items. C – these are numerous ( as many as 70-80% of the total items), inexpensive ( represent hardly 5-10% of the total annual expenditure on materials) and hence insignificant( do not require close control) items. The procurement policy of these items is exactly reverse of A items. C items should be procured infrequently and in sufficient quantities.

OBJECTIVE OF ABC ANALYSIS

1. It enables materials manager to exercise Selective control when he is confronted with a large no. of items.

2. Degree of control should be rigorous for A and minimum for C. 3. The process should be accurate for A. 4. It also helpful to rationalize the number of orders and reduce the overall inventory.

Example: - 3 items accounting for a consumption of Rs. 60,000/-, Rs. 4000, and Rs. 1000/- respectively. Each being ordered four times a year. The following pattern would then emerge.

Item no. Annual consumption

value

Nos. of orders Value per order Average inventory.

106

1 60,000 4 15,000 7500

2 4000 4 1000 500

3 1000 4 250 125

Total inventory 8125

If ABC analysis is done , then it implies that ‘A’ item should be ordered more, say 8 orders, 3 in case of ‘B’ and 1 for ‘C’ item.

Item no. Annual consumption value (Rs.)

Nos. of orders Value per order (Rs.)

Average inventory. (Rs.)

A ( due to highest

consumption value)

60,000 8 * 7500 3750

B 4000 3 1333 667

C 1000 1 1000 500

Total inventory 4,917

(*)it is made arbitrarily. If it is made according to formula then it will reduce Average inventory cost.

Item no. (1)

(2) Annual consumption value (Rs.)

(3) = √ (2) or

= √Annual consumption value

(4) Nos. of orders = Total orders*{ item wise (3)/Total value

of (3)}

(5) Value per order

(Rs.)

(6) Average inventory.

(Rs.)

A 60,000 √60,000=244.9=245 12*(245/340)=9 6667 3334

B 4000 √4000=63.2=63 12*(63/340)=2 2000 1000

C 1000 √1000=31.6=32 12*(32/340)=1 1000 500

Total =340 Total orders = 12 4834

Comparison between A, B and C items

Characteristics A items (high consumption value)

B items(moderate consumption)

C items (low consumption value)

1. Control Strict Moderate loose

2. inventory control System

Fixed order quantity System.

Fixed interval or periodic review

system

Same as B

2a. Control Report Weekly Monthly Quarterly

3. Safety stock Very low or no low High

4. ordering Frequent Once in three Bulk, once in a 6 months.

5.Follow-up Weekly Monthly Quarterly

6. Value analysis Rigorous Moderate Minimum

7. Sources As many as possible Two or more Two source for each item

8. Forecast Accurate Based on past data and present plan

Rough estimate for planning.

9. Review of waste, obsolete and surplus.

After 15 days Quarterly Annual

10. Authority of purchase and storage

centralized Combination Decentralized

11. Effort to reduce lead time

Maximum Moderate Minimum

12 handling Authority Senior Authority Middle Management Fully Delegated

107

Steps of Conducting ABC analysis

i) Obtain unit cost of each manufactured or purchased item in inventory. ii) Obtain the usage in units for each item or estimate the usage (future) over a period of

time). iii) Obtain the net value of the usage by multiplying the unit cost and the usage ( unit cost

*no. of units) iv) Average the items in descending order of the usage value. v) The number of items and their values are accumulated on a percentage of total basis. vi) Roughly divide the list of values in to three (3) groups-A –accounts for 70-75% of total

account.; B- which account for 10-15%and rest is C item- accounts for 5-10% .

V – E – D ANALYSIS While in ABC analysis items are classified according to their consumption value, in VED classification they are classified according to their criticality. V – Vital item – are those items whose no availability can cause havoc and can stop the wheel of organization. E- Essential – are those item whose non availability causes temporary losses/dislocation of production. D- Desired – which are necessary but their non-availability does not result in immediate loss of production or stoppage. Relationship between ABC and VED item

V items E items D items

A items Low stock and constant follow –up

and control

Medium stock and no follow-up

Nil stock

B items Medium stocks with little follow-up and

control

Medium stock Low stocks

C items High stocks Medium stocks Low stocks

F-S-N ANALYSIS F-S-N analysis is based on the consumption figures of the items. The items under this analysis are classified in to three groups : F- Fast moving , S – Slow moving , and N – non- moving. To conduct the analysis, the last date of receipt or the last date of issue whichever is later is taken into account and the period, usually in terms of number of months, that has elapsed since the last movement is recorded. Such an analysis helps to identify:

i) active items which requires to be reviewed regularly. ii) Surplus items whose stock are higher than their rate of consumption; iii) Non-moving items which are not being consumed. The last two categories are

reviewed further to decide on disposal action to deplete their stocks and thereby release company’s productive capital.

Further detailed analysis is made of the third category in regards to their year-wise stocks and items can be sub-classified as non-moving for 2 years, non-moving for 3 years, non moving for 5years and so on.

X-Y-Z ANALYSIS X-Y-Z analysis is based on value of the stock on hand.( inventory investment). Items whose inventory values are high are called X item, while those whose inventory values are low are called Z items and Y items are those which have moderate inventory stocks. Usually X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis. XYZ analysis when combined with ABC analysis is used as under:

Class of items A B C

X Efforts to be made reduce stocks to Z

category

Efforts to be made to convert them to Y

category

Steps to be taken to dispose off surplus

stocks

Y Efforts to be made * Control may be further

108

convert these to Z category

tightened

Z * Stocks levels may be reviewed twice a year

*

X Y Z analysis when combined with F S N analysis helps to formulate more specific strategies as under:

Class of items F S N

X Tighten Control Deplete the stock to very low level

Disposed off immediately at optimum price.

Y * Deplete the stock further at good price

Disposed off as early as possible.

Z Liberalize control ( to reduce clerical cost)

* Dispose off as early as possible even at

lower price.

( * items are within control. No further action is necessary.) XYZ, therefore helps to identify a few items which account for large amount of money locked up in stock and take steps for their liquidation/ reduction. XYZ when combined with FSN analysis helps to classify non-moving items into XN,YN,ZN group and thereby identify a handful of non moving items which account for bulk of non –moving stock. These can be stidied individually in details to take decision on their disposal or retention

Just In Time (JIT) Concept i. This is an acronym for Just In Time or Toyota product system and is also known as Zero

Inventory System. ii. The Zero Inventory system does not mean literally nil inventory , small amount of inventories

are maintained ,which is required to sustain production activity between two operation in an organization.

iii. This philosophy initiated in Japanese industry for industrial growth and captured a major share of world market.

iv. The aim is elimination of all waste, being anything not essential such as scrap etc. v. Production part, component or sub assembling must occur Just In Time, not earlier or not

later. vi. This is accompanied by a “pull” strategy instead of “push” strategy. vii. “pull system works without the need of costly and integrated procedures, thereby minimize

the WIP inventory.

Competitive study between Traditional buying and JIT

Characteristics Traditional JIT

1. Supplier /Buyer Relationship

Adversarial Partnership

2.Contract Period Short or long term Long term

3.Communication Written purchase order Verbal or telephonic

4.Quality Inspection No inspection

5. Quantity Bulk/large Small

6.No. of supplier Many Few

7. Design process Print then quote Ask for supplier ideas.

8. Ordering cost Negotiation+ open order cost + expediting cost +Receiving

cost + Inspection cost + Transportation cost.

Negotiation + transportation cost.

9. lead time High Low

10. Transportation Full truck of single item Full truck with multiple item

109

Just-In-Time (JIT) Production Just-in-time (JIT) is defined as “a philosophy of manufacturing based on planned elimination of all

waste and on continuous improvement of productivity”. It also has been described as an approach with

the objective of producing the right part in the right place at the right time (in other words, “just in

time”). Waste results from any activity that adds cost without adding value, such as the unnecessary moving

of materials, the accumulation of excess inventory, or the use of faulty production methods that create

products requiring subsequent rework. JIT (also known as lean production or stockless production)

should improve profits and return on investment by reducing inventory levels (increasing the

inventory turnover rate), reducing variability, improving product quality, reducing production and

delivery lead times, and reducing other costs (such as those associated with machine setup and

equipment breakdown). In a JIT system, underutilized (excess) capacity is used instead of buffer

inventories to hedge against problems that may arise.

JIT applies primarily to repetitive manufacturing processes in which the same products and

components are produced over and over again. The general idea is to establish flow processes

(even when the facility uses a jobbing or batch process layout) by linking work centers so that

there is an even, balanced flow of materials throughout the entire production process, similar to

that found in an assembly line. To accomplish this, an attempt is made to reach the goals of

driving all inventory buffers toward zero and achieving the ideal lot size of one unit.

The basic elements of JIT were developed by Toyota in the 1950's, and became known as the Toyota

Production System (TPS). JIT was well-established in many Japanese factories by the early 1970's. JIT

began to be adopted in the U.S. in the 1980's (General Electric was an early adopter), and the JIT/lean

concepts are now widely accepted and used.

History

The technique was first used by the Ford Motor Company This describes the concept of "dock to

factory floor" in which incoming materials are not even stored or warehoused before going into

production. The concept needed an effective freight management system (FMS); Ford's Today

and Tomorrow (1926) describes one.

The technique was subsequently adopted and publicised by Toyota Motor Corporation of Japan as

part of its Toyota Production System (TPS).

Japanese corporations cannot afford large amounts of land to warehouse finished products and

parts. Before the 1950s, this was thought to be a disadvantage because it reduced the economic

lot size. (An economic lot size is the number of identical products that should be produced, given

the cost of changing the production process over to another product.) The undesirable result was

poor return on investment for a factory.

The chief engineer at Toyota in the 1950s, Taiichi Ohno, examined accounting assumptions and

realized that another method was possible. The factory could be made more flexible, reducing the

overhead costs of retooling and reducing the economic lot size to the available warehouse space.

Over a period of several years, Toyota engineers redesigned car models for commonality of

tooling for such production processes as paint-spraying and welding. Toyota was one of the first to

apply flexible robotic systems for these tasks. Some of the changes were as simple as

standardizing the hole sizes used to hang parts on hooks. The number and types of fasteners

were reduced in order to standardize assembly steps and tools. In some cases, identical

subassemblies could be used in several models.

Toyota engineers then determined that the remaining critical bottleneck in the retooling process

was the time required to change the stamping dies used for body parts. These were adjusted by

110

hand, using crowbars and wrenches. It sometimes took as long as several days to install a large

(multiton) die set and adjust it for acceptable quality. Further, these were usually installed one at a

time by a team of experts, so that the line was down for several weeks.

Toyota implemented a strategy called Single Minute Exchange of Die (SMED), developed by

Shigeo Shingo. With very simple fixtures, measurements were substituted for adjustments. Almost

immediately, die change times fell to about half an hour. At the same time, quality of the stampings

became controlled by a written recipe, reducing the skill required for the change. Analysis showed

that the remaining time was used to search for hand tools and move dies. Procedural changes

(such as moving the new die in place with the line in operation) and dedicated tool-racks reduced

the die-change times to as little as 40 seconds. Dies were changed in a ripple through the factory

as a new product began flowing.

After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants.

Carrying the process into parts-storage made it possible to store as little as one part in each

assembly station. When a part disappeared, that was used as a signal to produce or order a

replacement.

Philosophy

Just-in-time (JIT) inventory systems are not just a simple method that a company has to buy in to;

it has a whole philosophy that the company must follow. The ideas in this philosophy come from

many different disciplines including; statistics, industrial engineering, production management and

behavioral science. In the JIT inventory philosophy there are views with respect to how inventory is

looked upon, what it says about the management within the company, and the main principle

behind JIT.

Inventory is seen as incurring costs instead of adding value, contrary to traditional thinking. Under

the philosophy, businesses are encouraged to eliminate inventory that doesn’t add value to the

product. Secondly, it sees inventory as a sign of sub par management as it is simply there to hide

problems within the production system. These problems include backups at work centres, lack of

flexibility for employees and equipment, and inadequate capacity among other things.

In short, the just-in-time inventory system is all about having “the right material, at the right

time, at the right place, and in the exact amount.”

Effects

Some of the results at Toyota were unexpected. A huge amount of cash appeared, apparently

from nowhere, as in-process inventory was built out and sold. This by itself generated tremendous

enthusiasm in upper management.

Another surprising effect was that the response time of the factory fell to about a day. This

improved customer satisfaction by providing vehicles usually within a day or two of the minimum

economic shipping delay.

Also, many vehicles began to be built to order, completely eliminating the risk they would not be

sold. This dramatically improved the company's return on equity by eliminating a major source of

risk.

Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. The

result was a severe quality assurance crisis, and a dramatic improvement in product quality.

Eventually, Toyota redesigned every part of its vehicles to eliminate or widen tolerances, while

simultaneously implementing careful statistical controls. (See Total Quality Management). Toyota

had to test and train suppliers of parts in order to assure quality and delivery. In some cases, the

company eliminated multiple suppliers.

When a process problem or bad parts surfaced on the production line, the entire production line

111

had to be slowed or even stopped. No inventory meant that a line could not operate from in-

process inventory while a production problem was fixed. Many people in Toyota confidently

predicted that the initiative would be abandoned for this reason. In the first week, line stops

occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per

day. After six months, line stops had so little economic effect that Toyota installed an overhead

pull-line, similar to a bus bell-pull, that permitted any worker on the production line to order a line

stop for a process or quality problem. Even with this, line stops fell to a few per week.

The result was a factory that became the envy of the industrialized world, and has since been

widely emulated.

The Just in Time philosophy was also applied to other segments of the supply chain in several

types of industries. In the commercial sector, it meant eliminating one or all of the warehouses in

the link between a factory and a retail establishment.

Some Key Elements of JIT

1. Stabilize and level the MPS with uniform plant loading (heijunka in Japanese): Create a uniform load

on all work centers through constant daily production (establish freeze windows to prevent changes in the

production plan for some period of time) and mixed model assembly (produce roughly the same mix of

products each day, using a repeating sequence if several products are produced on the same line). Meet

demand fluctuations through end-item inventory rather than through fluctuations in production level. Use of

a stable production schedule also permits the use of backflushing to manage inventory: an end item’s bill of

materials is periodically exploded to calculate the usage quantities of the various components that were used

to make the item, eliminating the need to collect detailed usage information on the shop floor.

2. Reduce or eliminate setup times: Aim for single digit setup times (less than 10 minutes) or "one-touch"

setup -- this can be done through better planning, process redesign, and product redesign. A good example

of the potential for improved setup times can be found in auto racing, where a NASCAR pit crew can

change all four tires and put gas in the tank in under 20 seconds. (How long would it take you to change just

one tire on your car?) The pit crew’s efficiency is the result of a team effort using specialized equipment

and a coordinated, well-rehearsed process.

3. Reduce lot sizes (manufacturing and purchase): Reducing setup times allows economical production of

smaller lots; close cooperation with suppliers is necessary to achieve reductions in order lot sizes for

purchased items, since this will require more frequent deliveries.

4. Reduce lead times (production and delivery): production lead times can be reduced by moving work

stations closer together, applying group technology and cellular manufacturing concepts, reducing queue

length (reducing the number of jobs waiting to be processed at a given machine), and improving the

coordination and cooperation between successive processes; delivery lead times can be reduced through

close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.

5. Preventive maintenance: Use machine and worker idle time to maintain equipment and prevent

breakdowns.

6. Flexible work force: Workers should be trained to operate several machines, to perform maintenance

tasks, and to perform quality inspections. In general, JIT requires teams of competent, empowered

employees who have more responsibility for their own work. The Toyota Production System concept of

“respect for people” contributes to a good relationship between workers and management.

7. Require supplier quality assurance and implement a zero defects quality program: errors leading to

defective items must be eliminated, since there are no buffers of excess parts. A quality at the source

(jidoka) program must be implemented to give workers the personal responsibility for the quality of the

work they do, and the authority to stop production when something goes wrong. Techniques such as "JIT

112

lights" (to indicate line slowdowns or stoppages) and "tally boards" (to record and analyze causes of

production stoppages and slowdowns to facilitate correcting them later) may be used.

8. Small-lot (single unit) conveyance: Use a control system such as a kanban (card) system (or other

signaling system) to convey parts between work stations in small quantities (ideally, one unit at a time). In

its largest sense, JIT is not the same thing as a kanban system, and a kanban system is not required to

implement JIT (some companies have instituted a JIT program along with a MRP system), although JIT is

required to implement a kanban system and the two concepts are frequently equated with one another.

Benefits

As most companies use an inventory system best suited for their company, the Just-In-Time

Inventory System (JIT) can have many benefits resulting from it. The main benefits of JIT are listed

below.

1. Set up times are significantly reduced in the warehouse. Cutting down the set up time to be

more productive will allow the company to improve their bottom line to look more efficient and

focus time spent on other areas that may need improvement.

2. The flows of goods from warehouse to shelves are improved. Having employees focused on

specific areas of the system will allow them to process goods faster instead of having them

vulnerable to fatigue from doing too many jobs at once and simplifies the tasks at hand.

3. Employees who possess multiple skills are utilized more efficiently. Having employees trained to

work on different parts of the inventory cycle system will allow companies to use workers in

situations where they are needed when there is a shortage of workers and a high demand for a

particular product.

4. Better consistency of scheduling and consistency of employee work hours. If there is no

demand for a product at the time, workers don’t have to be working. This can save the

company money by not having to pay workers for a job not completed or could have them

focus on other jobs around the warehouse that would not necessarily be done on a normal

day.

5. Increased emphasis on supplier relationships. No company wants a break in their inventory

system that would create a shortage of supplies while not having inventory sit on shelves.

Having a trusting supplier relationship means that you can rely on goods being there when you

need them in order to satisfy the company and keep the company name in good standing with

the public.

6. Supplies continue around the clock keeping workers productive and businesses focused on

turnover. Having management focused on meeting deadlines will make employees work hard

to meet the company goals to see benefits in terms of job satisfaction, promotion or even

higher pay.

Problems

Within a JIT System

The major problem with Just In Time operation is that it leaves the supplier and downstream

consumers open to supply shocks. In part, this was seen as a feature rather than a bug by Ohno,

who used the analogy of lowering the level of water in a river in order to expose the rocks to

explain how removing inventory showed where flow of production was interrupted. Once the

barriers were exposed, they could be removed; since one of the main barriers was rework,

lowering inventory forced each shop to improve its own quality or cause a holdup in the next

downstream area. Just In Time is a means to improving performance of the system, not an end.

With shipments coming in sometimes several times per day, Toyota is especially susceptible to an

interruption in the flow. For that reason, Toyota is careful to use two suppliers for most assemblies.

113

As noted in Liker (2003), there was an exception to this rule that put the entire company at risk by

the 1997 Aisin fire. However, since Toyota also makes a point of maintaining high quality relations

with its entire supplier network, several suppliers immediately took up production of the Aisin-built

parts by using existing capability and documentation. Thus, a strong, long-term relationship with a

few suppliers is preferred to short-term, price-based relationships with competing suppliers.

Kanban Production Control System

A kanban or “pull” production control system uses simple, visual signals to control the movement of

materials between work centers as well as the production of new materials to replenish those sent

downstream to the next work center. Originally, the name kanban (translated as “signboard” or “visible

record”) referred to a Japanese shop sign that communicated the type of product sold at the shop through the

visual image on the sign (for example, using circles of various colors to indicate a shop that sells paint). As

implemented in the Toyota Production System, a kanban is a card that is attached to a storage and transport

container. It identifies the part number and container capacity, along with other information, and is used to

provide an easily understood, visual signal that a specific activity is required.

In Toyota’s dual-card kanban system, there are two main types of kanban:

1. Production Kanban: signals the need to produce more parts

2. Withdrawal Kanban (also called a "move" or a "conveyance” kanban): signals the need to withdraw parts

from one work center and deliver them to the next work center.

In some pull systems, other signaling approaches are used in place of kanban cards. For

example, an empty container alone (with appropriate identification on the container) could serve as

a signal for replenishment. Similarly, a labeled, pallet-sized square painted on the shop floor, if

uncovered and visible, could indicate the need to go get another pallet of materials from its point of

production and move it on top of the empty square at its point of use.

A kanban system is referred to as a pull-system, because the kanban is used to pull parts to the next

production stage only when they are needed. In contrast, an MRP system (or any schedule-based system) is

a push system, in which a detailed production schedule for each part is used to push parts to the next

production stage when scheduled. Thus, in a pull system, material movement occurs only when the work

station needing more material asks for it to be sent, while in a push system the station producing the material

initiates its movement to the receiving station, assuming that it is needed because it was scheduled for

production. The weakness of a push system (MRP) is that customer demand must be forecast and

production lead times must be estimated. Bad guesses (forecasts or estimates) result in excess inventory and

the longer the lead time, the more room for error. The weakness of a pull system (kanban) is that following

the JIT production philosophy is essential, especially concerning the elements of short setup times and small

lot sizes, because each station in the process must be able to respond quickly to requests for more materials.

Dual-card Kanban Rules:

1. No parts are made unless there is a production kanban to authorize production. If no

production kanban are in the “in box” at a work center, the process remains idle, and workers

perform other assigned activities. This rule enforces the “pull” nature of the process control.

2. There is exactly one kanban per container.

3. Containers for each specific part are standardized, and they are always filled with the same

(ideally, small) quantity. (Think of an egg carton, always filled with exactly one dozen eggs.)

Decisions regarding the number of kanban (and containers) at each stage of the process are carefully considered,

because this number sets an upper bound on the work-in-process inventory at that stage. For example, if 10 containers

holding 12 units each are used to move materials between two work centers, the maximum inventory possible is 120

units, occurring only when all 10 containers are full. At this point, all kanban will be attached to full containers, so no

additional units will be produced (because there are no unattached production kanban to authorize production). This

114

feature of a dual-card kanban system enables systematic productivity improvement to take place. By deliberately

removing one or more kanban (and containers) from the system, a manager will also reduce the maximum level of

work-in-process (buffer) inventory. This reduction can be done until a shortage of materials occurs. This shortage is

an indication of problems (accidents, machine breakdowns, production delays, defective products) that were previously

hidden by excessive inventory. Once the problem is observed and a solution is identified, corrective action is taken so

that the system can function at the lower level of buffer inventory. This simple, systematic method of inventory

reduction is a key benefit of a dual card kanban system.

Scheduling : Gantt Chart, Johnson’s Rule

Scheduling is the process of arranging, controlling and optimizing work and workloads in a production process or manufacturing process. Scheduling is used to allocate plant and machinery resources, plan human resources, plan production processes and purchase materials.

It is an important tool for manufacturing and engineering, where it can have a major impact on the productivity of a process. In manufacturing, the purpose of scheduling is to minimize the production time and costs, by telling a production facility when to make, with which staff, and on which equipment. Production scheduling aims to maximize the efficiency of the operation and reduce costs.

In some situations, scheduling can involve random attributes, such as random processing times, random due dates, random weights, and stochastic machine breakdowns. In this case, the scheduling problems are referred to as Stochastic scheduling.

Scheduling is the process of arranging, controlling and optimizing work and workloads in a production process. Companies use backward and forward scheduling to allocate plant and machinery resources, plan human resources, plan production processes and purchase materials.

Forward scheduling is planning the tasks from the date resources become available to determine the shipping date or the due date.

Backward scheduling is planning the tasks from the due date or required-by date to determine the start date and/or any changes in capacity required.

The benefits of production scheduling include:

Process change-over reduction

Inventory reduction, leveling

Reduced scheduling effort

Increased production efficiency

Labor load leveling

Accurate delivery date quotes

Real time information

Production scheduling tools greatly outperform older manual scheduling methods. These provide the production scheduler with powerful graphical interfaces which can be used to visually optimize real-time work loads in various stages of production, and pattern recognition allows the software to automatically create scheduling opportunities which might not be apparent without this view into the data. For example, an airline might wish to minimize the number of airport gates required for its aircraft, in order to reduce costs, and scheduling software can allow the planners to see how this can be done, by analyzing time tables, aircraft usage, or the flow of passengers.

Key concepts in scheduling

A key character of scheduling is the productivity, the relation between quantity of inputs and quantity of output. Key concepts here are:

115

Inputs : Inputs are plant, labor, materials, tooling, energy and a clean environment.

Outputs : Outputs are the products produced in factories either for other factories or for the end buyer. The extent to which any one product is produced within any one factory is governed by transaction cost.

Output within the factory : The output of any one work area within the factory is an input to the next work area in that factory according to the manufacturing process. For example, the output of cutting is an input to the bending room.

Output for the next factory : By way of example, the output of a paper mill is an input to a print factory. The output of a petrochemicals plant is an input to an asphalt plant, a cosmetics factory and a plastics factory.

Output for the end buyer : Factory output goes to the consumer via a service business such as a retailer or an asphalt paving company.

Resource allocation : Resource allocation is assigning inputs to produce output. The aim is to maximize output with given inputs or to minimize quantity of inputs to produce required output.

Scheduling algorithms

Background

Batch production scheduling is the practice of planning and scheduling of batch manufacturing processes. See Batch production. Although scheduling may apply to traditionally continuous processes such as refining, it is especially important for batch processes such as those for pharmaceutical active ingredients, biotechnology processes and many specialty chemical processes. Batch production scheduling shares some concepts and techniques with finite capacity scheduling which has been applied to many manufacturing problems.[5] The specific issues of scheduling batch manufacturing processes have generated considerable industrial and academic interest.

Scheduling in the batch processing environment

A batch process can be described in terms of a recipe which comprises a bill of materials and operating instructions which describe how to make the product. The ISA S88 batch process control standard provides a framework for describing a batch process recipe. The standard provides a procedural hierarchy for a recipe. A recipe may be organized into a series of unit-procedures or major steps. Unit-procedures are organized into operations, and operations may be further organized into phases.

The following text-book recipe illustrates the organization.

Charge and Mix materials A and B in a heated reactor, heat to 80C and react 4 hours to form C.

Transfer to blending tank, add solvent D, Blend 1hour. Solid C precipitates.

Centrifuge for 2 hours to separate C.

Dry in a tray dryer for 1 hour.

A simplified S88-style procedural organization of the recipe might appear as follows:

116

Unit Procedure 1: Reaction

Operation 1: Charge A & B (0.5 hours)

Operation 2: Blend / Heat (1 hour)

Operation 3: Hold at 80C for 4 hours

Operation 4: Pump solution through cooler to blend tank (0.5 hours)

Operation 5: Clean (1 hour)

Unit Procedure 2: Blending Precipitation

Operation 1: Receive solution from reactor

Operation 2: Add solvent, D (0.5 hours)

Operation 3: Blend for 2 hours

Operation 4: Pump to centrifuge for 2 hours

Operation 5: Clean up (1 hour)

Unit Procedure 3: Centrifugation

Operation 1: Centrifuge solution for 2 hours

Operation 2: Clean

Unit Procedure 4: Tote

Operation 1: Receive material from centrifuge

Operation 2: Load dryer (15 min)

Unit Procedure 5: Dry

Operation 1: Load

Operation 2: Dry (1 hour)

Note that the organization here is intended to capture the entire process for scheduling. A recipe for process-control purposes may have a more narrow scope.

Most of the constraints and restrictions described by Pinedo are applicable in batch processing. The various operations in a recipe are subject to timing or precedence constraints that describe when they start and or end with respect to each other. Furthermore, because materials may be perishable or unstable, waiting between successive operations may be limited or impossible. Operation durations may be fixed or they may depend on the durations of other operations.

In addition to process equipment, batch process activities may require labor, materials, utilities and extra equipment.

Cycle-time analysis

In some simple cases, an analysis of the recipe can reveal the maximum production rate and the rate limiting unit. In the process example above if a number of batches or lots of Product C are to be produced, it is useful to calculate the minimum time between consecutive batch starts (cycle-time). If a batch is allowed to start before the end of the prior batch the minimum cycle-time is given by the following relationship:

Where CTmin is the shortest possible cycle time for a process with M unit-procedures and τj is the total duration for the jth unit-procedure. The unit-procedure with the maximum duration is sometimes referred to as the bottleneck. This relationship applies when each unit-procedure has a single

117

dedicated equipment unit.

If redundant equipment units are available for at least one unit-procedure, the minimum cycle-time becomes:

Where Nj is the number of redundant equipment for unit procedure j.

If equipment is reused within a process, the minimum cycle-time becomes more dependent on particular process details. For example, if the drying procedure in the current example is replaced with another reaction in the reactor, the minimum cycle time depends on the operating policy and on the relative durations of other procedures. In the cases below, an increase in the hold time in the tote can decrease the average minimum cycle time.

118

Visualization

Various charts are used to help schedulers visually manage schedules and constraints. The Gantt chart is a display that shows activities on a horizontal bar graph in which the bars represent the time of the activity. Below is an example of a Gantt chart for the process in the example described above.

Another time chart which is also sometimes called a Gantt chart shows the time during which key resources, e.g. equipment, are occupied. The previous figures show this occupancy-style Gantt chart.

119

Resources that are consumed on a rate basis, e.g. electrical power, steam or labor, are generally displayed as consumption rate vs time plots.

Algorithmic methods

When scheduling situations become more complicated, for example when two or more processes share resources, it may be difficult to find the best schedule. A number of common scheduling problems, including variations on the example described above, fall into a class of problems that become very difficult to solve as their size (number of procedures and operations) grows.

A wide variety of algorithms and approaches have been applied to batch process scheduling. Early methods, which were implemented in some MRP systems assumed infinite capacity and depended only on the batch time. Such methods did not account for any resources, and would produce infeasible schedules.

Mathematical programming methods involve formulating the scheduling problem as an optimization problem where some objective, e.g. total duration, must be minimized (or maximized) subject to a series of constraints which are generally stated as a set of inequalities and equalities. The objective and constraints may involve zero-or-one (integer) variables as well as nonlinear relationships. An appropriate solver is applied for the resulting mixed-integer linear or nonlinear programming (MILP/MINLP) problem. The approach is theoretically guaranteed to find an optimal solution if one exists. The disadvantage is that the solver algorithm may take an unreasonable amount of time. Practitioners may use problem-specific simplifications in the formulation to get faster solutions without eliminating critical components of the scheduling model.

Constraint programming is a similar approach except that the problem is formulated only as a set of constraints and the goal is to arrive at a feasible solution rapidly. Multiple solutions are possible with this method.

Johnson’s Rule is: 1. From the list of unscheduled jobs, select the one with the shortest processing time

in either work center. 2. If the shortest time is at the first work center, do the job first in the schedule

otherwise do the job last in the schedule. 3. Remove the job assigned in Step 2 from the list of unscheduled jobs. 4. Repeat steps 1,2 and 3 filling in the schedule from the front and the back until all

jobs have been scheduled.

120

Example 1

At the end of each month, a research and development team writes status reports for the projects at work. The team leaders, Andrew and Julie, submit them to the R&D director on the first Monday of each month. Unfortunately, they forgot to check their calendar one month until late Friday evening. To their surprise, they discovered that the month ended on Sunday and the reports were due the following Monday morning. As they had not started writing them, they decided to come to work early Saturday morning, so they could finish the reports before Monday morning. They split the work as follows: Andrew writes and edits the reports while Julie collates data and draws all the necessary graphs. Assume that Julie starts her work on a report as soon as Andrew is finished with it and that Andrew works continuously. Times for the reports (in hours) are as follows:

Projects Andrew Julie A 4 2 B 3 5 C 5 1 D 7 3 E 8 6

What is the order of the tasks using Johnson's rule?

ANSWER B-E-D-A-C CALCULATIONS

Order of jobs using Johnson's rule: B -> E -> D -> A -> C

How many hours will it take them to finish all the reports? ANSWER 28

CALCULATIONS Andrew: B (3), E (11), D (18), A (22), C (27) Julie: B (8), E (17), D (21), A (24), C (28) (time in parentheses is cumulative hours to complete) It will take 28 hours to complete all of the reports

How many hours is Andrew idle? ANSWER 1

CALCULATIONS: Andrew’s idle time: 28 - 27 = 1 hour

How many hours is Julie idle? ANSWER 11

CALCULATIONS: Julie’s idle time: 3 + 3 + 1 + 1 + 3 = 11 hours

Example 2

A company is faced with seven tasks that have to be processed through two work centers. Assume work center I works continuously and that they are using Johnson's rule. Data appear below in hours:

Task Work center I Work center II

A 2.58 3.47

B 1.66 5.84 C 2.71 2.41 D 5.52 1.99 E 3.38 7.62 F 5.22 1.73 G 2.89 1.11

What is the sequence of tasks? ANSWER B-A-E-C-D-F-G

Job order using Johnson's rule: B -> A -> E -> C -> D -> F -> G

Andrew Julie

Work Center I Work Center II

121

What is the time in hours to complete all the tasks in both work centers? ANSWER 25.83

CALCULATIONS

Work center I: B (1.66); A (4.24); E (7.62); C (10.33); D (15.85); F (21.07); G (23.96) Work center II: B (7.50); A (10.97); E (18.59); C (21.00); D (22.99); F (24.72); G (25.83) (time in parentheses is cumulative hours to complete) It will take 25.83 hours to complete all tasks

What is the total idle time in hours for work center I? ANSWER 1.87

CALCULATIONS: Work center I idle time: 25.83 - 23.96 = 1.87 hours

What is the total idle time in hours for work center II? ANSWER 1.66

CALCULATIONS

Work center II idle time: 1.66 hours (wait for task B)

Purchase Management: 8L

Purchase policy ; systems; procedures; vendor selection; Negotiation

Vendor Development and evaluation; Make or buy Decision; Legal aspect of

Purchasing.

An overview on law of contract and sales of goods act, Drug Control Act. Highlighting

the general features of the Act (no Clause by Clause study)

Definition of Purchasing

Purchasing has been defined as a “Business activity directed to securing the materials, supplies

and equipments required in the operation of an organisation.”

According to Lewis, Purchasing is the acquisition by manufacturer of any primary materials,

supplies, equipment and so forth by any method whatsoever. This procurement includes extraction

from owned mines or forests, cultivation of owned agricultural lands, manufacture in owned plant

and purchase.

Purchase objective and Functions

Some of the broad area of specific objective of purchase department are:

1) Economic purchase operation: Purchase is an economic function which should

contribute to the profits of an organization so, it should have working knowledge in the field

of economics, engineering, law, transport, imports, government, regulation policies.

2) Consistent Market survey: methodical collection, compilation, analysis and evaluation of

collected data (primary and secondary) are vital in drawing definite conclusion.

3) Proper Control over financial commitments: Material bill and services occupy 50%-

60% of company’s turnover so, proper control over financial commitment is very necessary.

4) To provide information and assistance to top management and other concerned

department: forecast of price trends , market situation such as possible scarcity of

materials , future investment commitments vs. working capital , are some the areas where

122

management must be kept informed periodically and based on which certain purchase

strategy and policy could be evolved.

Purchase Parameters

Or

Goals of purchase department

Functions of Purchasing Department / Management

1) Recognition of needs: - it has to be anticipated in advanced that what materials should be

needed and should buy in sufficient quantity.

2) Describe the need accurately by clear specification.

3) Selection of proper source of supply.

4) Research and Development for potential alternative materials.

5) Ascertaining or fixing price.

6) Placing purchase order.

7) Follow up the purchase order

8) Development of vendors and proper procedure.

9) Maintenance of good vendor relation.

10) Arranging transportation for material

11) Development of techniques of communication

Purchasing Systems

In organization, depending ON the size and nature of operation, the quantum of purchase varies

any where between a few thousands of rupees and hundred and Crore of rupees.

Formal procedures have to be laid down in initiating purchase, selecting suppliers, placing

purchase orders, follow-up, receiving materials and so on. In this chapter we will deal with various

systems that are used in a purchase department.

We can classify the systems in the following manner:-

1) Pre-purchase system.

RIGHT ATTITUDE Training SWOT

Materials intelligence

RIGHT MATERIALS

Value analysis

Standardization

RIGHT QUALITY

Rejection and specification

RIGHT QUANTITY,

EOQ & Inventory model.

RIGHT PRICE Negotiation

learning curve RIGHT TIME Re-order point

Lead time analysis

RIGHT TRANSPORTATION

Cost analysis of transportation logistics

RIGHT CONTRACT

Legal aspect.

RIGHT SOURCE Vendor Rating Purchase

research

RIGHT PLACE of Delivery Price

Communication

Fig: 2.1 (Goals of purchase department)

123

2) Ordering system.

3) Post-purchase system.

The salient features in each of the systems mentioned are as follows.

1) Pre-purchase system: initiating the purchase through requisition, requirement programmes,

selection of suppliers, obtaining quotation and evaluating them are broadly the pre-purchase

activities.

iii) Requisition: the department concerned in need of a material usually presents a completed

requisition form. It has to be countersigned by the senior officer. In any organization only a

limited nos. of officers are empowered to countersigned the requisition as it amounts to

authorization of the expenditure.

Note: the capital equipment cannot be procured in this manner. That decision are taken normally

at the board level and they are treated differently for taxation and accounting purpose.

iv) Traveling requisition: This document is widely used for requisitioning items that are required

frequently in bulk quantities over a long period. It travels from the requisitioning department to

the purchase dept. often.

v) Enquiries: Many organizations often invite suppliers to quote rates for supply of materials.

2) Ordering systems: Having selected the supplier and the rates agreed , the buyer places the

purchase order on the supplier, expressing the term and condition.

a) purchase order reference number ( which will be quoted in all subsequent follow-up

measures pertaining to that order)

b) Description of the materials and detailed specification.

c) Quantity required and delivery schedule.

d) Price and discount.

e) Shipping instruction.

f) Location , where the materials are to be shipped ( usually the name and address of buyer)

g) Signature of the material manager who can authorize the purchase order.

h) Detailed terms and conditions ( as a common practice these are printed at the back of the

purchase order.)

3) Post purchase system

a) Follow-up implies commitment of time and money and therefore it has to be selective.

b) Receipt: A systematic record of the consignment received, carrier details and descriptions are

to be maintained in chronological sequence.

c) Invoice checking: This step is concerned with checking invoice.

Principles of Purchasing / 6 Laws of Purchasing

6 R’s of purchasing

i) Right quality: Quality can be defined as the “power of accomplish or the capability of doing

certain thing”

- in other words quality means the useful value of a specific thing for a specific purpose

to fulfill.

- Quality can be specified in different meaning, i.e., dimension , power , tolerance,

harness, etc.

- Quality should be correctly specified.

124

- Right quality means neither too high nor too low.

ii) Right quantity: purchaser must buy the materials in right quantity to ensure that there is no

stoppage of production or, no extra stock piling. Right quantity is yet another important parameter

in buying. Quantity decisions are influenced by “replenishment method “and “buying methods.

Replenishment method such as “re-order level”, “two-bin system”, “review system: optional

replenishment” and “review system: compulsory replenishment” helps to provide broad guidelines.

Buying methods followed by the buyer has an influence on order quantity. For example re-order

quantity under:

Hand to mouth buying is too small.

Scheduled buying can be either economic order quantity, or smaller or larger than EOQ.

Forward buying is generally very large covering a long period of consumption.

Contract buying is received in staggered lots, each lot at times may equal to EOQ.

Besides the above mentioned factors, consumption, market conditions, lead time, source of

supply, etc influence the decision of right quantity.

iii) Right price: it is purchasers’ skill to determine the optimum price for a valued product. it does

mean that the lowest price but the price which minimizes the overall cost. Right price is not that

easy to determine. The technique of :

Negotiation: It is used when there are limited vendors, and /or time available to make

purchase is short, and /or items belong to fixed price category.

Tender system: It is followed in public sector organization to identify the lowest potential

bidder.

Learning curve: It is employed to determine the price of the item with high labor content.

iv) Right sources: The right source must fulfill the following condition

- Must be fully equipped to manufacture and supply the items ordered.

- He must look after the interest and buyer interest.

- He must also assist the buyer in market research.

- Must be gentle in nature and improving himself to cope with the condition.

- He must be man of integrity.

v) Right time: Time is very essential components in case of any business. Right time and lead

time are closely related. Right time implies that time at which the goods requested should be

received while lead time refers the time that elapses between the communication of the need for

the item by indenter to purchase till the item is actually received and is made available for

consumption. Basic elements of lead time are:

Time required by the indenter to communicate requirement to purchase.

Time required by purchase to locate, select, develop qualified source of supply including

agreement on contractual terms.

Transit time for purchase order to reach supplier.

Time required by supplier to fill buyers order.

Time required by the supplier to route buyer’s order through his administrative channels.

Transportation time for the goods to reach buyers’ destination.

Time required by buyer’s receiving department to collect materials from transporter’s go

down, verify receipted quantities and prepare necessary documents.

Time required by the buyer’s inward inspection to verify the quality of goods.

Time required by the main stores to take possession of the goods, deposit them into

appropriate bins and update stock cards.

125

vi) Right term: It concerned with legal term and condition.

Note: Among these 6 R’s the first 5 R’s are most important. When we are talking about 5 R s of

purchasing we have to mention Right Quality, Right Quantity, Right Price, Right time and Right

Sources.

Meaning of Purchase Cycle

Purchasing activity plays a vital rile in all the firms in general and in the manufacturing firms in

particular. Purchasing, is not merely “buying to satisfy the indentor’s requirements”, but “buying

goods of right quality, in the right quantities, at the right time and at the right price”.

Purchase cycle consists of following eight major activities (Fig 2.3)

9. Establishing and communicating the need for procurement.

10. Scrutiny of the purchase indents.

11. Market study and selection of sources of supply

12. Order preparation

13. Follow up

14. Receiving and inspection

15. Storage and Record keeping

16. Invoicing and Payment.

Establishing the need for

procurement

Scrutiny of the

purchase indent

Purchase market

research

Order

preparation

Follow up with

supplier

Receiving and

Inspection

Storage and record

keeping Invoicing and

payment

Fig: 2.3 Major activities of purchase cycle

6R’S OF

BUYING

Right source

-Source selection and source development

-vendor rating -purchase research

Right Quantity - EOQ

- Replenishment system

- Buying Method

Right Quality -Quality specification. - Source selection and

source development - Vendor quality rating.

Vendor up gradation /

self certification

- value analysis - Standardization

Right time

- Replenishment methods - Lead-time analysis

Right Price - Basic elements of price.

- Competitive bidding. - Negotiation. - Learning curve.

- Right place of delivery. - Right transportation. - Legal aspects.

- price negotiation. - payment methods

Right Term - Legal Aspects. - Other

considerations

Fig: 2.2 (Six R’s of purchasing)

126

Each of these activities is described below and their major aspects are summarized in Fig: 2.4.

Elements of Procurement Cycle / Steps of purchasing cycle

1. Establishing and communicating need for Procurement

The need for purchase originates in one of the firm’s operating departments or its inventory control

section. The demand may be for raw materials, such as steel; or it may be for semi-finished goods

such as castings, forgings, semi-matched parts; or it may be for bought out parts; or for cutting

tools such as drills, reamers, cutters, etc.; or it may be for supplies or for spares. The need is

communicated to the purchase department through a formal document called “Purchase Indent” or

a “Bill of Material”

a) Purchase indent: Purchase indent, also called purchase requisition, is a formal request made

to the purchase department to purchase materials or services specified, time when required etc. A

purchase indent originates either from the firm’s inventory control section, production control

department, or from one of the operating departments.

1. ESTABLISHING THE NEED FOR PROCUREMENT i. Recognising the need for procurement ii. Calculate the requirements iii. Jotting down the specifications iv. Informing requirements to purchase v.Purchase indents / Bill-of-material

2. SCRUTINY OF PURCHASE INDENT i. Completeness ii. Appropriateness iii. Passing the indent through stores iv. Logging of indents into indent register

3. MARKET RESEARCH i. Source selection & source development ii. Advertisement. iii. Telephonic quotations iv. Written quotations

4. ORDER PREPARATION i. Scrutiny of quotations ii. Negotiations iii. Placing orders to suppliers iv. Obtaining suppliers’ acceptance.

5. FOLLOW UP i. Pre-delivery follow up ii. Shortage chasing

127

Fig: 2.4 Activities of a purchase

cycle

6. RECEIVING & INSPECTION 10. Receiving dispatch details (RR/LR) and logging

them into the consignment register 11. Collection of material 12. Inspection for physical damages to the packages

and number of packages 13. Entering consignment details into GR register 14. Uncrating of goods 15. Quantity certification 16. Raising of GRR 17. Intimating receipt of materials to the indentor 18. Inspection of goods

7. STORAGE & RECORD KEEPING 6. Movement of materials to concerned store / rejection

store 7. Quantity certification 8. Application of protective coating / marking 9. Storage of materials into appropriate racks 10. Posting of receipt into stock card.

8. INVOICING & PAYMENT 7. Receiving GRRs in Accounts department 8. Receiving suppliers’ bills 9. Linking of GRR and suppliers’ bills 10. Posting of purchase register 11. Passing of bills 12. Effecting payments

128

The indent alternatively rose either by plant engineer, or by maintenance engineer, or by

office manager, or by other responsible persons authorized to request these items.

Organization permitted different person to sign the purchase indents for different kinds of

items are issued by the top management.

Stock items (items of regular use): for these items the purchase indents will be given by

inventory section or stores are generally. When the stock level drops to or nears the re-

order level, an indent is sent from stores to the purchasing department to replenish the

stock.

The buying department may also receive indents for capital goods, the purchase of which

has already been approved by the management.

Non-standard items: The indents for these items are filled in by the operating

departments. The requests for items may come from planning department. Indents are

raised by all indenting departments. It should have three copies. Original is sent to the

purchase, second goes to the stores, and third copy remains with the originating

department.

Purchase indents from inventory section or the store is sent directly to the purchase

department. Purchase indents from all other persons must be approved by the

authorized signatory and should be routed through inventory section or stores to

see whether required items are carried in the stores.

b) Bill-of-material:

Bill-of-material, also called parts list of building list,

Bill of material is prepared by the engineering department, production and material dept.

The final assembly is broken into major assemblies. Major assemblies are divided into

parts. The individual parts comprising each assembly are arranged, as far as practical, in

the manner in which each part is assembled.

The main advantages of bill-of-material are:

iv) It eliminates the unnecessary clerical activities regarding purchasing of goods. This saved time

and energy.

v) It can minimise clerical error.

vi) It can reduce wastage of materials and also reduces unnecessary inventory cost.

2. Scrutinising Purchase Indents

A purchase indent may describe the items either by its brand name, or by commercial

standard, or by its performance standards. Sometimes the indents may be forwarded

sample of the item.

Purchase departments must scrutinize the accuracy and completeness of quality

description.

The scrutiny of the indents is a routine activity of the purchase department. The indent is

scrutinized to see whether –

vi) It should be signed by the authorized signatories to avoid irresponsible and unethical

purchases;

129

vii) It should be coming through stores department to certify non-availability and stock history of

the item in stores;

viii) Quantity and quality specification of the item should be correctly and clearly written.

ix) The description of the required item should be clearly given;

x) Quality specification of the item may be correctly and clearly written

Each purchase indent after scrutiny is recorded in the purchase indent register and then given to

the concerned buyer. The second copy is initialed, dated and returned back to its indentor.

3. Identification, Selection, development of Sources of Supply or Survey

After the scrutiny of the indents the next stage is market survey and selection of the

sources of supply.

This stage involves differentiate and sorting of items into item groups, review of available

information, and selecting potential source(s) of supply who can supply goods -

iv) Of the right quality;

v) At the right price; and

vi) Meet buyer’s quantity requirements, and make reliable delivery promises.

Buyers can select suppliers by virtue of their experiences and data collected from their

various internal sources such as catalogues and price lists, etc.

In general, the work involved in market search and source selection is as under:

viii) For the items purchased to commercial standards, telephonic quotations are obtained from

vendors and verbal order is given to a supplier whose terms is most suitable.

ix) For highly price fluctuating products and items an inquiry is sent to probable sources and

quotations are received. A comparative statement is prepared from the quotations received

from the suppliers. Then company select one or more than one suppliers according to their

suitability.

x) For the regular use items buyers send design specification along with blue print or sample

and delivery schedules are released to the suppliers

xi) For non-stock items, the sources are selected as per previous points depending upon the

nature of the item

xii) For capital equipment, enquires are either mailed to the machine tool manufactures or the

enquiries are advertised (open tender) in the paper of this country. Company can float

global tender by advertised the enquiries in the news paper of other country.

xiii) If lesser amount is involved and the item is easily available, the buyer may buy with petty

cash.

xiv) For new items, the buying department have to explore information to identify sources and

undertake the activity of selection and development of suppliers.

4. Order Preparation

After selection of source of supply, the next step is to authorize the selected suppler to

supply material, which is done by placing the purchase order.

A purchase order is a formal document prepared by the buying department on behalf of

the company to authorize (request) the supply of the goods and services in the quantities,

at the time and at the price specified there in the document.

130

A purchase order is a legal document and serves as an evidence of the contract between

the buyer and the seller.

After getting the orders typed, the buyer has to check for its correctness and sign it. Once the

purchase order has been signed, it requires to be entered in the purchase register. The individual

copies of the purchase order, materials required urgently are purchased on verbal or telephonic

orders which are covered immediately by written purchase orders.

A written purchase order serves the following objectives:

v) It gives full details of the materials to be supplied to avoid ambiguities.

vi) It serves as a future reference for placement of orders.

vii) It helps buyer’s accounts department to link goods-receipt-reports with supplier’s invoices.

viii) It helps buyer’s receiving department to verify that the materials received are in accordance

with those ordered.

The copies of the purchase order go to the supplier, the accounts department, the receiving

department, the indenting department, the reference file, and the follow-up section.

The placement of an order cannot be considered complete until the acknowledgement of the

purchase order is received from the vendor.

5. Follow-up with Suppliers

The follow up function now-a-days has become the foremost function of the buyers. Basic rules of

follow-up are:

iv) Follow-up should be based on market condition and buyer’s experience with the vendor’s

delivery performance.

v) Buyer should keep a constant himself up-to-date with latest progress on each order.

vi) Mode of follow-up should be based importance of the item, reliability or otherwise of the

supplier, number of suppliers, location and so on.

Purchase follow-up is made in two stages: pre-delivery follow-up and shortage chasing.

Pre-delivery follow-up is intended to remind the supplier of the due date and obtain advance

information of expected delays. Pre-delivery follow-up enables buyer –

If the supplier is expected to fail in his delivery commitment; buyer has to develop alternate

arrangements to ensure that delivery should be on time. In this case buyer may identify

another source of supply to make delivery on schedule. Typical methods used are:

v) Phone call to local suppliers;

vi) Letters to outside supplier typed and signed by the buyer;

vii) Regular visits –to new suppliers to review progress

viii) Delivery confirmation letters from supplier intimating that the delivery shall be made on

promised date. It is one sort of guarantee card;

Shortage chasing is the universally accepted most vital part of purchase follow-up. purpose:

First to obtain the shortage materials as soon as possible and

Second to intimate suppliers that delivery should be made on time, if not then shortage

chasing will be done by company. It prevents future recurrences.

The approach depends upon the type of supplier:

131

v) In the time of vendor evaluation buyer may warn supplier about the delivery and shortage

of supply.

vi) Supplier’s delivery ratings should be communicated on periodical basis. Suppliers with A

and B ratings should be encouraged. Those with C and D rating should be warned to

improve on their delivery performance.

vii) New sources should be developed and schedule on existing suppliers who are in C and D

position should be gradually rejected to pressurize them to improve.

viii) Meeting between the senior representatives should be arranged to discuss the problems.

Example: the follow-up system in operation can be done in following manner

Once the date is marked on the follow-up copy, the staff has to segregate all order copies

and puts them into date compartments.

The buyers are asked to adopt the following method for follow-up:

vi) Telephone or email the party;

vii) Faxes: when urgency exists

viii) A personal visit should be made to local supplier in case of extreme urgency and in case of

failure to get the supplier on phone;

ix) Telephone and also write a reminder on a printed form indicating the delivery required, the

quantity pending and so on;

x) Written letters, duly typed and signed by the higher authorities must be issued to distant

supplier.

6. Receiving and Inspection

After receiving the purchase order the supplier fills up the buyer’s requirements and arranges

delivery of the materials according to instructions regarding quantities, time, route, mode of

transport, etc.

In a small company “Receipt” or “Receiving” department/section will receive the materials

and inspect. In a large company, receiving materials is looked after by the stores

department.

The activities involved are as under:

(f) Receiving:

Materials in the receiving department are received against a specific document depending upon

mode of dispatch and geographical location of the supplier.

Materials from local supplier

Responsibility of delivery of materials depends on the terms of contract. Materials to be

delivered by the suppliers

The original copy of the delivery challan is retained by the receipt department. The duplicate

copy is stamped “Subject to physical count and inspection” and is signed by the receipt clerk

and is handed over to the supplier’s representative.

Different methods of receiving Materials from outside supplier:

v) Post parcel: Post parcel is the convenient method of receipt of materials from outstation

suppliers. No information is received from postal authority regarding receipt of materials but

132

postman personally delivers the parcel. Only light weight materials such as samples, spares,

and cutting tools are sent by the post parcel.

vi) Road transport:

If the materials are sent through road transport, the receipt of the transporter, called “Lorry

receipt”. It is sent by the supplier.

The lorry receipt is numbered and contains description of the items packed in the boxes,

the number of Containers.

Freight paid or to be paid and the type of delivery has to be mentioned.

If the delivery is mentioned as “Door delivery”, the transporter has to deliver the goods at

the buyer’s works.

vii) Rail transport: This is similar to road transport except the following differences:

The railway receipt is received by the buyer in duplicate;

The railway does not inform the consignee of the arrival of the material;

The materials require to be collected by the consignee.

viii) Air: Air consignment (AC) note must be sent as soon as material is booked. The receipt

department on the receipt of A.C. note visits airlines office to collect materials.

Since, it takes a long time for clearing, a register is maintained to keep a proper control on the

documents.

The register mentioned above serves many purposes:

It enables clearing department to do follow up with the transport agency.

It enables buyer to know the time when the materials to be received.

It enables clearing department to plan their administrative work load as well as achieve

optimum utilisation transport facilities.

(g) Verification and logging of delivery challan of materials:

When materials are received with supplier’s delivery challan, receiving department takes out the

copy of the relevant purchase order and verifies to ensure:

i) Right materials

ii) They have supplied materials as per delivery schedule.

iii) Right quantity.

iv) Purchase order number, part name, part number, broad purchase category etc. are

mentioned clearly and correctly.

v) Right time.

After having satisfied, the receipt clerk makes the entry of the receipt materials into a register

called “Goods Receipt Register”.

(h) Preparation of Goods-Receipt-Reports (GRR):

Goods receipt register cannot be made available to different departments.

Other departments have to be informed. That’s why information from the goods-receipt-

register is transformed on “Goods Receipt Report” (GRR). It is also known as “Goods

Inward Note” (GIN), or Receipt-cum-Inspection Advice (RCIA), or Materials Inward Note

(MIN) etc.

133

The need for preparing a separate document such as GRR arises because of the following

reasons:

iii) Only one copy of the delivery challan is received. But, concerned department should be

informed.

iv) Preparation of GRR helps to combine information on delivery challan and results of

inspection.]

(i) Communication of receipt of material:

Moreover, the personnel who are engaged in receiving may not know whether a particular

material is required urgently.

Therefore, they have to inform the concerned departments as soon as materials are

received. First communication can be made on intercom. But, after that written

communication should be done.

Physical count of the received material:

Materials received should be verified for quantities.

The receipt clerk has to attach receipt tag containing all details about the delivery challan to the

part or to the package. This tag also contains challan numbers, description of materials, code

numbers of materials, name of the suppliers, number of packages received, quantity received and

date of receipt.

The verification method of quantities may be one or more of the following types:

iv) Counting by number (quantity).

v) Weighing.

vi) Measurement of length.

After quantity verification material is kept ready for quality verification by the inward inspection

department.

If the verified quantity is less than claimed quantity then authority should issues Discrepancy

Note.

(j) Inspection of goods

All supplies are subjected to inspection and testing.

Critical items: These are inspected at vendor’s plant prior to deliveries by the vendor.

All remaining items are inspected by the inward inspection at the buyer’s premises to conform the

following criteria

Dimensions;

Materials specifications, and

Performance.

7. Storage and record keeping

After inspection The goods are segregated in to accepted and rejected categories.

Only fully accepted quantity is forwarded to the stores. The quantity is physically verified

and entered into the ledger or bin cards and only thereafter the issue is allowed.

134

8. Invoicing & Payment

Receipt of supplier’s invoice:

When the supplier supplies goods, he immediately prepares invoices. Sometimes, both buyer and

supplier have discussion and supplier agrees to raise invoices after the receipt of goods-receipt-

reports. Such a system has a number of benefits namely:

i) Reconciliation statements are very easy to prepare

ii) Invoices indicates the exact quantity of materials accepted by the buyer.

iii) Paper work is cleared faster and payment wise there is no dispute.

iv) Raising of credit or debit notes can be avoided for discrepancies in quantities or rejection.

Scrutiny of invoice:

Supplier’s invoices on receipt are sent to the accounts department. The personnel of this

department again scrutinize the invoice in accordance with GRR.

Journal entries:

Verified invoices are entered in a purchase register, called “purchase journal”. A purchase journal

is a register wherein invoices are entered supplier wise.

Payment:

The purchase journal is reviewed periodically and the cashier is informed of the invoices which are

due for payment. Cheques are drawn to effect payment on due dates

Methods of Buying Introduction

The buying department of the company is responsible to provide goods and services required by

the company at least cost to the company. The request to procure may be received either from

stores department or from one of the functional departments.

Such requests may be received:

i) Either for direct materials or for indirect materials;

ii) Either for production items or for non-production items;

iii) Either for low priced items or for expensive items;

iv) Either for the items which are controlled by the forces of supply and demand or for the

items which are available off the self;

v) Either for items to be procured from manufactures or for items to be bought from

middlemen;

vi) Either for the seasonal items or for the non-seasonal items;

vii) Either for items produced to buyer’s design or for items produced to commercial standards;

viii) Either for items sold at premium or for items sold at discount;

ix) Either to meet immediate needs or it may be to satisfy needs at a later date;

x) Either at time when prices are at their peak or at a time when prices are stable;

The above discussion, therefore, implies that there can be wide variations in the practices to be

followed for the purchase of different types of items. This chapter deals with such practices (i.e.

different buying methods)

135

Factors Influencing Selection of a Buying Method

A number of factors influence selection of a buying method. They are:

i) Nature of the item;

ii) Regularity of its demand;

iii) Quantities required;

iv) Susceptibility to price variations

Some organizations decide upon different methods of buying on the basis of market condition

where decision may be –

1) Hand to mouth buying.

2) Speculative buying

3) Hedging

4) Forward buying / Market purchasing

Apart from these main buying methods there are other buying methods.

5) Scheduled buying.

6) Contract buying

7) Blanket orders.

8) Tender buying.

9) Seasonal buying.

10) Group purchasing.

11) Sub-contracting.

12) Central purchase organization.

13) Directorate general of supplies and disposal.

Different types of Buying Methods

1) Hand to Mouth Buying

Hand to mouth buying also called “buying according to the requirements”. It refers to the

frequent purchases of an item in small quantities.

Important characteristics of hand to mouth buying are undertaken:

a) When demand arises.

b) To cover immediate requirements.

c) When the quantity purchased is small.

d) When there is emergency or urgency.

Advantages:

i) Inventory investment Low.

ii) Carrying charges is Low.

iii) Losses will be lesser when price declines.

iv) Reduced deterioration and obsolescence of materials.

Disadvantages:

i) Higher clerical costs.

ii) In emergency case quality may be degraded.

136

iii) Increase in prices may lead to loss.

iv) In urgency buyer may have to buy the materials with high price.

v) Production schedule may be interrupted for the shortage in the time of urgency.

Criteria:

This method applies to:

a) Items whose prices are expected to fall in the near future;

b) Items which are perishable;

c) Items required for under development products in product development phase;

d) Items which are used infrequently and would not be required to stocked.

e) Cover immediate requirements of a stock items caused either due to delay in delivery from

regular supplies or due to increase in consumption;

f) Replacement spares;

g) Bulky Materials

2) Speculative buying

Definition: Speculative buying refers to the buying large requirements of an item when its price is

low with the intention to sell bulk of it at a higher price for speculative profits.

Characteristics:

i) An item which is not required for production may be purchased.

ii) Its single aim is to make speculative profits when price of the commodity increases.

iii) The quantity purchased is high.

Advantage:

Speculative profit can be earned

Disadvantages:

Investing large amount of capital,

Storage problem.

Risk of obsolescence.

Inventory holding cost higher.

3) Hedging

One of the techniques used to minimize the risk associated with fluctuation of prices is Hedging.

Hedging is used to protect an organization, or business from an open exposure in the foreign

exchange market. By using hedging, the trading party is protected from loss, - the risk of advance

changes in the price of an asset.

Hedging is used by both traders to eliminate foreign exchange risk in international and by

multinational corporations to avoid foreign exchange risks in the translation of their financial

statement into dollars.

In order to protect their business traders have got two options (i) hedging in Spot exchange rate

and (ii) hedging in Forward exchange rate.

(i) Hedging in Spot exchange rate

If the contract with the customer to buy or sell foreign currency is agreed upon and executed

137

immediately it is known as spot transaction and the rate quoted is the spot rate. Example:

purchase of an export bill. Here the customer tenders the bill for which the bank quotes a rate. If

the rate quoted by the bank is acceptable to the bank, the bill is purchased by the bank and the

account of the customer is credited with the amount.

(ii) Hedging in Forward exchange rate.

A “future” transaction takes place where the purchase is made now at the quoted price, while the

actual delivery will take place at a future date to be specified in the contract.

Forward rate:

The N-day forward rate is the rate which appears in a contract to exchange a currency for another N days in

the future. It is distinguished from the spot rate, which is the rate used in agreements to exchange one

currency for another immediately. No currency changes hand between the parties in a forward contract at the

time it is signed; the currency is exchanged at the maturity date of the contract N days in the future.

A forward exchange contract or simply a forward contract is one where a banker and a customer or another

bank enters into a contract to buy /sell a fixed amount of foreign currency at a specified future date at a

predetermined rate of exchange. the rate quoted for the transaction is called forward rate. Example: Bank

of India agrees to buy one month forward US$ 1million from Bank of Baroda. That means the delivery of

foreign exchange by Bank of Baroda to Bank of India will take place after one month from the date of

contract.

Forward premium (forward discount):

A forward premium (forward discount) is the proportion by which a country's forward exchange rate

exceeds (falls below) its spot rate. Premium and Discount Forward Rate may be the same as the spot rate .

then it is said to be ‘at per’ with the spot rate. But, it rarely happens. More often the forward rate may be

costlier or cheaper than the spot rate . The difference between forward rate and spot rate is known as

‘forward margin’. The forward margin either may be either premium or discount.

When the foreign currency is cheaper under forward rate than under the spot rate , the currency is said to be

at a premium. Under direct quotation , more Indian rupees will be needed for a unit of foreign currency

under the forward rate than under the spot rate. Therefore, premium is added to the spot rate to arrive at

the forward rate.

Under indirect quotation, for a Liven unit of Indian rupees the customer would get lesser units of foreign

currency than he would get by applying the spot rate. Therefore premium is deducted from the spot rate

to arrive the forward rate. The addition and deduction of premium is applicable both for purchase and sell

transaction.

When the foreign currency is cheaper under forward rate than under the spot rate, the currency is said to be

at a discount. Under direct quotation, fewer Indian rupees will be needed for getting unit of foreign currency

under the forward rate than under the spot. Therefore, discount is deducted from the spot rate to arrive

at the forward rate.

Under indirect quotation, for a given unit of Indian rupees, the customer would get more units of foreign

currency than he would get under the spot rate. Therefore, discount is added to the spot rate to arrive at

the forward rate.

Determinants of the forward premium:

138

The forward premium (or forward discount if the number is negative) is determined by the interest rate

differential between the United States and Canada. According to the Interest Rate Parity theorem, the

expected appreciation of the Canadian Dollar is equal to the difference between the U.S. and Canadian

interest rate. For example, if the interest rate in Canada is one percent higher than in the United States, over

a period of one year the Canadian Dollar will tend to depreciate by one percent. Note that a raise in

Canadian interest rates first lifts the exchange rate, and only then the CAD starts to depreciate. The interest

rate differential is based on comparable assets (with risk premium already factored in), for example,

Canadian and U.S. 90-day or 1-year treasury bills.

Condition of forward rate:

Insurance against exchange rate risk can be obtained through contracts in the forward market. Such activity

is called hedging. A hedge is the offset of a given position in a separate bu parallel market by an equal and

opposite position in which the effect of the offset reduces or eliminates the effects of a value change in both

positions. In simple terms, a hedge locks in the current value in a contract. The instrument for a hedge is

often a currency swap in which a spot contract is offset by an equal-amount forward contract.

Illustration:

Dollar is quoted in the inter bank market as follows: (simulated value)

Spot US$ 1=Rs.31.35 -31.40

1 Month forward 20 /30 pm

2 Month forward 40/50 pm

3 month forward 60/70 pm

Calculate 1month , 2Month and 3 Months forward rates for dollars.

This is a direct quotation. Premium should be added to spot rate to obtain forward rate.

Buying :- 1 Month (Rs.) 2 Months (Rs.) 3 Months (Rs.)

Spot Rate - 31.35 31.35 31.35

Add: Premium 00.20 00.40 00.60

Forward Rates 31.55 31.75 31.95

Selling :- 1 Month (Rs.) 2 Months (Rs.) 3 Months (Rs.)

Spot Rate 31.40 31.40 31.40

Add: Premium 00.30 00.50 00.70

Forward Rates 31.70 31.90 32.10

4) Forward buying / Market purchasing:

Definition: In this case a buyer may enter in to a long term contract with a vendor, say for one in

this one year vendors, and say for one year. In this one year time spam the delivery only a single

delivery.

Example: - suppose buyer enter in to contract in March for one year and seller supply the material

in September and it will be single delivery. But, the purchase contract inclusive of price, delivery

date and other terms concluded in January

Reasons:

i) It is a safeguard in regard to continuity of supplies.

ii) It protects the price over a long period.

iii) It is a safeguard in respect to standard of quality.

iv) For seasonal product forward buying can be seen.

139

5) Scheduled Buying

Definition: Scheduled buying is the process of procuring an item in slower deliveries according to

the delivery schedule furnished to the supplier by the buyer.

The salient characteristics of scheduled buying are:

i) A purchase order covering annual requirements is placed to the supplier.

ii) The supplier is given the estimate of the procurement needs covering a mutually agreed

period of time.

iii) When fresh delivery schedules are given to the supplier prior to completion of the previous

schedule. Fresh schedule supersedes the previous schedule.

iv) Monthly deliveries are usually specified except for perishable materials, bulky items and

others required in large quantities

Advantages:

i) This is an win-win situation where both buyer and seller enjoy the savings resulting from

regularity of production and smaller inventories.

ii) Buyer is assured of supply of goods while supplier is assured of business.

iii) Supplier can effectively plan his factors of production while buyer can plan his

requirements of finance.

Criteria:

Scheduled buying is best suited for –

Items of regular use, Proprietary items and items produced according buyer’s design.

6) Contract Buying

Definition (According to Spiegel): “Contract buying is the purchasing made under contract, usually

formal, of needed materials, the delivery of which is frequently spread over a period of time.”

Characteristics:

a) Contracts are given to suppliers for large amount of future requirements or for a certain

period.

b) Quantity received per occasion is small.

c) The cycle time between two consecutive receipts may be any period considering the value

of requirements, distance and the mode of transport;

d) The buying department usually finds sufficient time to secure competitive bids and

negotiate terms of contract.

Advantages:

i) It saves time and money of the company from the inviting quotations, preparing,

comparative statements, placing of orders, etc.

ii) It ensures regularity in supply.

iii) The buyer needs to keep very little working stock and safety stock. So that capital blockage

is minimum.

iv) The buyer can plan their financial requirement as they have a prior idea about payment to

vendor.

140

Types of contracts:

Contract buying is of three types:

Rate contract: In this case rate is fixed but, quantity is not fixed.

Running contract: Here the rate and the quantity both are fixed for the contract period.

Service contract: In this case various services are obtained periodically.

Criteria:

Contract buying is suited to the procurement of materials and production items of regular use.

7) Blanket Orders

Definition: Blanket orders refer to the purchase of variety of items from single source, usually a

middleman.

Characteristics:

a) A blanket order specifies the categories of items covered by the order;

b) The supplier is given requirements on phone who supplies at the prevailing prices with

discount.

c) The items covered by the order generally have low unit price;

d) More than one middlemen may be selected ensure right time of delivery

Responsibility of the buying department:

i) The middleman who is selected should be located nearer to buyer and should have large

stock facilities (warehouse) and who are known for their honesty and reliability.

ii) The buying department must watch the items in the groups and periodically check up

whether the demand for any item has risen considerably.

Criteria:

The method is best suited to general hardware, electrical supplies, stationery.

8) Tender Buying

Generally government departments and public sector undertakings in India follow this method of

buying.

Characteristics:

i) The buying department establishes a bidder’s list and invites them to submit bids

(quotation)

ii) Bids on receipt are evaluated by comparison and the right supplier is selected. Mainly

lowest price is the criterion of this method. But, when supplier quoting the lowest price has

questionable delivery time, quality, reliability or financial stability they may be evaluated

under different criteria.

Advantage:

i) By tender buying is the purchaser can select qualified supplier on the basis of competitive

price.

ii) It eliminates favoritism, patronage and personal preferences.

Disadvantages of the method:

141

Tender buying is costly and time-consuming.

Types of Tenders:

Tenders are of four types:

i) Single tender refers to the system of tendering wherein the details of the requirements are

communicated only to one firm.

ii) Limited or closed tender refers to the system of tendering wherein enquiry is sent to a

limited number of suppliers who are on the approved list of suppliers and bids are received

in response.

iii) Open tender system is the system of tendering wherein the enquiry is advertised in the

newspapers or periodicals. in response. It may be termed as ‘open tender’, ‘advertised

tender’, or ‘unlimited tender’ is used.

iv) Global tender is the system of tendering wherein the enquiry is advertised in the

newspapers and trade journals of not only of the home country but also in the foreign

country.

9) Seasonal Buying

Definition: “buying of the annual requirements of an item during its season”. This method is used

for items available in particular season only. Example: Food processing industry.

a) The items involved are seasonal and therefore need to be purchased and stocked in

sufficient quantities till the next season (e.g. oranges, sugarcane, apples, mangoes etc.).

b) Usually purchases are made directly from producers / farmers of the goods.

c) The items covered may be small in size but they are required in large quantity.

d) Market price is the lowest during the season. Therefore, the items can be purchased at the

cheapest rates:

Criteria:

Purely seasonal products

Items which are having high price in off season.

10) Group Purchasing

Definition: ‘buying of items in a single purchase order’.

Characteristics:

a) Items required in small quantities are classified into few basic groups. These basic groups

depend on the source of purchase.

b) Inventory levels are fixed for each item within each classified group.

c) One purchase order – one for each group – covering a number items within its group.

d) Stocks-on-hand are reviewed periodically.

e) Replenishment is also done

Advantages:

Group purchasing reduces clerical and delivery costs, because, one order is placed for a number

of varied small items instead of an individual order for each item.

11) Sub-Contracting

142

Definition: Sub-contracting is the hiring of another firm to perform some of the manufacturing

operations or assembling or producing certain parts and sub-assemblies to be incorporated into

the buyer’s end product.

Types of sub-contracting:

Sub-contracting is of two types:

i) The company makes some units of the final product on their own shop and buys balance

from outside.

ii) The company buys some assembly form outside.

iii) The company can do certain operations like electroplating, heat-treatment, rough

blanking etc. done from others

Conditions:

Sub-contracting is desirable when –

i) The product involves number of components requiring different types of machines.

ii) Special expertise is required for certain operations and this is not available in the buyer’s

firm.

iii) There is lack of capacity at the home plant

iv) If the cost of buying is less than cost of production then company may buy materials from

outside.

Responsibilities of the buying department:

i) The buying department has to locate, select and develop qualified sub-contractors who can

supply parts of right quality, in right quantity, at right cost in right time

ii) Sub- contractor should be located within close proximity. Because,

Transportation cost, and time is less.

Follow up is easy and less costly.

Buyer can have better control on supplier’s quality

iii) More than one sub-contractor should be selected for each component.

iv) Maintain supply of goods from alternate source in the event of any production hold-up with

one of the sub-contractors.

v) Buyer should ensure the quality of the materials which are required to make final product.

vi) Delivery scheduling is the most important aspect of sub-contracting.

vii) Buyer can give financial, marketing and administrative support to the supplier to ensure

time, price, delivery of goods ( in the time of natural condition and in the time of

emergency)

Central Purchase Organisation

A large firm in the public or private sector may have section-wise stores at different places. The

requirements of these stores can be satisfied by either of the following two methods:

i) Each store to make its own purchases.

ii) A central stores to make purchases and supply material in turn to section wise stores.

The advantages of central stores purchases are:

143

i) The central purchase organisation (CPO) can obtain quantity discounts, lower rate and

better contract terms due to large purchases made possible due to consolidating the

requirements of individual stores.

ii) Malpractices by individual purchase officers by some kind of understanding with the local

dealers which can result in purchase at higher prices are avoided.

iii) The Central Purchase Organization can exercise strict control on consumption thereby

minimizing the risk of malpractices.

iv) The central purchase organisation can contract directly with the manufacturers and obtain

items as per specifications. Individual section stores may not be able to do this.

Examples:

Reserve Bank of India, State Bank of India, etc.

Directorate General Suppliers & Disposal (DGS & D)

The DGS and D is the Central Purchasing Organisation for the various government departments. It

enters into contract with various firms for the supply of certain materials to the government

departments during the year at the agreed rate. A formal document raised for the purpose is called

“rate contract”.

Purchasing Policy and procedure

POLICY: A policy can be defined as a statement either expressed or implied of those principles

and rules that are set by company as guide.

Procedures: purchasing procedures should be standardized in an organization with scope and

provision of flexibility to accommodate any changes as per changes in the business environment

and commercial climate.

Example:- procedures of indent:-

When to indent

How to indent

What are the responsibilities & authorities regarding scrutiny, should be clearly mentioned.

In this way procedure regarding material requisition, vendor’s enlistment, enquiries, conditions of

purchase order, follow-up, inspection, delivery, guarantee and warranty, invoice, bill passing,

maintenance of records, performance appraisal of vendors should be clearly identified, expressed

or circulated.

Policy Manual of Material With Special Reference to Purchase

The condition necessary for the success of materials function from profit center point of view, must

incorporated in the form of a manual.

The policy manual familiarizes the procedures and guidelines to be observed. Obviously the

following list is only indicative and not exhaustive.

1) It defines responsibilities and authorities for purchase.

2) It intimates all concerned department about the systems and procedures of –

Indenting the materials.

Procurement.

Authorization do’s and don’ts and extent.

144

3) Buyer-vendor relationship with ethical standard.

4) Indicates the limits of purchasing power by different official at different level.

5) Unambiguous policies and procedures.

6) Clearly indicate the policy and procedures to be followed for

Indent

Tendering

Receiving quotations

Opening quotation

Approval from finance and legal department and concurrence of engineering dept. (if

required) before placement of final purchase order or letter of indent.

7) Promotes new ideas and suggestions for improvement of purchasing system.

8) Express the procedures of

Source selection

Vendor development

Vendor’s performance evaluation for rating and ranking purpose.

Relationship to be maintained between purchase dept. and other concerned dept. for

effective coordination.

9) Procedures of –

a) Negotiation with vendors

b) Follow-up and inspection system.

c) Guarantee and warranty

d) Passing bills and release of payment.

e) Purchase record and record keeping.

10) Legal aspect of purchasing

11) Management information system.

Vendor Rating and Source Selection

Reputed suppliers are intangible asset of any organization.

They are not only supplier of materials, but they also extremely important source of information

regarding market condition , price trend and general industrial climate.

Many organization have accepted source selection as a corporate policy. This brings fair

competition among the suppliers and supply failure are minimized.

Improper selection causing inferior goods and servicing has resulted in authority being shared with

the using department.

Therefore, proper source selection must b exercised by the purchasing department to avoid

possibilities of interdepartmental conflict.

Procedures:

Procedures of source selection involves the preparation of an exhaustive list of prospective supplier and the

successive elimination from this list on various grounds until the number has been reduced to the one or ,

few to be forwarded wit the business.

The stages of procedures as follows:

1) Searching stage: The need for a materials or product is starting point. The search process begins

with the finalization of specification in consultation with technical department.

145

It involves identifying the source of supply.

It can be obtained from various journals and news paper advertisement.

Supplier representative also be a good source of information.

2) Selection stage: The selection of supplier starts with floating of enquiries by the purchaser.

Certain progressive suppliers often contact buyers with a request to be included in the buyer’s list of

approved suppliers.

The buyer can also visit and inspect the suppliers factory to know the details.

3) Negotiation and trial order: After selection the process of negotiation will be started for placing the

trial orders. Correct and cordial relationship with the vendors are essential for mutual cooperation.

4) Rating and experience stage: After the trial order are executed, it becomes necessary for the

buyer to rate the vendors to enable him for determining how he should apportion his requirements

among vendors.

Special Aspect of Source Selection

Local source:

Generally local source are preferred, provided they meet the requirements of buyer in terms of

quality, delivery and price.

A personal follow-up or a local “phone call” is enough for quicker delivery.

In fact, some organization prefers local suppliers even though they may not compare favorably with

outside supplier.

In India may big organization encourage ancillary suppliers in and around their plants through

technical and financial assistance.

Subcontracting: Selection of source for sub contracting is another special issue. The manufacturer may

decide to “off-load” some product to suppliers s as to facilitate scheduling of production in the plant. It also

enables better utilization of manpower.

Small or big? If the requirement is small, then obviously small suppliers are prime choice.

A personalized contact can be established and because he is small, he is likely to have fewer customer, will

be more loyal and will meet even unusual request.

Big suppliers are equipped to meet larger requirements they usually have reserve facilities and may thus be

able to meet additional requirement.

Development of Vendors – Necessity and Importance

1) Sometimes it can happen that there is no supplier of an item or, the item is a new one. In this case

development of vendor is very much essential.

a) first , is to locate a manufacturer who produces an item almost similar to the one required.

b) He may be encouraged t take up the new line of production.

c) Often development costs are shared by the purchasing company, and even expertise is

shared by two company.

2) To facilitate procurement of materials need all organizations require to develop source of supply for

the material requirement.

146

3) Vendor development helps to develop sources for new material and enlarge/ increase source for

other materials.

4) Revolution in the field of materials management field such as , MRP, KANBAN, JIT, etc.

necessitates structured discipline of material flow which leads to development of new sources.

5) Establishment of indigenous sources of supply to substitute imported materials

6) To incorporate functional improvement.

7) To reduce overall cost of a product.

8) In case of monopoly situation the price of the goods are frequently changed without any reasons,

even commercial terms and conditions like payment terms, liquidated damage, performances

guarantee, etc are not accepted by all of the monopoly vendors for different items. If few more

parallel sources can be located, then better price , improve delivery , better quality , etc. may be

obtained.

9) Due to delay of the materials by the existing vendors, as a result stock out situation arises which

leads to stoppage of production.

10) When the vendor is not at all interested to reply or, provide acceptance letter of an order, within

stipulated time frame, then others vendors can supply the product.

11) Proximity of vendors is necessary. Because, a local buyer is always welcome than the buyer of

distant area.

12) Diversification will force the requirement of vendors.

13) When capacity of current vendors do not meet with the demand of the buyer, and then buyer needs

other vendors.

14) To ensure the availability from more than one sources.

Factors influencing Source/ vendor selection

1) Price: this is the most obvious factor, along with any discount offer, although it may not be the most

important. Because firm spend a large amount of money of their total income on purchasing items,

finding supplier who charges low prices is a key objective in vendor selection.

2) Quality: quality of a supplier’s materials also is important because a company may be willing to

spend money to obtain materials of high quality.

3) Delivery: shorter lead times and on-time delivery help the buying firm maintain acceptable customer

service with fewer inventories. The benefit of fast, on time deliveries applies to both service and

manufacturing sectors. Many manufacturers demand quick, dependable deliveries from their

suppliers to minimize inventory level.

4) Services: special services can sometime be very important in choosing a supplier. Replacement of

defective item supplied, instruction in the use of equipment, repair of equipment and other similar

services can play a key role in preferring one supplier over another.

5) Location: location of supplier can have impact on shipping time, transportation cost and response

time for rush orders or emergency service. Local buying can create goodwill in the community by

helping the local company.

6) Inventory policy of the supplier: if a supplier maintains an inventory policy of keeping spare parts on

hand, this could be helpful in case of an emergency equipment break- down.

147

7) Flexibility: the willingness and ability of a supplier to respond to changes in demand and to accept

design changes could be important considerations.

In addition to the above major factors several other factors are also considered in supplier selection.

1. Reserve capacity: A supplier with an adequate reserve of productive facilities can respond to increased

requirements of customer.

2. Internal factors and quality control procedures: the stage of a supplier’s technological

development and its ability to keep up with current methods are also considered to choose an

effective source.

3. Labour Relation: A possible interference with the continuity of production in a supplier’s plant may

originate with the workers themselves. Strikes or production slow down are directly related the

labour relations of the supplier.

4. Warranties: Service may include the kind and form of warranty that accompany the supplier’s

products, i.e., installation, maintenance, replacement of parts etc.

5. Plant visits: it is often desirable for a representative of the production or engineering departments

to accompany the buyer on such visits, especially if highly technical products are involved.

Types of Vendor Development

1) The vendor is given a plot outside the buyer’s premises:

The buyer also gives them all assistance with tool and gadgets.

The entire product of the vendor may not be consumed by buyer itself and vendor has the liberty to

sell the balance materials in the market.

The vendor is assured of the fixed sales of his production by the buyer’s firm.

The buyer may give them managerial, financial, and technical help.

These are two types:

a) Local source (nearby source): The source of supply may be inside the state where the buyer’s plant is

situated. The buyer develops them with technical, managerial and financial assistance so that they get

the product on desire.

Advantages:

Closer cooperation because of proximity.

Delivery dates are more certain as transportation sonly the minor factor.

Rush orders are likely to be filled faster.

Saving in entry tax.

Implied social responsibilities to the community are fulfilled.

Shorter lead time can frequently permit in inventory. In effect the seller carries the buyer inventory.

Disputes are more easily resolved.

b) Far away source:

The vendor can be located any where outside the state of buyer.

Advantages:-

As a result of economies of scale the vendor, in some situation can be more efficient and offer

higher quality of better services at a lower price.

148

Sales tax – since, the central tax is applicable which is quite lower than the state sales tax.

2) captive development:

In this type, the vendor’s plant is inside the buyer’s premises. An agreement is made with the vendor that a

section of the product will be solely manufactured for the buyer and buyer has the first option to get it.

Advantages:-

Buyer can get it at lowest possible cost.

Saving in transportation ( time & cost)

Delivery is assured. This enables the buyer to operate at low inventory.

Considerable savings in sales tax.

Techniques and Procedures of Vendor Development

If the current vendor(s) is not capable to supply goods in right time in right manner then company has to

develop some other vendors. the techniques & procedures of vendor development are as follows.

1st step: identify the problem of current vendor.

2nd step: investigate the genuinity of the problem.

3rd step: in case of a genuine problem the buyer has to identify the area problem after identification buyer

may give assistance to the vendor.

4th step: sit with the supplier with the problem.

5th step: if the vendor posses any managerial incapability, then buyer may assist them with managerial

support. Else, buyer proposed them to be sole vendor of them or, negotiate with other vendor apart from this

vendor.

Vendor Evaluation

Purpose:

Periodically vendor analysis is a must for such analysis, which is essential to build up efficient source of

supply. This analysis seeks to evaluate each vendor, past performance and overall worth to buying

company.

Vendors are generally evaluated on the basis of the following attributes.

i) Delivery as per schedule.

ii) Reliable quality.

iii) Quick replacement of rejection.

iv) Supplier with out asking for any financial consideration.

v) Answering queries readily.

Performance will be determined by applying decision matrix system. In this system weightage is determined

which indicate the relative importance of each attributes and this is known as Attribute Weightage Coefficient

(AWC).

During course of inspection of suppliers premises all the following factors are also to be ascertained –

1) Technical know how.

2) Financial capability

3) Organization set-up and man power.

149

4) Records of past performance of supplier in delivering materials in right time with right quality and

quantity.

5) Own manufacturing units.

6) Staff and line capacity of firm.

7) Service level.

8) History of labor relation.

9) Quality control and testing facilities.

10) Financial adequacy and stability

11) R&D facilities.

12) After sales service.

13) Reputation in the market regarding price, quality, quantity and behavior.

14) Whether he is vendor or agent of vendor.

Levels of Vendor Evaluation:

i. Product level: At this level, the focus is on establishing and improving the vendor’s product quality.

Incoming inspection and quality inspection are carried out to establish the degree of quality

conformance of incoming materials.

ii. Process level: At this level the production process is closely investigated rather than focusing on

product inspection. It is because the quality of product depends on manufacturing process.

iii. Quality assurance system Level: quality assurance means checking the way in which quality

inspection procedures are developed, maintained and improved.

iv. Company level: In this approach, not only quality aspects are focused, but also financial aspects

are taken into consideration. The quality of the management of the vendor firm is assessed. In this

way the buyer tries to establish how competitive that a particular supplier will be in future.

Different Methods of Vendor Evaluation

1) Categorical method:-

In this method the buyer makes out a list of all the factors, which he considers necessary for

evaluation, and at periodic intervals he makes out a performance report.

The buyer may also seek the help of all dept. i.e., production or, quality control dept. in order to

determine the grading given.

A performance standard may be decided upon the points.

i.e., 80-100= excellent

70-80 = very good

60-70 = good

50-60 = satisfactory

40-50 = poor.

On the basis of points meeting between buyers and supplier should be held.

Low rated suppliers should be warned and given chances for one or more times, if they do not show

any improvement, they will be removed.

Merits:

150

1) It depends upon the performance of the vendor.

2) It is a very inexpensive method.

Demerits:

1) It totally depends on experience and ability of the buyer.

2) If buyer is lazy and does not have ability to do it periodically then it loose importance and ability.

2) Weighted point method:

Suitable point should be allotted on different criteria such as, quality conformation, delivery scheduling, total

price, innovative attitude, etc.

Depending upon the prime use of an organization, the point of each factor can be earmarked for some

users.

Point should be allotted according to preference lead down by the top management to achieve the corporate

objective and mission.

Example: (A company for which quality is the key factor)

Quality – 50 points

Delivery – 30 points

Price – 15 points

Service – 05 points

For vendor ‘X’

i) for quality, we calculate Quality Performance Ratio (QPR) =

No. of Delivery without rejection / Total No. of deliveries.

Say, total no. of deliveries =100.

Deliveries without rejection =70

Therefore, QPR = 70/100 = .7 = 70%

ii) for Service, we calculate Service Performance Ratio ( SPR) =

No. of calls Attended / Total No. of deliveries.

Say no. of calls attended = 10

SPR = 10/100 = .1

iii) Price Performance Ratio (PPR) = lowest offer received / price offered by vendor

Example:

Vendor ‘X’ quoted – Rs. 40/- per unit.

Vendor ‘Y’ quoted = Rs. 50/- per unit.

Vendor ‘Z’ quoted = Rs. 60/- per unit.

PPR for –

Vendor ‘X’ = 40/40 = 1

Vendor ‘Y’ = 40 /50 =. 8

Vendor ‘ Z’ = 40/60 = .67

Note : in ideal situation the ratio should be =1

iv) Delivery Performance Ratio ( DPR) =

Nos. of delivery on schedule / total no. of delivery = 60 /100 =. 6

151

Total weightage = (50 * QPR) + (30 * DPR) + (15 * PPR) + ( 5* SPR)

For vendor ‘X’ –

TW = (50*. 5) + (30*. 6) + (15 * 1) + (5*. 1) = 35 +18 +15 +. 5 = 68. 5

In this way value can be compared with other vendors.

Merits:

a) Any number of evaluation factors can be included and they can be assigned relating weight as

required by the organization.

b) Subjective evaluation is minimized. 3) Cost Ratio Methods: it involves a good systems of determining the actual costs incurred in purchasing, follow-up, transaction, packaging, receiving, etc. and determining the unit cost incurred by the buyer on the material when actually received. The higher the cost, the lower the supplier’s comparative rating.

Example: Cost related to quality— Vendor’s Factory visit – Rs. 3000/- Approval of sample - Rs. 1000/- Inspection cost - Rs. 2000/- Cost of rejected materials- Rs. 800/ Cost of losses in production- RS. 100/-

Total Rs. 6900/- The value of purchase = Rs. 6, 90,000/- Hence, quality –cost ratio = 6900:6, 90,000 = 1:100 = .01 =1% Cost related to Delivery – Cost of telegram, fax, telephone, etc = Rs. 900/- Visit to plant for expediting = Rs. 6000/-

Total = Rs. 6900/- Delivery –cost ratio = 6900:6,90000 = 1:100 =.01 = 1%

The three methods described above are intended to enable buyer to exercise better judgment over selecting his vendor.

Vendor evaluation and Selection process

1. Recognize the need for vendor selection

2. Identify key sourcing requirement

3. Determine sourcing strategy

4. Identify potential supply source.

5. Limit vendor in pool

6. Determine the method of vendor

evaluation and selection

7. Select Vendor

152

1. Recognise the need for vendor selection:

Recognizing that a requirement exists to evaluate and select a supplier for an item or service is the first step

of the evaluation and selection process. Purchasing may participate in a product development team to get

an early insight into new product development plans and thereby obtain some preliminary specifications on

the type of materials, services or process required. This preliminary information may trigger initial evaluation

of potential sources of supply in anticipation of future material need. The recognition of a purchase

requirement occurs when a standard purchase requisition is received by purchase department. Also, a

supplier selection decision may arise when existing supplier fail to perform satisfactorily. Changing supplier

for existing items is termed as supplier switching.

2. Identify key sourcing requirement:

The requirement that are crucial for a purchase often differ widely from item to item, organization to

organization or industry to industry – while different requirements exist for each evaluation area, the

minimum evaluation criteria include supplier quality, cost, delivery – performance, and technological

capacity.

3. Determine sourcing strategy:

There is no single sourcing strategy which can satisfy the requirements of all purchases. Because of this,

the purchasing strategy adopted for a particular item or service will influence the approach adopted for

supplier evaluation and selection process.

A commodity sourcing strategy provides direction on the overall objectives to be achieved for the commodity

such as the number of supplier that will be used (multiple sourcing), the type of contract ( long term or short

term) and the type of supplier to be evaluated.

Some of the strategy options available are:

Single versus multiple supply source.

Short-term versus long-term purchase contracts.

Choosing suppliers who provides product design support versus those who lack design support

capacity.

Developing a close working relationship versus traditional purchasing.

The strategy option selected has great influence on the supplier selection and evaluation process.

4. Identify potential Supply Sources:

Purchasers rely on various source of information when identifying potential sources of supply several

variables determine the degree to which a buyer must search for information about supplier.

Strategy importance of purchaser/ technical complexity requirement

Capacity of existing supply base to satisfy low cost, delivery, technology

and service requirements

High Low

High Minor-moderate information search

Minor information search

Low Major –moderate information

Major information search

153

A major source of information comes from existing suppliers. Buyers often expect existing suppliers to

satisfy a new purchase requirement. The advantage is that doing business with an already familiar supplier

thereby saving time and resources required to evaluate a new items is that the purchasing manager may

never know whether better supplier are available without information about other sources of supply.

Selecting an existing supplier for a new purchase requirement may be recommended if a list of preferred

suppliers is maintained. A preferred supplier status conveys immediate information about the supplier’s

overall performance and competency.

Other information sources are:

a) Sales representatives.

b) Information Data bases.

c) Experience of purchasing personnel by which they gain knowledge about potential supplier.

d) Trade journals and trade directories.

e) Industrial trade shows or exhibition.

f) Other supplier.

g) Purchasing personnel of other units.

h) Internet search.

5. Limit Supplier in a Pool:

Based on the information gathered, the purchaser may identify many potential supply sources from which to

choose. Because the performance capabilities of suppliers vary widely and also because of limited resource

available to the purchaser, an in-depth visit to all potential supplier or evaluation of all of them will not be

possible. Hence, a preliminary evaluation of potential supplier is often used to narrow down the choice

before conducting an in-depth formal evaluation.

The various criteria used to making the preliminary evaluation are:

i) Financial Risk analysis.

ii) Evaluation of current and previous supplier performance.

iii) Evaluation of information provided by suppliers.

6. Determine the method of supplier evaluation and selection:

Based on the preliminary evaluation, supplier who are not capable are eliminated. The buyer or purchase

team must decide hoe to evaluate the remaining suppliers who may appear to be equally qualified.

7. Select Supplier:

The final step of evaluation and selection process is to select one supplier or more than one supplier. The

selection methods vary widely depending on the purchase item under consideration.

Vendor Rating

Vendor rating system is an asset and valuable tools of making the purchase decision and also providing a

154

feedback to suppliers with low rating to encourage improvement in their performance

After selecting the most eligible vendor, the buyer must “educate” them with regard to his various

requirement.

It is important to evaluate vendor’s performance as apart of continuing process of vendor development.

Example: Relative weights given to different parameters.

Quality – 40

Delivery – 40

Price – 20

i) Quality points = (quality product accepted / total quantity supplied) *40.

j) Delivery points = (Quantity delivered in time / Quantity ordered) *40

k) Price point = (last normal or emergency purchase rate / ordered price) * 20

Delphi survey was conducted in certain organization to identify the factors and corresponding weightages,

which need to be considered for designing an effective system to monitor the performance of supplier.

In order to ascertain the view of management as to the criteria to be adopted for selecting a supplier a list of

8 criteria was circulated to 25 managers and purchase officers. Blank spaces were left for individuals to add

additional criteria.

The criteria chosen were:

a) Quality of product.

b) Price of product.

c) Maintaining delivery date.

d) After sales service.

e) Reputation in the market.

f) Ancillary unit supply.

g) Technological expertise / experience of supply.

h) Financial standing.

The twenty three completed performances were received back and ranking was as follows.

Criteria Position

a) Quality of product. I

b) Price of product. III

c) Maintaining delivery date. II

l) After sales service. VII

m) Reputation in the market. VI

n) Ancillary unit supply. VIII

o) Technological expertise / experience of supply. IV

p) Financial standing. V

The following additional criteria were also received—

b) payment terms

c) Testing facilities available.

d) Proximity of supplier.

e) Installed capacity

155

Objectives of vendor rating:

I. To establish a procedure by which quality control, purchasing and user departments can fulfill the

corporate objective of obtaining quality product at minimum cost.

II. To develop an effective tool for rectification of defects, improving the vendor’s ability to serve more

satisfactorily and as a basis for making future purchase decisions.

III. To periodically evaluate the written evaluation aspects relating to quality, quantity, price and service

pertaining to the vendor.

Advantages of Vendor Rating:

i. An efficient vendor rating system obtains the best vendor for the buyer organization which saves both

and money and also achieve the best value for money spent on purchases.

ii. Provide scientific vendor rating system, which improves the image of the purchasing executive.

iii. Rates the entire performance of the vendors and is not guided by a narrow vision.

iv. Provide the buyer additional information on the capabilities of the vendor with regard to know-how,

testing, transport, contractual willingness etc.

v. Objectively compares performance of vendors and improves their performance.

vi. Decision to disqualify , blacklist or discriminate the existing vendors can be arrived at on an objective

basis.

vii. Inculcate a competitive spirit among vendors.

viii. Vendors rating can be used as an important mechanism to allocate the share of business amongst a

large number of supplier.

ix. Vendor rating not only enables the buyer organization to know the performance of their suppliers but

also gives an idea as to how much they out-perform their competitors regarding price, quality, lead-time,

split shipment, service , technical assistance, meeting in emergency, ad hoc requirement of buyers etc.

Negotiation

Negotiation means conferring, discussing, bargaining to reach an agreement on business

transaction.

Objective:

1) To obtain fair and reasonable price for the specified quality.

2) To influence supplier to perform the contract in time.

3) To exert some amount of control over performance of supplier

4) To persuade the supplier to give maximum cooperation to the buyer company.

5) To develop a sound and continuing relationship with the competent supplier.

Negotiation in purchasing becomes necessary on the following circumstances:

1) Competitive bidding is missing.

2) Many variable factors in quality and service.

3) Control over the design and standard set by buyers.

4) Business risk can not be predicted.

5) When tooling and set-up cost is high.

6) Long time of producing the purchased item.

156

7) Frequent interruption in production.

8) Analysis is required in case of make or buy decision.

Techniques of Negotiation

The known techniques for Negotiations are price analysis, persuasion, discussion, interrogation

investigation, staging walk out, prolong silence, weighing pros and cons., offensive strategies,

blow hot and cold, suggesting complicated formula and learning curve.

A successful Negotiation has to posses the qualities of politeness persistence, persuasiveness,

clear thinking, logical analysis, optimism, knock of getting along with people, ability to plan and be

thick skinned while negotiating.

Tactics and Strategy in Negotiation

‘Tactics and Strategy’ should not be taken as one. ‘Strategy’ refers to a basic plan of action

chosen to achieve a given objective. Where as tactics refer to the means which is adopted to

translate the plan in to action. Strategy is a plan of action, tactics is the means to achieve it.

Phasing the Negotiation:

Strategy can be represented by there stages or phasing which is called phasing of Negotiation.

Phase I → Pre negotiation phase

Phase II → Meeting phase

Phase III → Post negotiation phase

Phase I → Pre-negotiation phase

In the pre negotiation phase information is received and analyzed, objectives for negotiation are

defined, strategies are developed and preliminary tactics are discussed.

Phase II → Meeting phase

It is actually discussion phase. During this phase explanatory information are collected and

analyzed. This bargaining is done and argument is arrived at. The matching phase may not be

completed in one sitting.

If the member of meeting is necessitated it may further be planned out in to the following.

i) The introductory meeting phase or, the explanatory meeting phase in which additional

explanatory information may be collected and the meeting be adjourned for analysis inner

circle discussions, evolution by strategies, and discussions on preliminary tactics.

ii) After such a meeting another meeting – called discussion meeting – may be called at a

mutually convenient date and time. This meeting may be utilized for full length discussions

and sorting out many problems arising out of discussions and further analysis. Such

discussions are held with a view to arrive to a certain decision so that a final argument may

drafted and contract signed.

iii) When all the clarifications have come through and all the problems are sorted out obviously

there remains only drafting of agreement the points of which are decided at the discussion

meeting. A meeting for the purpose of signature on the drafted agreement may then be

arranged so that the parties may enter into a contract.

(I) Prenegotiation

Phase 2) Objectives

defined → 1) Information Recd.

and information

analysed

→ → 3) Strategies developed

→ 4) Preliminary

Tactics

157

Phase III → Post negotiation phase

The post – negotiation phase may also be called execution phase. The post negotiation phase

may be shown diagrammatically as wonder.

Negotiating Guidelines:

1) Aim to persuade.

2) Remember the importance of mutual respect and that most negotiations have a futurity.

3) Try to exclude emotion from the proceedings.

4) Neither under estimate nor overestimate the other party’s skill information or intelligence.

5) Do not fall into the trap of thinking that the other party’s derive comply with the same norms

as yours.

6) Clearly indicate the potential mutual benefits of the position which you have taken.

7) Reinforce positive progress enrooted through the negotiation by recapitulating mutual gains

and clarifying the effect of those gains.

8) Do not treat negotiation as a debate for scoring points.

9) Do not be afraid to say “No”.

10) Do not hurry to agreement.

11) Emphasis on positive side of agreement that negative.

12) Persistence and determination can toil the balance even when the power advantages are

in the hands of the other party.

Make or Buy Decision

It is question of deciding that at what phase of manufacturing or purchasing a component should

be purchased. An undertaking must buy a component or assemble completely from outside

supplier, buy it semi-finished or buy the raw material. Make or buy decision has to be made very

carefully.

The question of make or buy decision arises on the following situation :

1) In case of a new product or substantial modification of any existing product.

(II) Meeting

Phase → 1) The two parties

introduced and pleasentry exchanged

→ 2) Additional and explanationary

information asked for and collected

→ 3) The information so received

analysed

4) Issues

discussed

5) Agreement

arrived at

↓

Introductory

Meeting

Second and subsequent

Discussion Meeting

Agreemen

t Meeting

Passing

of orders

Inspection at

Source Materials

Received

Inspection

on Receipt

Materials accepted on

Rejected

Recording

Storage and Preservatio

n

Payments

158

2) Unsatisfactory supplier.

3) Periods of sales growth or decline

Factors to be considered:

1) Cost consideration: In this case company has to consider the total cost. If the total cost is

higher in case of “make” the product then they can go for purchasing the product. The following

problem explain this proposition.

Problem:

A factory is producing 4 types of articles in condition of full capacity working, a decision has to be

made as to which article shall be bought out & which one shall be manufactured in the factory. The

cost of manufacture and bought up cost of 4 article are as follows.

Cost / article A B C D

Marginal cost 49 55 70 75

Fixed cost 10 20 25 70

Total cost 59 75 95 145

Purchased price 46 84 115 128

Determine with the help of mathematics which item you will be purchasing.

Ans: If the company purchases 4 articles from outside, then company has to pay purchase price

+ fixed price/ article

Cost / article A B C D

Purchased cost 46 84 115 128

Fixed cost 10 20 25 70

Total cost 56 104 190 198

Previous cost 59 75 95 145

Only incase of A the purchasing price is lower than “making” price . that’s why they can purchase

only item no. A from out side sources. But, incase of other three (3) items the “making” price is

lower than the “purchasing” price. so they need not buy these three product from outside sources.

1) Plant capacity: company has to look after the plant capacity. Whether the present plant

capacity will be able to make an item or not or they have to determine how much cost will be

necessary to increase the capacity and whether this increasing capacity is commercially viable

or not.

2) Quality: In this cut- throat competitive age a company can not compromise with their quality.

To retain its quality and improve it they have to look after the following factors:

a) Whether present supplier supplies the item with standardized quality.

b) Shall we make the same item with same quality standard and within that cost?

c) Any other supplier who supplies this material with lower / same cost.

d) Is their any foreign company who can supply this in same cost.

3) Quantity: The quantity totally depends on plant capacity and demand of the materials and

demand of the end-product as well.

In the following cases decision should be made in favor of “Make item”:

1) Less expensive in making.

159

2) Desire to integrate plant operation.

3) Productive use of excess plant capacity.

4) To keep and maintain design secrecy.

5) In case of unreliable supplier.

6) Need to exert direct control over quality and production.

7) Desire to maintain desire labor force.

In case of making an item the following cost should be considered:

1) Delivered raw material cost

2) Direct labor cost

3) Incremental overhead cost

4) Factory overhead

5) Managerial overhead.

6) Purchasing overhead.

7) Inventory carrying overhead.

8) Capital.

In the following cases decision should be made in favor of “Buy item”:

1) Less expensive by buying

2) Suppliers have got special knowledge about the particular item

3) Small volume requirement/ seasonal requirement.

4) Having limited production facilities.

5) Desire to maintain a multiple source policy

6) Indirect managerial cost.

7) Desire to maintain stable work force to rising sales.

Legal Aspects of Buying

§ 2.13.1 Legal aspect of purchasing – rules and regulation regarding purchasing

The Indian “sale of goods” act,1930 and “Indian contract Act”, 1872 cover some of the important

legal aspects.

Materials manage and purchasing manager should know some of the legal aspects, such as 1)

law of agency, 2) Law of contracts, 3) law pertaining to sales of goods and 4) Arbitration.

1) Law of agency:

In this era trans-nation business enables a business man to depend up on the service of a person

is called Agent.

Agent: An agent is person employed to act on behalf of another called principal, for the

purpose of bringing the principal in to contractual relationship with third person.

Essential of relationship of Agency:

i) Agreement between principal and agency.

ii) Intention of agent to act on behalf of principal.

1) Agreement:

Agency depends on agreement but not on contract. There is no consideration is necessary.

Principal has to agree to be represented by the Agent is sufficient determinant.

This relationship can be created by the express agreement and by the implied agreement.

160

a) Expressed agreement: it is usual power of attorney within stamp paper.

b) Implied agreement: Agency is not contractual in nature.

A B C

2) Law of contract:

The Indian contract Act, 1872 (Act IX of 1872) lays down certain general rules regarding

contracts. Sec (6) of Indian Law of Contract provides that “An agreement when enforceable by

law” is a contract.

A contract has been defined as “an agreement enforceable by law” or “a legal binding, agreement

between two or, more persons b which rights are acquired by one or more to act or, bearance on

the part of other or others.

In the definition there are two things – agreement and enforceability by law.

To form an agreement there must be n offer from one party and acceptance by another

party.

Agreement = offer+ acceptance.

But, social agreement is not contract. Contracts are those agreement which are

enforceable by law courts. So , contract = Agreement + enforceable by law.

Therefore, all contracts are agreement but all agreements are not contract.

Essential Elements of Contract

1) Offer and acceptance: There must be lawful offer by a party and lawful acceptance by another

party.

2) Legal relationship: The agreement must create legal relationship between two parties.

3) Lawful consideration: The agreement to be enforceable by law must be supported by a

consideration. The agreement is legally enforceable only when the parties give something and

get something in return.

4) Capacity of parties -- competency: The parties to the agreement must be competent o enter in

to the contract.

He or she is of –

Sound mind

Age of majority.

Not disqualified from contracting by any law to which he is a subject.

5) Free and genuine consent:- Both the parties must be of the same min on all the material terms

and condition.

6) Lawful object: the object must be lawful.

7) Agreement not declared void – the agreement must not have been declared void by any law of

the country.

a) Statutorily declared void:

Sec 26: Any agreement restraining the degree of freedom of choice of marriage in respect of

adult is void.

Sec 27: Freedom of commerce, trade, business, unreasonable restriction on commerce, trade,

business to any one is void.

Void agreement

a) Not fulfilling essential requirement b) Statutorily declared void sec

(26-30) of contract act, 1872

161

Sec 28: Full restriction on legal proceeding is void.

Sec 29: If language of a contractual not meaningful and no capable to mean anything that is

vague, then the agreement is void.

Sec 30: ( wagering agreement or contract) – it is an agreement either parties stands to gain or

loose depending upon the outcome of an uncertain event over which both the parties have no

control , is void.

8) Certainty and possibility of performance: the terms and condition must be certain and not

vague.

9) Legal formalities: the agreement may be oral or, in writing. Where it is in writing is must comply

with the necessary legal formalities as to writing, registration and attestation.

3) Sale Of Goods Act, 1930:

When an offer to sell or buy goods for a price is made , It is known as contract of sale. However, it

is binding only when accepted by the buyer and his acceptance is communicated to the seller on

the terms and conditions is equivalent to a rejection of the original offer.

Definition of sale

Sale: Sale is defined by Indian Sale of Goods Act, 1930 as:

“A contract of sale of goods is a contract whereby the seller transfer or agrees to transfer the

property in goods to the buyer for a price”.

From the above definition of a sale, the following may be derived as essential features of a sale:

1) A sale is a bilateral contract.

2) Money consideration is a must for a sale of goods.

3) There is distinction between sale and contract of work and material. But, according to Avtar

singh “ the dividing line between the two is not very clear. The only conclusion that can be

drawn from English authorities is that every case must be judged of by itself”.

4) Goods must be a subject –matter of the contract for sale. The “ goods” is defined by

Section 2(7) of Indian Sale of Goods Act, 1930 as under:

“Goods means every kind of movable property other than actionable claims and money;

and includes stocks and shares, growing crops, grass, and things attached to or forming

part of the land which are agreed to be severed before sale or under the contract of sale”

Condition: - It is stipulation in a contract of sale of goods, which is so essential to the fulfillment of

the contract.

Important Ingredients of a transaction of sale:

- There must be two competent parties. ( buyer and seller)

- There must be definite goods in the contract of sale.

- Goods must be in deliverable form.

- Title of goods or effects transfer of goods.

- Must be concluded by delivery in one hand and payment of price (

consideration in one hand)

Document for title of goods:-

- Dock warrant

- Bill of loading

- railway receipt, etc.

4) Arbitration:

Arbitration is a judicial process under which one or more outsider render binding award in the merit

of the dispute.

162

Voluntary arbitration is only in a name, in reality it is same as adjudication.

Question 1

Discuss some of the legal aspects of buying. Explain the law of agency in

detail.

Or

Discuss the legal duties and responsibilities of purchase manager regarding

buying of materials.

Answer:

It is the duty of purchase manager to see the finance available before placing order for purchases.

The purchase manager being a capable person is expected to know the basic laws regarding the

law of agency, law of Sale of Goods Act, law relating to sales tax, law relating to transport, law

relating to excise etc.

Law of Agency

In legal term such persons who provide services are called agents. This is a law pertaining to the

relationship between the agent and the principal and is known as law of agency.

Section 182 of the Act defines an agent as “person employed to do any Act for others or to

represent another in dealing with third persons. The person for whom such Act is done, or who is

represented, is called the “principal”. The contract of law may be in writing or oral; when their law

is in writing, it is in the form of “Power of Attorney”.

The above definition is wide enough.

Essentials of an Agency

There are two essentials for agency: (a) Agreement between the principal and his agent and (b)

Intention of agent to act on behalf of the principal.

(a) Agreement: It is very essential that agency will be created when there is an agreement. It is

also true that no consideration is needed for creation of an agency. The fact that the principal has

agreed to be represented by the agent is sufficient to principal to support the contract of agency. It

is true that the agent is remunerated by the principal.

The relationship between agent and principal may be created by the express agreement and by

163

implied agreement.

Agency by Express Agreement: A contract of agency may be created by an express agreement.

Normally the authority given by the principal in his agent binds the principal by the acts done within

the scope of his authority. The usual form of written contract of agency is the power of Attorney on

stamped paper.

Agency by Implied Agreement: Agency is not necessarily contractual in nature. The existence

of agency may in certain cases be implied when it is to be inferred from the circumstances of the

case. For example, ‘A’ owns a shop in Delhi himself living in Kolkata. The shop is being looked

after by ‘B’ and during the course of business, he buys ordinary goods from ‘C’ for the purpose of

running the ship, and pays for them out of ‘A’s fund with his knowledge. Here, ‘B’ has implied

authority from ‘A’ to order goods from ‘C’ and make payment in the name of ‘A’.

The implied agency arises when the principal conducts himself towards the agent or the third

parties, in such a manner as if the principal had conceded to the appointment of the agent.

Implied agency includes Agency by Estoppels, Agency by Holding out, and Agency by Necessity.

A detailed study of such agencies is beyond the scope of this text.

Creation of Agency

The law of agency between agent and principal can be created in any of the following ways:

i) By appointment either by words or by writing;

ii) By conduct either the principal or the agent behaving as principal and agent respectively

though the concerned parties might have not expressed in clear terms;

iii) By situation created by the parties though again there may not have been any expression in

clear terms;

iv) By necessity of the case, that is, agency of necessity;

v) By ratification of an act not authorized previously.

Duties of an Agent:

The following may be described as duties of an agent:

1. To avoid conflict of interest between him and his principal in particular.

2. To execute the mandate given to him by the principal.

3. To follow instructions or accepted customs. The agent is bound to go by the directions of his

principal. The agent may be held liable for the loss, if he does not abide by the instructions

or follow the accepted customs.

4. To take reasonable care and skill, which is expected to a man of average caution.

5. Not to delegate since agent himself is the creation of delegation by the principal.

6. Not to make secret of any profit which he has earned due to creation of the agency.

7. To remit money whatever has been received on behalf of the principal and which is due to

him.

Rights of an Agent:

The following are the some of the important rights of an agent:

1. Right to remuneration

164

2. Right to retain the principal’s money till his claims are settled.

3. Right of lien of goods, other property, etc., till his claims are settled.

4. Right to indemnity which is extended to all losses and expenses incurred by the agent during

the course of the business which he does for his principal.

5. Right to compensation, if the principal exposes himself to unreasonable risks by giving

directions to his agent to work for him and in the process, of course, working as per the

principal’s direction, the agent suffers a loss which is to be compensated by the principal.

Section 225 in this connection provides:

“The principal must make compensation to his agent in respect of injury caused to such agent by

the principal’s neglect or work of skill.”

Question 2

Explain the law relating to sale of Goods Act 1930. Discuss the main points of

difference between sale of goods and agreement to sale.

Answer:

When an offer to sell or buy goods for a price is made, it is known as contract of sale. However, it

is binding only when accepted by the buyer and his acceptance is communicated to the seller on

the terms and conditions are equivalent to a rejection of the original offer.

Definition of Sale

Sale Defined: “Sale” is defined by Indian Sale of Goods Act 1930 as: “A contract of sale of goods

is a contract whereby the seller transfer or agrees to transfer the property is goods to the buyer for

a price.”

From the above definition of a ‘sale’, the following may be derived as essential features of a sale:

1. A sale is a bilateral contract.

2. Money consideration is a must for a sale of goods.

3. There is distinction between sale and contract of work and material. “the dividing line

between the two is not very clear. The only conclusion that can be drawn from English

authorities is that every case must be judged of by itself.”

4. Goods must be a subject-matter of the contract for a sale. The “Goods” is defined by

Section 2(7) of the “Indian Sale of goods Act 1930 as:

“Goods means every kind of movable property other than actionable claims and money and

includes stocks and shares, growing crops grass, and things attached to or forming part of the land

which are agreed to be served before sale or under the contract of sale.”

Difference between Sale and Agreement to Sell: A sale is different from an agreement to sell.

Section 4(3) of the Act gives the distinction between the two and states:

“Where under a contract of sale the property in the goods is transferred from the seller to the

buyer, the contract is called a sale, but where the transfer of the property in the goods is to take

place at a future time of subject to some condition thereafter to be fulfilled, the contract is called an

agreement to sell.”

Difference between Agreement to Sell and Hire-Purchase

165

The following are the distinguishing points between an agreement to sell and a hire-purchase.

Sl.

No.

Criteria Agreement to sell Hire purchase

1 Entitlement An agreement to sell does

not entitle to the intending

purchaser to the possession

of the goods agreed to be

sold on a future date or on

the fulfillment of some

conditions as may have

been laid down.

But a hire purchaser is

entitled to have the

possession of goods he

has agreed to purchase on

hire-purchases basis.

2 Title of

goods

In an agreement to sell the

question of transferring the

goods to the purchaser does

not arise.

In a hire-purchase case

too the title of goods

remains with the seller and

thus it is not transferred to

the purchase though the

possession and

permission to use the

goods is given to the

purchaser.

3 Payment In an agreement to sell such

a situation never arises.

Neither there arises a

question of any payment in

an agreement to sell.

The hire-purchaser is the

hirer and he has to pay the

installments regularly as

per the settlement failing

which he invites the

forfeiture of the amount he

has already paid besides

the lien which the seller

enjoys over the goods.

4 Law Agreement to sell is

governed by the Sale of

Goods Act.

The hire-purchase is

governed by the Hire-

Purchase Act

5 Sales-tax Sales tax is not levied till

they become a sale

according to respective laws.

Sales tax is not levied till

they become a sale

according to respective

laws. (Same as Agreement

to sell)

Formalities of the Contract of Sale: The formalities of the Contract of Sale is clearly spelt out by

Section 5 of the Act which lays down as given below:

(1) “A contract of sale is made by an offer to buy or sell goods for a price. The contract may

provide for the immediate delivery of the goods or immediate payment of the price or both,

or for the delivery or payment by installments, or that the delivery or payment or both shall

be postponed.”

166

(2) “Subject to the provision of any lay for the time being in force, a contract of sale may be

made in writing or by work of mouth, or partly in writing and partly by word of mouth or may

be implied from conduct of the parties”.

The Subject-mater of the Contract of Sale: The subject-matter of the Contract of Sale can only

be ‘goods’ as defined by Section 2(7) of the Act.

The Price in a Contract Sale: Section 9 of the Act defines the price in a Contract of Sale. In fact

this Section has not attempted a definition. Instead a through Section 9(1) and Section 9(2)

enunciates two principles for the determination of the price under a Contract of Sale. The two sub-

sections read as follows:

Section 9(1):

“The price in a contract of sale may be fixed by the contract or may be left to be fixed in a manner

thereby agreed or may be determined by course of dealing between the parties.”

Section 9(2):

“Where the price is not determined in accordance with the above principle. The buyer shall pay the

seller a reasonable price. What is reasonable is a question of fact dependent on the circumstances

of each particular case.”

‘Conditions’ and ‘Warranties’: Section 12(2) of the Act defines the conditions as reproduced

below:

“A condition is a stipulation essential to the main purpose of the contract, the breach of which

gives rise to a right to treat the contract as repudiated.”

Section 12(3) of the Act defines the warranties as given below:

“A warranty is a stipulation collateral to the main purpose of the contract, the breach of which

gives rise to a claim for damages but not to a right to reject the goods and treat the contract as

repudiated.”

Section 12(4) of the Act concludes that the stipulation in a contract of sale depends on the

construction of the contract. It lays down:

“Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on

the construction of the contract. A stipulation may be a condition though called a warranty in the

contract.”

The Implied Conditions in a Contract of Sale: The following are the implied conditions in a

contract of sale:

1. Condition to the title: Section 14 provides that, “In a contract of sale, unless the

circumstances of the contract are such as to show a different intention there is an implied

condition on the part of the seller that in case of a sale, he has a right to sell the goods and

that, in the case of an agreement to sell, he will have a right to sell the goods at the time when

the property is to pass.”

2. Sale by description: Section 15 provides that “where there is a contract of sale of goods by

description, there is an implied condition that the goods shall correspond with the description.”

167

3. Sale by description and also by sample: Section 15 further lays down that “….if the sale is

by sample as well as by description, it is not sufficient that the bulk of the goods corresponds

with the sample, if the goods do not also corresponds with the description. “Thus, the goods

must correspond with the sample as well as with description, if the sale contract is affected

taking both the stipulations into active consideration of the purchaser as well as of the seller.

4. Buyer beware: The lesser is guarded against by exceptions provided in the Act to the

Principle of Caveat Emptor when the Act makes a provision under Section 16 which reads as

follows:

“Subject to the provisions of this Act and any other law for the time being in force, there is no

implied warranty or condition as to the quality or fitness for any particular purpose of goods

supplied under a contract of sale.”

5. Goods of merchantable quality: Section 16(2) provides “where the goods are bought by

description from a seller who deals in goods of that description (whether he is the

manufacturer or producer or not) there is an implied condition that the goods shall be of

merchantable quality.”

6. Goods should be fit for the buyer’s purpose: Section 16(1) of the Act provides that “where

the buyer, expressly or by implication, makes known to the seller the particular purpose for

which goods are required, so as to show that the buyer relies on the seller’s skill and judgment

and the goods are of a description which it is in the course of the seller’s business to supply

(whether he is the manufacturer or producer or not), there is an implied condition that the

goods shall be reasonably fit for such purpose.”

Sale by Sample: Section 17(1) says that “a contract of sale is a contract for sale by sample where

there is a term in the contract, express or implied, to that effect.”

Section 17(2) further explains and lays down three conditions which are implied in every contract

of sale by sample. Section 17(2) (a), (b) and (c) read as under:

12(2) (a) “That the bulk shall correspond with the sample in quality.”

(b) “That the buyer shall have reasonable opportunity of comparing the bulk with the

sample.”

(c) “That the goods shall be free from any defect rendering them un merchantable which

would be apparent on reasonable examination of the sample.”

Implied Warranties: According to the Act the following warranties are implied in every contract of

sales of goods:

1. Quite possession of the goods: Section 14(b) of the Act provide that if there is no agreement

to the contrary there is an implied warranty that “the buyer shall have and enjoy quite

possession of the goods.”

2. The goods should be free from any charge or encumbrance: Section 14(c) of the Act

provides that “the goods shall be free from any charge or encumbrance in favour of any third

party not declared or known to the buyer before or at the time when the contract is made.”

Circumstances Reducing Conditions to Warranty: There are certain circumstances in which a

condition can be reduced to warranty. When this happens:

1. The buyer loses his right to reject the goods supplied to him by the seller and

168

2. The buyer in such cases is left with no alternative but to be content with the remedy to

claim damages for the breach of the condition.

The following courses are open to buyer when a condition is reduced to warranty under certain

circumstances:

1. The buyer may waive off the condition.

2. The buyer may opt for the alternative of treating the breach of condition as the breach of

warranty.

3. The buyer cannot reject the goods hence he is required to accept them as supplied by the

seller particularly when the contract of sale is not severable and the buyer has either

accepted the goods in full or any part thereof.

Exclusion of Liability for Implied Terms: Section 62 of the Act provides “where any right, duty or

liability would arise under a contract of sale by implication of law, it may be varied by express

agreement or by the course of dealing between the parties, or by usage, if the usage is such as to

bind both parties to the contract.”

There are three modes by which the liability for implied terms may be varied as envisaged by this

Section of the Act:

1. By Express Contract;

2. By Course of Dealing, and

3. By Usage.

Stipulations as to Time of Payment: Section 11 of the Act lays down that “unless a different

intention appears from the terms of the contract, stipulations as to time of payment are not

deemed to be of the essence of a contract of a sale.”

Passing of Goods sold on Approval: Goods sold on approval should either be accepted or

rejected within the time specified or within reasonable time. If without rejecting the goods the buyer

retains the goods up to the specified period or does not return the same within reasonable time

then the goods would be deemed to have been purchased by the buyer and buyer becomes liable

for the payment.

Section 24 of the Act lays down rules the essence of which is that the goods sold posses to the

buyer either by acceptance or by failure to return within the stipulated time or within reasonable

time.

Sale of Unascertained Goods: Section 18 of the Act provides that “where there is a contract for

the sale of unascertained goods, no property in the goods is transferred to the buyer unless and

until the goods are ascertained.”

In this connection Section 23 also makes the following provision:

“Where there is a contract for the sale of unascertained or future goods by description and goods

of that description and in a deliverable state are unconditionally appropriated to the contract either

by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property

in the goods thereupon passes to the buyer.”

Section 23(2) of the Act recognises one mode of appropriation in explicit terms when it lays down:

“When, in pursuance of the contract, the seller delivers the goods to buyer or to a carrier for the

purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to

have unconditionally appropriated the goods to the contract.”

169

Section 26 under section “Risk prima facie passes with property” deals with transfer of risk in a

contract of sale of goods where risk and property go together. It reads as given below:

“Unless otherwise agreed, the goods remain at the seller’s risk until the property therein is

transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at

the buyer’s risk whether delivery has been made or not.”

Question 3

Explain contract of sale? Discuss the law of breach of contract.

Answer:

When a person offers to sell or buy goods for a price, it is known as contract of sale. In general,

orders for purchases are placed through telephones; in order to make these binding a formal

purchase order should be forwarded.

The proposal cannot be revoked once the acceptance is put in a course of transmission to the

proposer. In a similar manner the acceptance cannot be revoked once the communication of the

acceptance comes to the knowledge of the proposer. Suppose, Ram proposes to sell an item to

Rahim by a letter sent by post. Rahim accepts the proposal by a letter of post. Ram can revoke

this proposal at any time before Rahim posts his letter of acceptance but not afterwards. Rahim

can revoke his acceptance at any time before his letter teaches Ram but not afterwards. However,

the party who give time to another to accept or reject an offer is not bound to wait till the time

expires.

Special Contracts: The materials managers place contracts where a rate is agreed upon and the

quantities to be supplied from time to time are left to be intimated by periodical releases. Here, the

buyer does not commit himself to lift any minimum quantity. Such a contract is deemed to be only

a standing offer and its acceptance only means that the buyer recognises this standing offer for

the stated period. However, once a release order is issued by the buyer the contract becomes

binding for that quantity. The supplier may feel free to withdraw his standing offer with reference to

future order. This is not possible if the tender and its acceptance were intended by the buyer and

the seller to be a contract involving an obligation on both of them during that time period.

Frequently contracts are entered into, stipulating a specific quantity to be lifted during a stated

period, with clauses providing some variations in the quantity or the period during which it is to be

lifted. This is a binding contract and enforceable for the supply of the entire quantity of goods

contemplated in the contract. There is another type of contract in which, though the buyer is not

bound to any specific quantity, he commits to buy and pay for all the goods needed by him or

goods that are produced by the seller in a stipulated period. This again is a binding contract. a

purchase contract becomes null and void when the price to be paid is not stipulated in the order or

at least the manner in which the price is to be fixed is not indicated.

However, according to the Indian Sale of Goods Act, stipulations regarding time of payment are

not condition of the contract. In other words, they are not of essence. This is because a delay in

payment does not make the contract without consideration. But, if the contract is for the delivery of

goods by installments and each installment is to be paid for on delivery, then failure to pay for any

one installment is adequate for the seller to repudiate the contract. When the time of payment for

170

each installment is of the essence. In determining whether the time was of the essence of the

contract the court will consider the intention of the buyer and the seller as expressed in the

contract as well as in the course of dealing between the parties or usage, surrounding

circumstances, equitable considerations, etc. Ordinarily, however, when a specific time is fixed, it

is treated to be of essence and the ones of proving that it is not so lies with the one who asserts

so. To quote Indian Sales of Goods Act, “Unless a different intension appears from the terms of

the contract, stipulations as to the time of payment are not deemed to be of the essence of a

contract of sale. Whether any other stipulation as to time is of the essence of the contract or not

depends on the terms of the contract.”

Condition and Warranty: A condition is a stipulation in contract of sale pertaining to goods which

are the subject of contract and this stipulation is essential to the main purpose of the contract, the

breach of which will make the contract liable to be rejected. A warranty is also a stipulation in

contract of sale pertaining to goods which are the subject of contract but this stipulation is only of a

collateral nature to the main purpose of the contract, the breach of which gives rise to a claim for

damages but does not make the contract liable to be repudiated and hence the goods cannot be

rejected.

Sale by Description: It is not uncommon to find orders which have only a description of the item

in question. By implication, it follows that items must follow the description. It pays in the long run

to make certain that such purchase orders are complete and clear in their description. This could

be done by mentioning the end use, furnishing drawings, tolerances, finish etc., referring to the

national or international specifications, and the tests which the item has to pass.

There are cases when the supplier produces the item under the full knowledge as to how exactly it

will be used. In such a case there is an implied warranty in the sense that the buyer can claim

damages when the item later proves to be unfit. There is a mistaken notion that there is an implied

condition in the case of a contract for the sale of a specific item under its patent. There is actually

no implied condition as to the fitness of the item for any specific use. Similarly, statements

regarding the quality of the product and performance appearing in commercial advertisements are

not to be construed as an express or implied warranty.

Aspects in Contracts Based on Samples: Goods sold on the basis of samples give the buyer

many advantages. The buyer must be able to establish the existence of a sample as well as a

clear understanding to the effect that the sample is of the contract standard. For this purpose the

sample needs to be preserved for future inspection.

Works Contract: This type of contract pertain to the supply and fixing of materials of buildings and

such immovable properties. The important factor in works contract is that it is indivisible, i.e., it

cannot be looked upon as a contract of sale of goods plus a contract for labor. From the materials

manager’s point of view a good amount of saving can result by way of reduction in sales tam

through resorting to works contract.

We will now see the difference between a guarantee and warranty. A warranty is a part of the

contract through only collateral to the main object of the contract. it is a statement of something

which a party undertakes to do. A guarantee is something which the promiser undertakes, to be

answerable to the promise for the debt, default, etc., of another person whose primary liability to

171

the promise himself exists or is contemplated. Therefore, it is an additional and conditional

contract.

We will discuss the legal aspect involving the payment of price. It has three dimensions, viz., time

of payment, place of payment and mode of payment. As regards the time of payment, the amount

should be paid when it is due. The buyer has no right to delay it till a demand is made. As regards

the place, it should be the place previously appointed. If unspecified it should be at the seller’s

place. The mode of payment is very important. In the purchase order, this should be clearly spelt

out. Factors like sales tax, octroi, customs duty, excise duty, escalation classes, discounts, credit

terms, dispatch terms, such as FOB, CIF, etc., must be clearly laid down. If the buyer complies

with the mode of payment suggested in the contract, he is safe even if the money is stolen or does

not reach the seller.

Risks and Rights: It is necessary for the buyer to recognize that the risk of deterioration of goods

during transit rests with him even though the seller might have agreed to deliver the goods at his

own risk at a place other than where they are when sold. The buyer, has his rights. After

reasonable verification within stipulated time buyer can accept the goods and unless it has been

done it can not be called as “accepted”. If the buyer fails to inspect the goods within a reasonable

time and determine whether they conform to contractual terms, then he is deemed to have waived

his right. If by mistake the buyer has failed to discover defects then subsequently he has a right to

claim damages.

Acceptance of Goods: Acceptance by the buyer is complete only when he has intimated the

seller of his acceptance, or when he fails to intimate the seller even after a reasonable time, during

which he had opportunities to inspect the goods, or he does not act in relation to them which is

inconsistent with the ownership of the seller. The buyer has another important right. Unless agreed

upon, the buyer is under no obligation whatsoever to return the goods which he has rejected as

they do not conform to contractual requirements.

Breach of Contract

Discharge of contract by breach is also provided in the Act. A breach of contract takes place when:

i) Any of the contracting party renounces his liability under contract,

ii) Any of the contracting party acts in such a manner as to make it impossible to discharge

his liability under the contract, and

iii) Any of the contracting party totally or partially fails to perform and fulfill his obligations

under the contract.

The breach may be anticipatory or present. An anticipatory breach occurs when there is prior

repudiation of the contract by any of the party. Two legal effects emerge from this. First, the party

concerned may be excused from performance or from further performance. Secondly, the injured

party, however, is entitled for the following:

1. For compensatory damages, which is not penal.

2. For compensation for mental pain and suffering.

3. For mitigation of damages.

4. For liquidated damages and penalty.

The party which sustains a loss due to breach of contract will be so compensated with respect to

damages that it will be placed in a position as if the contract has been performed. In commercial

172

transactions the aggrieved party can claim only the actual loss caused to him and not to others.

Damages arising out of a breach of contract in the usual course are recoverable. Damages which

arise owing to circumstances peculiar to the case and which would not have arisen during the

normal course are not recoverable. Unless the circumstances are made known to the party which

breaks the contract and such damages are contemplated by both the parties at the time of

entering into the contract. The amount of compensation by way of replacing the damages will be,

as far as possible, the amount which will place the hurt party in the same position as it would have

been, had it not suffered the breach of contract which led to such damages. Very often the parties

wish to reduce damages to a certainty. This, they achieve by fixing a rate or sum at which

damages are to be assessed. If such an amount is a genuine pre-estimate of the damages, then it

is known as liquidated damages. However, if the amount fixed is not at per with the greatest loss

that could have followed form the breach, it would be considered a penalty. As per the Indian

Contract Act, it is for the court to ascertain the actual loss and award the same. A similar provision

is available for security deposit and earnest money. If the amount is small and in reasonable

proportion to the price then the forfeiture of the deposit or earnest money paid by the defaulting

party is not considered as penalty. If the amount is a large part of the price, then forfeiture of the

amount will be in the nature of penalty. In such cases the Court will not permit forfeiture but will

only award reasonable compensation.

Patent Rights: The buyer can protect his organisation by adding special patent infringement

clauses to his purchase orders. However, when the buyer orders to his own specification, this

does not apply. It is often the case that big buyers give financial and technical assistance to the

supplier for developing new products and materials. It is advantageous, in such cases, for the

buyer to include a clause in the purchase orders, covering the patent rights in inventions

discovered by a supplier in the course of executing his purchase contract.

Settlement of Disputes: Arbitration is used for settling disputes between buyers and sellers. It is

less time consuming when compared with litigation. For this purpose the buyer must include an

arbitration clause and the supplier has to agree to it. Once such a clause is stipulated, the court

will not entertain any suit unless the arbitration process is exhausted. Arbitrators have similar

powers the courts and their award is binding and enforceable on the parties.

Question 4

What are the rules regarding transfer of title in the contract of sale?

Answer:

Section 27 of the Indian Sale if Goods Act lays down the principle of nemo dat quod non habet.

Explaining this ancient maxim it provides as follows:

“Subject to the provisions of this Act and of any other law for the time being in force, where goods

are sold by a person who is not the owner thereof and who does not sell them under the authority

or with the consent of the owner, the buyer acquires no better title to the goods than the seller

had.”

Justice Deamin has clarified the position of modern law in the following words:

“In the development of our law, two principles have given for mastery. The first is the protection of

property: no one can give a better title than he himself posses. The second is the protection of

173

commercial transaction: the person who takes in good faith and for value without notice should get

a good title. The first principle held away for a long time but it has been modified by the common

law itself and by statute so as to meet the needs of our times.”

Rules as to Delivery of Goods

1. Place of delivery: In the absence of any contract to the contrary, goods should be delivered at

which the respective parties are having their business at the time of sale.

2. Time of delivery: In the absence of any contract to the contrary, goods should be delivered

within a reasonable time.

3. Delivery by allotment: In the absence of any contract to the contrary, if the goods are in

possession of any third person there cannot be any delivery unless the third person

acknowledges to the purchaser that he is in possession at the goods on his behalf. Once he

acknowledges, it amounts to a delivery to the purchaser.

4. Time for tender of delivery is said to be a reasonable hour when the buyer can demand the

delivery from the seller.

5. Delivery of wrong quality: Short delivery: If the goods are diverted in short quantity as per

the provisions of Section 37(1) the buyer has a right to reject them. The buyer, however, has

every right to accept the goods in short supply but he has to pay only for the goods delivered

to him and not for the ordered goods.

6. Delivery in wrong quantity: Excess delivery: If the goods is delivered in excess quantity as

per the provision of Section 37(2), the buyer has a right to accept the contracted goods. The

rest he may reject and may make payment for the goods actually accepted by him. However,

the buyer has every legal right to reject the whole consignment, if it is in excess.

7. Delivery of mixed goods: Here also the buyer has a legal right to either accept the goods

contracted and reject those goods which do not conform to the description of the contract or he

may reject the whole lot.

8. Delivery in instalments: If otherwise not provided in contract for sale of goods according to

Section 38(1) of the Act, “the buyer of goods is not bound to accept delivery thereof by

instalments.”

Deteriorating during Transit: Regarding deterioration during transit, Section 40 of the Act lays

down as follows:

“Where the seller of goods agrees to deliver them at his own risk at a place other than that where

they are when sold, the buyer shall, nevertheless, unless otherwise agreed, take any risk of

deterioration in the goods necessarily incident to the course of transit.”

No Rejection after Acceptance: Section 42 of the Act provides:

(a) If the buyer has once accepted the goods and has already intimated the fact to the seller

he has no right to reject them.

(b) If the goods have already been delivered to the buyer and he does any act in relation to

them which is inconsistent with the ownership of the seller, he will have no right to reject

them.

(c) It the goods have already been delivered to the buyer and he has retained them without

intimating to the seller within stipulated or reasonable time that he has rejected the goods,

he will have no right to reject them.

174

An Unpaid Seller: According to the provisions of Section 45 of the Act:

“The seller of goods is deemed to be an ‘unpaid seller’ within the meaning of this Act —

(a) When the whole of the price has not been paid or tendered;

(b) When a bill of exchange or other negotiable instrument has been received as conditional

payment, and the condition on which it was received has not been fulfilled by reason of the

dishonour of the instrument or otherwise.”

Right of an Unpaid Seller: The law provides that:

(a) An unpaid seller has a lien on the goods for the price if he is in possession of the said

goods;

(b) An unpaid seller has a right to stop the goods in transit after he has parted with the

possession of the sold goods and he comes to know about the insolvency of the buyer.

(c) An unpaid seller has a right to re-sell the goods.

Seller’s Remedies against Buyer for Breach of Contract: The seller has a right:

i) To sue the buyer for the price, if he has not been paid and the goods have passed to the

buyer.

ii) To claim damages for non-acceptance and move the court if he so wishes. Section 56

notes: Where the buyer wrongfully neglects or refuses to pay for the goods, the seller may

sue him for non-acceptance.

Buyer’s Remedies against Seller for Breach of Contract: The buyer has a right:

(a) To claim damages for non-delivery. Section 57 provides: where the seller wrongfully

neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for

damages for non-delivery.

(b) To reject the goods if there is breach of warranty or where the buyer elects or is compelled

to treat the breach of condition as a breach of warranty.

Question 5

What is contract of sale? What are the essentials of a valid contract?

Answer:

From the materials manager’s point of view, the Law of Contract is an important branch of

Mercantile or Commercial Law, because all commercial transactions start from an agreement

between two or more people. The object of the Law of Contract is to introduce definiteness in

commercial and other transactions. It may be said that the purpose of the Law of Contract is to

ensure the realisation of reasonable expectation of the parties who enter into a contract. The Law

of Contract may be defined as that branch of law which determines the circumstances in which a

promise shall be legally binding on persons making it. The Indian Contract Act of 1872 (Act IX of

1872) lays down certain general rules regarding contracts.

Definition of Contract: “Contract is an agreement enforceable by law.” — Section 2(b) of Indian

Contract Act, 1872

Thus, the definition points out two basic features of a contract. To make contract there must be:

175

1. an agreement, and

2. The agreement entered into should be such which is capable of being enforced by law, i.e.,

an enforceable agreement can only be classed as a contract in the eyes of law.

“Agreement”, defines Section 2(e), is “every promise and every set of promises forming the

consideration for each other.” And a promise is an accepted proposal. Section 2(6) of the Contract

Act defines the promise as a proposal when accepted, becomes a promise. Therefore, in simple

words it can be said that an agreement is an accepted proposal. Two points emerge from this:

1. Every agreement is made of a proposal, and

2. The proposal is accepted.

Hence, there should be two parties to make an agreement—the proposer and the acceptor. The

accepted proposal, called agreement, should be enforceable by law.

From enforceability clause emerges that every contract is an agreement but every agreement

cannot be a contract under the law. The agreement to become a contract has to satisfy the

following conditions:

(i) There should be some consideration for the agreement.

(ii) The parties entering into agreement should be legally competent to contract.

(iii) The contracting parties should necessarily give free consent. There should be no

coercion or pressure from any side.

(iv) The object of the agreement and of the parties should be lawful. The object should not be

contrary to legal provisions.

To conclude, Contract = Agreement + Enforceability at law. All contracts, therefore, are

agreements, but all agreements are not contracts.

An agreement may be made in writing, by word of mouth, by reference from the conduct and

circumstances of the case or by any combination of the above methods.

Essential Elements of a Valid Contract: An agreement is a wider term than a contract, because

an agreement may or may not be enforceable by law. It is extremely important to know what

agreements are contracts in law. In respect of an agreement which is not a contract, no legal

remedy is available to either party, if the other party fails to carry out the agreement.

A contract, in order to be enforceable by law, must have the following essential elements:

1. Offer and Acceptance: There must be a lawful proposal or offer by one party and a lawful

acceptance of that proposal by the other party thus resulting in an agreement. The terms of

offer and acceptance must be definite. The acceptance of the offer must be according to the

mode prescribed and must be communicated to the proposer. A proposal when accepted

becomes a promise.

2. Legal Relationship: The agreement must create legal relationship between the parties. If

there is no intention to create legal relationship, there can be no contract between the parties.

3. Lawful Consideration: The agreement to be enforceable by law, must be supported by a

consideration. The term consideration in simple words means ‘something in return’. The

agreement is legally enforceable only when both the parties give something and get something

in return. A promise to do something, getting nothing in return, is usually not enforceable by

law.

4. Capacity of parties—Competency: The parties to the agreement must be capable of

entering into a valid contract. Every person in competent to enter into a contract if he is of

176

sound mind, age of majority, and not disqualified from contracting by any law to which he is a

subject. Flaws in capacity to contract may arise from minority, lunacy, idiocy, drunkenness,

and status.

5. Free and Genuine Consent: It is essential to the creation of every contract that there must be

free and genuine consent of the parties to the agreement. The parties must agree upon the

same thing in the same sense, i.e., they must be of the same mind on all the material terms of

the contract.

6. Lawful Object: The object of the agreement must be lawful. It is lawful unless it is forbidden

by law or is of such a nature that if permitted, would defeat any provisions of law.

7. Agreement not Declared Void: The agreement, though it might posses all the essential

elements discussed above, must not have been expressly declared void by any law in force in

the country.

8. Certainty and Possibility of Performance: The terms of the agreement must be certain and

not vague or ambiguous. If the agreement is vague and if it is not possible to ascertain the

meaning of agreement, it cannot be enforced. The terms of agreement must enable

performance. An agreement to do an act impossible in itself cannot be enforced.

9. Legal Formalities: The agreement may be oral or in writing. Where it is in writing it must

comply with the necessary legal formalities as to writing, registration and attestation. If the

agreement does not comply with these legal formalities it cannot be enforced by law.

Question 6

What are the general rules relating to insurance especially for materials

purchase manager.

Answer:

The responsibilities of the purchase manager as regards to insurance starts from the time he

places an order with his supplier till the materials reach the hands of the ultimate consumer. He

arranges:

(a) to ensure the materials in transit,

(b) to insure the materials in store,

(c) to analyse the insurance needs,

(d) to see that adequate insurance cover is provided to (a) incoming materials, (b) materials in

storage, (c) outgoing materials, (d) work-in-progress and finished goods till they are in the

charge of the materials department.

(e) to see that ocean voyage (in case of imports) is fully insured against all odds according to

the terms, conditions and policy of the organisation.

Goods on Ocean Voyage

All marine ocean voyage policies lay down certain conditions which must be borne in mind while

dealing with insurance of goods being imported. The following should be sincerely thought of and

actions taken accordingly.

1. On delivery of goods either to the consignee or to the warehouse, etc. on the advice of

either the consignee or the consignor insurance cover ceases to be effective.

2. The insurance cover ceases after the expiry of 60 days after the completion of discharge of

the goods form the overseas vessel at the final port of discharge.

177

3. The insurance cover ceases as soon the goods start for the next destination after the

discharge from the overseas vessel.

4. The insurance cover remains in operation if there is a change of the voyage or termination

of the voyage before the goods reach the final destination provided a prompt notice is

given and the insurer pays additional premium.

Goods in Inland Transit

The following points should be borne in mind for getting the goods insured while in inland transit:

(i) ‘All risks’ should conveniently be covered.

(ii) Commencement of policy should be clearly specified.

(iii) Termination clause should be clearly specified.

Usually the policy commences at the time of loading the goods and terminates (ceases to be in

operation) seven days after the arrival of the inland carried at the destination town or on delivery

whichever is earlier.

(iv) Period of storage at the destination should be clearly specified during which the risk will

be covered. Also it should be clearly specified as to what type of insurance risk — theft,

fire, pilferage etc., — will be covered during storage period. Usually ‘fire risks’ are

covered in the absence of any specific terms.

Insurance of Goods in Storage: During storage goods are usually covered against the following

risks and insurance policy is taken for either all of them (comprehensive) or any one or more of

them:

1. Fire 5. Flood

2. Explosion 6. Earthquake

3. Riot 7. Theft and burglary

4. Strike 8. Pilferage etc.

Claims Management

Since claims settlement takes time and involves considerable effort, an Insurance or Claims

Officer would be well advised to take the following points into considerations:

1. He should remember the termination date of the policy his organisation has taken.

2. He should take prompt action for the extension of period of insurance cover if the

termination date is near or about to cease.

3. He should get the insurance cover extended well before the materials reach the ultimate

destination.

4. He should intimate the insurer about the change, if it is to take place, in the ordinary course

of transit, well before it actually takes place.

5. He should not give a clean receipt where he has any doubt regarding the condition of the

goods received. Of course, he may receive goods in doubtful condition under written

protest.

6. He must give written notice to the carrier or his representative within three days of the

receipt of delivery if there is (i) any loss to the goods, (ii) any damages not apparent at the

time of delivery but subsequently detected on opening the packing.

7. He must submit a prompt written claims statement for the loss, damage, etc.

178

8. He should take care that the claim so submitted should bear documentary proof for quick

claims settlement the important documents are as listed below:

i) The original policy,

ii) Bill of Lading or Railway Receipt or Transport Agency Receipt,

iii) Invoice.

iv) Survey Report,

v) Claim, Bill, and

vi) Letter of Subrogation

9. He should make every effort to minimize the loss and risk by specifying the nature and

quality of packing.

Minimising Insurance Cost and Self-Insurance: There are only two ways of minimising

expenditure on insurance: First, by reducing the element or risk involved in materials movements,

and secondly, by introducing self-insurance to take care of small and fairly predictable losses and

seeking the insurer’s assistance only for protection against catastrophic loss.

Risk Improvement and Loss Minimisation: The natural mode of transport and the extent of care

exercised in materials management have a bearing on the probability of losses occurring and on

the quantum of such losses. Whenever there is an improvement in any of these, the insurers

should be persuaded to consider a reduction in premium rates. It is sometimes profitable to

discuss risk and loss minimization measures with the insurers themselves, who may come out with

suggestions based on their experience over a wider range of clients.

It appears a sound policy, from the point of view of cost reduction, to consider self-insurance for

certain risks, especially where the size of operations is large. The cost of processing claims has to

be taken into account while calculating the expenditure on insurance. Self-insurance could operate

more profitably for the transit of finished goods than for incoming materials, because, in the case

of finished goods, all the risk factors attendant on transit are within the organisation’s control and

the experience of losses over the past few years should be readily available to ascertain the

pattern of transit losses. But to transfer the insurance responsibility to the carriers is an unwise

move. Self-insurance could be introduced progressively by first excluding claims for less than a

specified amount and working up to a stage where only the most restricted form of insurance to

take care of catastrophic losses is taken. But these are decisions which have to be taken in each

case depending on the circumstance, taking into account the accumulation of risk, the maximum

possible loss arising out of an accident, the administrative expenses in dealing with insurers,

suppliers and buyers, regarding claims and the tax angle.

A systematic and periodic, preferably, an annual review of the existing insurance arrangements of

the organisation, the cost and benefits, should be undertaken. The insurance needs of a large

and complex organisation are ever changing and the insurance cover designed with care today

may not remain a perfect fit two years from now.

The Drugs (Control) Act, 1950

An Act to provide for the control of the sale, supply and distribution of drugs. Be it enacted by Parliament as

follows:

179

1. Short title and extent. (1)This Act may be called the Drugs(Control) Act, 1950

(2) It extends to the territories which immediately before the Ist November, 1956 were comprised in Part C

states.

2. Interpretation. (1) In this Act, unless the context otherwise requires,

(a) dealer means a person carrying on, either personally or through any other person, the business of selling

any drugs, whether wholesale or retail;

(b) Drug means any durg as defined in Clause (b) of Section 3 of the Drugs and Cosmetics Act, 1940(23 of

1940) in respect of which a declaration has been made under Section 3;

(c) offer for sale includes a reference to an intimation by a person of the price proposed by him for a sale of

any drug, made by the publication of a price list,by exposing the dug for sale in association with a mark

indicating price,by the furnishing of a quotation or otherwise howsoever;

(d) producer producer includes a manufacturer.

(1-A) As from the Ist November, 1956, any reference in this Act to the Central Government or the

Chief Commissioner shall, in relation to the territories which, immediately before the Ist November 1956,

were comprised in the Part C State of Ajmer or Bhopal and Vindhya Pradesh or Coorg or Kutch be

construed as a reference to the State Government of Rajasthan or Madhya Pradesh or Mysore or Bombay,

as the case may be.

(2) A drug shall be deemed to be in the possession of a person

(i) when it is held on behalf of that person by person or when held by that person behalf of another

person;

(ii) notwithstanding that it is mortgaged to another person.

3. Drugs to which this Act applies. The Central Government may by notification in official

Gazette,declare any drug to be a drug to which this Act applies.

4. Fixing of maximum prices and maximum quantities which may be held or sold. (1)

The Chief Commissioner may,by notification in the official Gazette, fix in respect of any drug

(a) the maximum price or rate which may be charged by a dealer or producer;

(b) the maximum quantity which may at any one time be possessed by a dealer or producer;

(c) the maximum quantity which may in any one transaction be sold to any person.

(2) The prices or rates and the quantities fixed in respect of any drug under this section may be different in

different localities or for different classes of dealers or producers.

5. Restrictions on sale, etc., where maximum is fixed under Section. No dealer or producer shall (a)

sell, agree to sell, offer for sale or otherwise dispose of, to any person any drug for a price or at a rate

exceeding the maximum fixed by notification under Clause(a) of sub-section

(1) of Section 4;

(b) have in his possession at any one time a quantity of any drug exceeding the maximum fixed by

notification under Clause (b) of sub-section (1) of Section 4; or (c) sell, agree to sell or offer for sale to any

person in any one transaction a quantity of any drug exceeding the maximum fixed by notification under

Clause(c) of sub-section (1) of Section 4. 2

6. General limitation on quantity which may be possessed at any one time. (1) No person shall have in his

180

possession at any one time a greater quantity of any drug to which this section applies than the quantity

necessary for his reasonable needs. (2) This section shall apply only to such drugs as the Chief

Commissioner may, by order published in the official Gazette,specify for the purpose: Provided that nothing

contained in this section shall apply to a dealer or producer in respect of any drug sold or produced by him.

7. Duty to declare possession of excess stocks. Any person having in his possession a quantity of any drug

exceeding that permitted by or under this Act shall forthwith report the fact to the Chief Commissioner or

other Officer empowered in this behalf by the Chief Commissioner and shall take such action as to be

storage,distribution or disposal of the excess quantity as the Chief Commissioner may direct.

8. Refusal to sell. No dealer or producer shall, unless previously authorised to do so by the Chief

Commissioner, without sufficient cause refuse to sell to any person any drug within the limits as to quantity,if

any,imposed by this Act. Explanation. The possibility or expectation of obtaining a higher price for a drug at

a later date shall not be deemed to be a sufficient cause for the purpose of this section.

9. Cash memorandum to be given of certain sales. (1) Every dealer or producer when selling any drug for

cash shall, if the amount of the purchase in five rupees or more, in all cases, and, if the amount of the

purchase is less than five rupees,when so requested by the purchaser, give to the purchaser a cash

memorandum containing particulars of the transaction. (2) The Chief Commissioner may, by notification in

the official Gazette, prescribe the particulars to be contained in any such cash memorandum. (3) The Chief

Commissioner may, be notification in the official Gazette, exempt specified areas, classes of dealers or

producers,or classes of drugs from the operation of this section.

10. Marking of prices and exhibiting list of prices and stocks. (1) The Chief Commissioner may direct dealers

or producers in general, or any dealer or producer in particular to mark any drug exposed or intended for

sale with the sale prices or to exhibit on the premises a price list of drugs held for sale and the quantities of

such drugs in his possession, and may further give directions as to the manner in which any such direction

as aforesaid is to be carried out. (2) No dealer shall destroy, efface or alter or cause to be destroyed,

effaced or altered any label or mark affixed to a drug and indicating the price marked by a producer.

11. Obligation to state price separately on composite offer. Where a dealer or producer makes an offer to

enter into a transaction for a consideration to be given as whole in respect both of a sale of any drug and of

some other matter, the dealer or producer making the offer shall state in writing the price which he assigns

to that drug, if he is required to do so by any person to whom the offer is made, and the offer shall be

deemed for the purposes of the Act to be an offer to sell that drug at the price so stated.

12. Prohibition or regulation of the disposal of drugs. If in the opinion of the Chief Commissioner it is

necessary or expedient so to do, he may be order in writing (a) prohibit the disposal of any drug except in

such circumstances and under such conditions as may be specified in the order; (b) direct the sale of any

drug to any such dealer or class or dealers and in such quantities as may be specified in the order; and

make such further orders as appear to him to be necessary or expedient in connection with any order issued

under this section. 3

13. Penalties. (1) Whoever contravenes any of the provisions of this Act or fails to comply with any direction

made under authority conferred by this Act shall be punishable with imprisonment for a term which may

extend to three years, or with fine, or with both. (2) A Court convicting any person of an offence punishable

under this Act may order that the whole or any part of the stock of drugs in respect of which the offence was

committed shall be forfeited to the Government. (3) It shall be defence for a person charged with a

contravention of any of the provisions of this section to prove that, in relation to the matter in respect of

181

which he is charged, he acted in the course of his employment as servant or agent of another person on the

instructions of his employer or of some other specified person.

14. Offences by corporations. Where a person committing an offence punishable under this Act is a

company or an association or a body of persons, whether incorporated or not, every director, manager,

secretary, agent or other officer or person concerned with the management thereof, shall, unless he proves

that the offence was committed without his knowledge or that he has exercised all due diligence to prevent

its commission, be deemed to be guilty of such offence.

15. Procedure. (1) No person other than a police officer of or above the rank of an Inspector of Police or an

officer not below the rank of an Inspector of Police authorised in this behalf by the Central Government by

notification in the official Gazette, shall investigate any offence under this Act. (2) No prosecution for any

offence punishable under this Act shall be instituted except with the previous sanction of the district

Magistrate.

16. Powers of search and seizure. Any person competent to investigate any offence under this Act may

search any place in which he has reason to believe that an offence under this Act has been, or in being

committed, and take possession of any stock of drugs in respect of which the offence has been or is being

committed and the provisions of the Code of Criminal Procedure, 1898,(5 of 1898) shall so far as may be

applicable, apply to any search or seizure under this Act as they apply to any search or seizure made under

the authority of a warrant issued under Section 98 of that Code.

17. Power to make rules. (1) The Central Government may make rules to carry out the purposes of this Act.

(2) In particular, and without prejudice to the generality of forgoing power, such rules may provide for all or

any of the following matters, namely (a) the maintenance by dealers and producers generally,or by any

dealer or producer in particular, of records of all sale and purchase transactions made by them; (b) the

furnishing of any such information as may be required with respect to the business carried on by any dealer

or producer; (c) the inspection of any books of account or other document belonging to or under the control

of any dealer or producer. 18. Protection of action in good faith. No suit, prosecution or other legal

proceeding shall lie against any person for anything in good faith done or intended to be done under this Act.

19. Saving of other laws. The provisions of this Act shall be in addition to, and not in derogation of, any other

law for the time being inforce regulating any of the matters dealt with in this

1. Inspection and quality control: 6L

1.1 Types and criteria of inspection; statistical quality control; control charts.

1.2 Contract administration – model contract for different services, i.e., Laundry,

Dietary, Dispensary, Security and ambulance services. Annual Maintenance

Contract.

Principles of storage and stores accounting – Types of storage- care and preservation of

materials and equipment, role of computers. 4L Store keeping is a service function which deals with the physical storage of goods under the

182

custodianship of a person called storekeeper or stock controller. Goods stored may be either

“stores” or “stocks”. Materials which are not used in work or raw materials are usually referred to

as “stores” and the place where they are kept is known as “store room”.

“Store function concerns receiving, movement, storage and issue of items – raw materials, bought

out parts, tools, spares, consumable, etc.—required for production, maintenance, and operation of

the plant and finished goods until its dispatched to customers.”

“Stores , therefore is the custodian of all goods that are received in the company until they are

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

issue and accounting function”.

Responsibilities of store management are:

To receive materials, to protect them while in storage from damage or authorized removal,

To issue materials in the right quantities at the right time, to the right place, and to provide

these services at the least cost.

§ 3.1 Objective of Store Management / Objective of Store

1) THE MOST IMPORTANT OBJECTIVE is to provide uninterrupted supply of the raw

materials, equipments, tools, components, to the user department.

2) Receive the materials (raw materials, components, tools and equipments) and check the

materials in respect to bills of materials.

3) Receive, inspect, and issue the materials.

4) Receive and issue finished goods

5) Accept, store, arrange scrap for disposal.

6) To provide adequate and proper storage & preservation so that obsolescence and damage

of materials will be minimized.

7) To provide proper safety and security to materials & personnel.

8) To meet the demand of the consuming departments by proper issues and account for the

consumption.

9) To minimize obsolescence, surplus, and scrap through proper codification, preservation

and handling.

10) To ensure good house keeping, so that material handling, material preservation, stocking,

receipt and issue can be done adequately.

11) To assist in verification and provide supportive information for effective purchase action.

§ 3.2 Functions of Scientific Store Management

The working of store need to be organized to perform the following functions:

i. Requisitioning from purchasing department an economical quantity of material for delivery at

the most appropriate time.

ii. Exercising control on quantity of material received.

iii. Storing and protecting materials against hazardous condition, weather, deterioration and

pilferage.

iv. Issuing materials against properly authorized material requisitions.

183

v. Maintaining exact records of all receipt, issues, and balance to facilitate ordering of required

materials.

vi. Maintaining adequate records of records of receipt and expenditures.

vii. Maintaining adequate stock of materials to serve production needs.

viii. Keeping inventory investment within desired limits.

In another Way We can determine the Functions of Store Management

1) Identification: It is the process of codifying and describing all items required to be stocked.

2) Receipt: It is the process of accepting after inspection all materials required for use and (or)

accepting of end product.

3) Inspection: It is the quality checking pf all incoming materials.

4) Storage: It is the process of storing the materials in the warehouse.

5) Stores accounting: It is charging each issue voucher in a manner so that the money spent

is properly allocated.

6) Stock control: It is the process of provisioning, which mean continuously arranging, receipt

and issuing of stocks so as to ensure required service consistent with economy.

7) Stock record: It has to be maintained day to day position of receipt issue.

8) Stock taking: It is the process of verifying physically the quantity of materials.

Corresponding with the above responsibilities and functions every store should have the following

sections.

Identification

Receipt and inspection

Stocking wards that look after storage issue.

Dispatch

Ledger, which looks after stock records.

Stock verification.

9) Issue and dispatch: It is process of receiving demands from consumers and issuing

the demanded materials without loss of time.

§ 3.3 Functions of Store can be divided into Two Heads

1) Primary function and 2) Secondary function

1) Primary function:

a) To make available a balanced flow of raw materials, components, tools, equipment and

other stores required for operation.

b) To provide maintenance materials spare parts and general stores as required.

c) To received and issue materials after physical inspection and proper identification.

d) Storage and preservation of materials.

e) Safety and security of materials.

f) To arrange for collection, acceptance of scrap & other discarded materials for disposal.

2) Secondary function:

a) Quantity inspection and acceptance.

b) Stores accounting.

c) Stock control.

d) Feedback information to material control section.

e) Help in standardization and variety reduction.

184

f) Service information such as:

i. Demand for materials and its specification quantity, etc.

ii. Notification when stocks are running low.

iii. Details of deliveries rejected on inspection.

iv. Certification of invoices for quantity and quality.

v. Particulars of anticipated change in consumption.

vi. Warning of items urgently required for breakdown.

vii. Listing of obsolete, surplus and scrap materials for disposal.

§ 3.4 Benefits of Scientific Store Keeping / Advantages of Store Management

i) Scientific stock control reduces losses due to accumulation of inventories.

ii) Efficient stores issues reduce down time in production and increases profit.

iii) Periodic review detects obsolete and non- moving items and helps the firm to get rid of

unproductive inventory.

iv) Follow up with purchase, helps to avoid stock outs and the production losses.

v) Proper record keeping, provides exact picture of inventory in store to higher level of

management.

Store Layout

It can be defined as physical arrangement of space for storage, materials movement, material

handling equipment, office and its records and to provide the most efficient receipt, storage and

issue of materials.

Criteria:

i) Issue of materials in cost effective way and smoothly.

ii) Operation of handling equipment (both mechanized and manual).

iii) Optimum utilization of storage space.

iv) Adequate capacity and provision for future expansion

v) Easy receipt, storage and issue of materials.

vi) Ease in physical stocking.

vii) Easier and efficient supervision of stores.

viii) Clear identification of materials.

ix) Protection against fire risk to the store and rest of the organisation.

x) Sufficient space for easy movement of men and material

xi) Quick location of items through Identification, codification, standardization.

Location Systems / Placement within the Store

Location is the place in the store in which the item is kept. Efficient location system requires –

i) Listing and classifying the items to be stored.

ii) Locating materials within the store.

iii) Determine the space requirements.

iv) Determine method of storing.

v) Relating space requirements to space availability.

Heavier and bigger items should be stored near the issue window and heavy items should be

kept in lower racks nearer to the ground level

While lighter and smaller items may be located in the racks far from issue counter. Lighter

items can be kept in the upper racks.

185

Arrangement of materials:

Fast moving items (see ABC Analysis) should be stored near the issue window. For efficient

and economic receipts and issues,

Systematic arrangement of items in the store is necessary for their quick and easy location at

the time of issue (identification and codification). Different practices are found in the industry.

Rules regarding placement of materials:

i) High usage items: it should be located as close to the issue counters as possible.

ii) Heavy items those are difficult to transport: Near the point of use ( in case of raw

materials or capital items), or near broad gangways, or near the gate ( incase of returned

items and end product).

iii) Oil, greases, paints and combustible items: In a separate store.

iv) Inflammable and dangerous items: In a isolated fireproof place.

v) Rubber and rubber parts: In air conditioned store.

vi) Costly items: In locked cupboard and away from entrance to store.

§ 3.7 Types of Stores

According to function (functionally) stores are of five types.

1. Receiving stores.

2. Main store.

3. Finished product store (warehouse)

4. Special store.

5. Scrap yard.

According geographical area stores are of four (4) types:

1. Central store

2. Regional store.

3. Divisional store.

4. Sub store.

Lay out of a store building consists of

1) Store building plan

2) Layout within store

3) Stockyard

1) Store building plan

Factors influencing store building plan:

i. The store house should be as near as possible to the area of operation.

ii. Accessibility to road, rail (if necessary) for smooth movement of heavy vehicle and rail way

wagon.

iii. Store house should be provided with materials handling equipments like overhead cranes,

forklift trucks, etc. of reasonable size depending upon the likely materials to be handled.

iv. The store rooms should be equipped with suitable racks, shelves , cupboards and other

devices for strong materials conveniently so as to be accessible whenever required.

186

v. Lighting: clear and adequate lighting is a must for a proper work environment. Lighting effects

can be seen brighter through a wall colors. For stores personnel who work day in and day out

in the stores a pleasing environment can enhance their motivation and reduces their fatigue

level.

vi. Safety: this factor is perhaps the most important aspect. The following measures are

necessary if accidents are to be checked.

a) Safety conscious ness should be instilled in the mind of stores personnel through training,

visual aids, literature.

b) Safety equipment i.e., goggles, hand gloves, etc must be provided. Inspection should be

their to ensure that they are using those equipments.

c) Good housekeeping is essential.

d) All the stores equipment must be kept in good order and must be cleaned periodically to

avoid accident.

e) Provision of fire fighting facilities is necessary especially where inflammable materials are

stored and handled.

f) Other factors include provision of toilets, routine maintenance equipments, safe electrical

wirings, etc.

2) Layout within store

i. The large store house is divided in to Bays.

Examples: A system of this kind will give a symbol, E-2-56-120, which will indicate that the

material location of the item is at bin no: 120, shelf no: 56, room no: 2 and bay no: E

ii. Each bay will consist of several rows of shelf or cupboards each serially numbered.

iii. Each section of the shelf will be numbered

iv. Each Bin inside the shelf will be numbered further.

Some Typical Layout Plans

1. Layout of a small store:

A layout of small in a small scale industry is shown in the figure. The seating arrangement, filing

cabinet, storage equipment, and arrangement of equipment to form aisles is shown in the figure.

1. Entrance

2. Issue clerk

3. Store keeper

4. Filing cabinet

5. Cup boards

6. Storage racks

7. Passage

2. Layout of a Crib (sub/ borrow) store

5

4

2

3

6

Fig: A Layout of a small store

1

7 Passage

187

A layout of a crib store is shown in the Figure. The figure shows entrance, issue window, tool

racks and drawing files cabinet.

1. Entrance

2. Issue window

3. Clerk

4. Drawing files

5. Gauge racks

6. Passage

3) Stockyard

It is a position of store area outside the store building house but adjacent to it. Within stores heavy

and bulky equipments, steel rods, fabricated materials, cable drums, structural raw materials,

pipes are kept within the store.

Influencing Factors

1. Action from time to time to weed out any growth of vegetation which may overflow the material

stocked.

2. Extension of railway siding in to the stockyard, where the material can be unloaded without

extra handling.

3. Proper surface road inside the stockyard.

4. Proper installation of lights are to be done round the perimeter of fence of wall and also inside

the stockyard.

5. Planned way of stocking.

6. Provision of suitable weigh bridge for determining the weight, in the stock stockyard.

7. The number of gate should be less and should be locked up and inspected properly.

8. Adequate number of security should be given.

Travel/Transfer under rack

Travel/Transfer

Broken case peak

Tra

ve

l

Tra

ve

l

1

2

3 4

Fig: B Flow plans of crib (sub/ borrow) store

5

6

188

Layout of some stores

Fig: C Large scale drug warehouse with very narrow aisle pallet storage and vertical carousels for small

items. Designed to hold as much product as possible in an area where space is VERY expensive.

Fig: D Full size aisles for reach fork truck & good aisle space for passing while picking. Replenishment from

front side only, using rolling ladder or fork to drop product

Full case rack pick

Cross dock staging and

carton “put” area

Shipping and ship staging bulk receive &

stage

bulk store & pick

40,000 sq ft building for tires and misc.

overflow

Pick Start

EXPANSION

Packing, shipping

Receiving

189

Fig: E Wide aisles, no fork truck & fair aisle space for passing while picking. Replenishment from front side

only, using rolling ladder to drop product with some interference in picking. more than 100 bays in main W/H

Area

Fig: F Version 1Wide aisles, single deep rack. Fair aisle space for passing while picking, replenishment from

rear side, using rolling ladder to drop product with no interference in picking. 100 rack bays in main W/H

area

Fig: G Version 2

§ 3.8 Methods of Storing

§ 3.8.1 Preservation of Stores

Storage means that as long as materials belong to the custody of stores department, they should

free from damage and deterioration and maintain their required properties. preservation,

technically is the protection of stores from heat, moisture, dust corrosion rust fire, etc so as to

maintain materials in their original form.

Preservation measures serve three objectives:

Pick Start

EXPANSION

Packing, shipping

Receiving Pick End

Pick Area

Start

EXPANSION

Packing, shipping

Receiving

Pick Area

End

190

i) To keep materials safe from all kinds of damage.

ii) To maintain materials to their original value and quality.

iii) To reduce storage losses and consequently to reduce production cost

Deterioration is caused by

I. Climate and environment

II. Physical and chemical agents

III. Biological agents.

General rules of preservation:

i) Materials should not be kept in direct contact with the floor; they should be kept on raised

platforms. This prevents moisture from ground, dust, insect,

ii) All items those are perishable – should be issued on “first in first out” (FIFO) principle.

iii) Expiry date should be informed for replacement

iv) The store should be kept free from rodent menace for which the following measures are

essential:

a) The floors should be in concrete or bricks.

b) Windows should be kept at least one meter above the floor level.

c) The edges of the windows should lined by tin plates. Should be sealed properly

d) Drains pipes should be kept provided with wire mesh inside.

e) The rat holes should be fumigated.

f) Pesticides and fungicides should be sprayed in order to remove termites, ants and

fungi in the store.

§ 3.8.2 Precautions and specific method of preservation

Preservation methods for a particular class of material depend on its properties, characteristics

and special problems. The following are the preservation methods of some common items.

Leather goods:

i) They should be protected from exposure to sunlight and high temperature.

ii) They should be periodically turned to changes their location.

iii) Yellow soap powder and should be applied to make the goods soft and long lasting.

Wood and wooden product:

i) They should store above the ground so that the moisture does not attack them.

ii) They should be treated with creosote oil which makes the wood unattractive to insect to

eat. Pesticides should be applied periodically to remove termites.

iii) They should be kept away from heat.

Textile and cloths:

i) Small textile goods should be stored in airtight container and boxes.

ii) The goods should be occasionally exposed to sun.

iii) Naphthalene balls should be placed layer and packed.

iv) DDT should be sprayed.

Rubber and rubber goods:

191

i) Rubber parts should be stored in dry and cool place.

ii) Rubber tubing and rubber sheet should not be folded.

iii) Oils and greases should not be allowed to contact with rubber items.

iv) Specially designed racks should be used for storage of rubber parts.

v) They should be periodically rotated to change their position so that they are not on the

same end for long.

vi) Rubber goods being perishable should be issued on first in first out basis.

Metals (iron and steel):

i) The material should be stored at least 15 to 20 cm above the ground.

ii) These should not be stored in open space since sun rays are harmful particularly for bright

finished steel.

iii) Metals should be painted by anti-corrosive paints or covered by a film of oil, grease or

mineral jelly.

iv) Black bituminous paint should be applied to cast iron surface exposed to sun and rain.

Chemicals:

i) It should be stored in cool and dry places.

ii) Air –conditioned room or places having refrigeration facilities are ideal location for storage

of chemicals.

iii) All containers – drums, carboys, etc must be properly corked.

Paints:

i) These are inflammable and must be protected from fire.

ii) It should be kept in cool and dry place protected from heat and water.

iii) Paint drums should be periodically rolled to prevent sedimentation.

iv) Issue of paint should be first in first out basis.

v) It should not be exposed to atmosphere.

Machinery:

i) It should be kept in packed condition or in running condition.

ii) Sophisticated machines should be kept in air- conditioned room.

§ 3.8.3 Security of Stores

Security of stores include measures against i) theft against outsider, ii) pilferage by employees, iii)

mal practices by store staff, iv) precaution against fire protection, and v) pest control measures to

control rodents and termite menace.

The measure should include:

Daily closing of stores and custody of keys.

Marking of stores.

Storage of expensive and scarce materials.

Movement control of incoming/ outgoing vehicle. Number should be taken in the time of

192

Indemnity bonds or bank security from stores employees.

Enquiry and disciplinary action against defaulter.

Fire fighting equipment.

Pest control measures.

Theft by outsiders.

Pilferage by employees.

Malpractices by stores staff.

Prevention of fire.

Menace of rodents and termites.

1. Daily closing of stores:

1. Daily closing of stores should be properly supervised.

2. Stores keys must be numbered and registered. Written instructions should be issued

nominating the persons responsible for them.

During off duty hours, keys should be kept in a locked key safe under the supervision of a

responsible person of watch and ward.

3. “Key movement” register should be maintained. Any one collection and depositing a key,

particularly after the factory hours, should be required to sign the register.

4. All duplicate keys should be kept under the custody of the senior officer.

5. Loss or misplacement of a key on each occasion should be thoroughly investigated.

2. Theft by outsiders

To check theft by outsiders, the following measures should be taken:

1. The entire factory should have a high compound wall or high barbed wire fencing.

2. The number of windows, glass shutters and open ventilators should be minimum possible.

3. All windows and skylights should be capable of being securely fastened. They must also

be fitted with bars and iron-mesh.

4. Security guards should be put on duty at strategic points.

5. Outsiders should not be permitted to enter inside the store beyond the serving counters.

6. During closed hours a watchman should be provided to look after the stores building or

alternatively to have visits made at short intervals by the patrolling watchman.

7. Expensive and scarce items should be kept locked in steel almirahs.

8. Stores should be insured against burglary.

3. Pilferage by employees

Pilferage is gradual removal of material in small quantities by the employees of the company. The

following steps should be taken to check pilferage by the employees.

1. Only authorized personnel should be allowed to enter the store.

2. No personal property should be allowed to be kept inside the store.

3. Items liable for pilferage should be monogrammed with company’s name or marked for

some identification details before taking them into stock. Specific points to be observed

are:

Heavy items generally do not require identification marks.

Articles of domestic use such as hand tools, soaps towels, clothing, lamps etc. should

be marked.

193

Cutting tools should also be marked.

Measuring instruments such as micrometers, verniers scales etc. particularly need

marking.

Costly office stationery liable for pilferage should also be marked.

4. Fresh materials may be used against return of old ones.

5. Surprise checks of a section of store items should be done now and then.

6. Store staff should be searched before they are allowed to leave the main gate after day’s

work.

7. Immediate enquiry should be conducted as soon as any case of malpractice is brought to

light.

8. Prompt disciplinary action should be taken against defaulters (i.e., employees caught while

pilfering).

9. The punishment for pilferage should be given adequate publicity.

4. Malpractices by stores staff

Malpractices are the manipulations by store personnel with active help of outsiders. The following

steps help in checking malpractices by store staff:

1. Outgoing trucks, trolleys, parcels etc. should be thoroughly checked.

2. Gate passes should be made to take material out of the company.

3. Indemnity bonds or bank security must be taken from stores employees at the time of

employment.

5. Prevention of fire

Fire is an accident caused by chemical reaction between combustible and oxygen. Possible

causes of fire are:

1. Careless handling, storage and disposal of inflammable materials

2. Open electrical circuits causing short circuits.

3. Smoking by staff and clients in the store.

4. Spontaneous ignition due to slow oxidation with inadequate ventilation to remove heat.

5. Lightning.

6. Spark from shunting engine.

7. Auto-combustion

The following precautions should be taken towards fire prevention in stores:

1. Doors and staircases should be made of fire resistant materials

2. Smoking should be prohibited in and around the store houses.

3. Adequate earthing should be provided to the external and internal wiring of store buildings.

4. Materials should be properly stored. Leakage of inflammable oils, greases and fluids

should be prevented.

5. Combustible materials should be stored in covered metal bins and if they are in large

quantities, they should be stored in small lots at more than one location with enough gap to

limit spread of fire.

6. Defective wiring should be immediately replaced to eliminate possibility of fire due to short

circuit.

194

7. Since inflammable materials can undergo spontaneous ignition on account of slow

oxidation coupled with inadequate ventilation to remove resulting heat, they should be

stored appropriately.

8. Those parts of buildings where inflammable materials are kept should be well insulated to

reduce risk of fire spread.

9. Exits should be provided with panic bolts and should open outwards.

10. Telephone should be provided at strategic location with ready access to telephone

numbers of fire brigade.

11. Material inside the stores should be stocked keeping fire hazard in mind:

a) Enough clearance (around half a meter) between wall and the storage rack should be

provided.

b) A minimum of meter of aisle space should be maintained between the storage racks.

c) A meter of clearance is recommended between the stacked items and tube light

fittings.

12. a) Appropriate fire fighting equipment (e.g. fire extinguishers, sand and water-buckets,

water sprinklers etc.) should be provided at the appropriate places.

b) Fire extinguishers should be located as near as possible to exits or stairs landing.

c) Fire extinguishers should be visible and easily accessible (the bottom of the

extinguishers should be 75 cm above the ground) with a completely unobstructed passage

leading to them.

d) A framed plan showing the location of the fire fighting equipment and other useful

information should be displayed at the suitable places.

e) Fire fighting equipment should be checked periodically and kept ready to be used during

any eventuality.

13. a) In a large organization, a separate fire fighting department manned by trained

manpower should be created.

c) In small companies, 2-3 persons from each work area and all personnel from security

and store should be given training on 2 to 3 occasions in a year.

d) Smoke detectors should be installed in the storehouses to provide early warning.

e) Fire alarms should be provided at appropriate place to sound emergency

communication to all.

f) Store buildings, stocks, machinery and other assets should be covered by fire

insurance.

6. Rodents and termites

Measures against rodents and termite should be like the following:

1. If rodents is observed, the stores should be fumigated and rat poison traps kept.

2. For termites, white ants and fungi, suitable pesticides and fungicides should be sprayed.

§ 3.9 Stores Receipts

Receiving concerns control on quantity and quality of materials from the time they are received

until they are accepted and taken into stock.

Receiving is though a clerical operation but is the most important function of stores management.

Its importance can be gauged from the following:

195

Errors in purchase transaction can be detected more easily at the time of receiving of

material rather than afterwards.

Correctly performed receiving function can prevent malpractices.

Receiving department can assist purchase department in improving effectiveness of their

vendors.

Receiving department therefore, should not be looked upon as merely a clerical operation but

an important function designed to throw up error automatically.

§ 3.9.1 Responsibilities of Receiving Stores

The receiving store is charged with the following responsibilities.

i) Verification of correctness of paperwork and appropriateness of supply before accepting

the goods.

ii) Verification of quantities.

iii) Unloading of materials.

iv) In warding of the consignment.

v) Informing purchase/ indenter/PPC regarding receipt of goods.

vi) Preparing necessary documents

vii) Arranging inspection of materials.

viii) Returning all rejected goods and all chargeable empties back to suppliers.

ix) Forwarding accepted materials to appropriate stores for storage.

§ 3.9.2 Nature of Materials Receipt

Material in the receiving store are received from following sources:

i) Purchased materials received from supplier.

ii) Materials received from customer for processing.

iii) Materials returned by customer as defective.

iv) Materials returned by the customer on account of excess supply.

v) Defective materials returned by customers during the warranty period.

vi) Tooling, gauges, etc. received from customers “on loan” to be returned.

vii) Semi-finished or finished jobs received from vendors.

viii) “On loan materials” returned by the vendors.

ix) Delivery of materials by the couriers.

x) Materials received from forwarding agents against imports.

xi) Petty cash purchases by the purchase personnel.

§ 3.9.3 Documents Used in Receiving

The following documents are received/ raised for receipt transaction:

1. Delivery challan:

Also called dispatch memo, delivery note or delivery advice.

It is sent by the supplier with the material.

It lists the item details and the number of packages sent by them.

Two copies of the delivery note are sent by the supplier to the buyer.

Buyer retains the original and returns the second copy duly signed asa proof of safe

delivery.

196

2. Rail way receipt (RR)/ lorry receipt (LR): Issued by the railways/ transporter is the

document which acts as an authorization slip for getting the delivery of goods by the

purchaser from the railways/ transporter.

3. Bill of entry: It is received from the clearing agent against imports.

4. Cash memo: when cash purchased is made then it is used as a receipt for the money

which buyer has paid to the seller.

§ 3.9.4 Receiving Procedure

1. In warding at the security gate:

It guards against the malpractices by store personnel.

2. Verification correctness of paper work and appropriate ness of supply:

Right kinds of goods are only received.

Goods should be received in the right time, not very early and not late.

Right quantity goods should be received.

3. In-warding in the receiving stores

Verifying number of packets (quantity checking).

Observing apparent damages (damage and shortage checking). If any damage or

shortage found then discrepancy note should be made and it should be duly signed by

carrier.

Unload materials with the help of carrier and own people at the appropriate place.

Entering details of the consignment in to a goods received register.

The carrier copy is also stamped duly signed by receiving authority.

4. Verification of quantities:

Loss of packages: The number of packages received may be less than the number

that is supported to be received.

Damage of packages: The packages on receipt may be found to be broken or

damaged.

Wrong items: material different than what has been ordered may be found on opening

of the package.

Damage to the materials: Materials within the package should be checked that these

are in the right condition. If any thing found damaged then company has to do

according to the contract.

Shortages in supply: If the quantity will be found short, then discrepancy notes should

be issued.

Excess supply: If the quantity will be found excess than mentioned in the packing slip

or in the delivery challan/ delivery advice note, then again discrepancy note to be

made.

5. Notifying indentor about receipt of materials:

It notifies the indentor/ purchaser of the receipt of materials and thereby avoid

unnecessary follow up on their part.

It provides a formal “communication channel” between receiving department and

purchasing department as well as receiving and indenting department.

It enables the indentor to inspect “urgent materials”.

6. Preparation of goods received report:

GRR - Goods Receipt Report – is prepared by the receiving store on completion of physical

197

verification of quantities. It is also known as GIN ( Goods Inward Note) , MRR ( Materials

Received Report), MIN( Materials Inward Note), RCIA (Receipt-cum-Inspection Advice), etc. is

an important linking document between supplier, store, inspection, purchase and accounts

department. It has different copies like following:

i. Original copy

ii. Accounts Copy should be provided to accounts department on quantity invoiced by the

supplier. It is given to facilitate the movement of payment.

iii. Indenter’s copy to intimate the receipt and inspection results of the materials received.

iv. Main stores copy to give custody of the accepted materials, post stock cards, etc.

v. Purchaser’s copy to enable buyer to record receipt materials on follow up copy of the

P.O.

vi. Receipt cum inspection copy to maintain records on GRRs.

7. Inspection of materials:

After the materials have been verified for quantity, quality control department has to

undertake quality certification process.

Most commonly used approach is to forward the complete set of GRR.

The task of inspection of material may require the receiving store to –

i) Send the material to inspection department.

ii) Indicate the location where material is kept in the receiving stores.

iii) Provide copy of drawing of the component to be inspected.

Inspection department after receiving GRR carry out the inspection function.

They have to issue another report after completion of inspection; this is known as

Inspection Note.

Few companies use a document called “Rejection Note” to report inspection results.

8. Delivery of inspected materials to stores:

Accepted / rejected materials after inspection are forwarded to their respective stores

accompanied by a copy of goods receipt report (GRR).

Accepted materials are moved to main store while non-conforming materials are sent to

rejection store.

9. Return of defective materials back to suppliers:

Defective materials are kept in the rejection store.

A rejection register is maintained where each rejected material is recorded. Local

suppliers are informed to collect rejected materials. Outstation suppliers are notified and

defective materials are sent back to suppliers.

10. Returning all changeable empties back to supplier:

All empties are returned to the supplier as per terms of purchase order.

§ 3.10 Issue Control

Issue can be divided into

i) Issues to consuming department: These issues are based on work order and bills of

materials. Listing for each material. Quantity to be issued against each components requiring

that material.

Sometimes materials are issued on loan basis.

198

ii) Issues to outside supplier for processing or conversion: this aspect of issuing materials

depends on delegation of authority. Personnel of different hierarchy has the authority to issue

different quantity of materials

§ 3.10.1 Methods of Issue

1. Issue on request: This is most traditional and conservative way of issue where in the

indenting dept. sends a man and collect materials from stores.

2. Issue per schedule: In a batch production unit sometime the requisition for issue of stores

is sent before indicating time & date.

3. Imprest issue: In this system a list of certain items with quantities is approved for the

processing to be in charge of sub store near the shop floor mainly for tools and

components.

4. Replacement store: When a fresh issue has to be made to replace old machine.

5. Loan store: Supplying of stores to meet emergency need to repair some break downs.

§ 3.10.2 Issue of Materials

One of the major activities of stores is to issue materials of the right quality, in the right quantities

and at the right time. “Efficiency of the stores infact is judged by the user departments how

correctly and efficient their demands for materials are met”.

Materials, in general, are issued for the following purposes. Material is issued to –

i) Production for manufacture of goods against customers’ demand to make supply equals

demand.

ii) Maintenance department for plant repairs and maintenance of machinery.

iii) Suppliers to be returned.

iv) Sister companies from stock held.

v) Employees / scrap contractors (e.g. sale of scrap materials).

vi) Customers as sale of finished products. etc

Timing of Issue

Material should be issued only during specified hours of the day. This enables the storekeeper to

attend to other duties outside these hours.

Issue Procedure

The following issue procedure may be followed:

i) Logging the request for material: Request for the issue material should be logged in the

requisition register which maybe maintained date wise like a diary.

ii) Scrutiny of request: Material requisitions should be scrutinized to verify whether it is

signed by an authorized signatory. For this, the storekeeper should be provided a list of

authorized officials and their designations and specimen signatures.

iii) Checking availability of materials: Stores keeper should check the availability of

indented material in full or part in any one of the following categories:

a) Second hand / repaired

b) Obsolete

c) Surplus

199

d) Material returned from shops.

e) New material

Issue should be made in the above order to ensure that accounts of second hand repaired

and surplus are closed first.

If the material of the exact specifications is not available, the store should check the

availability of substitute material. The indentor should be informed of the availability of

substitute material and the same should be issued if it is acceptable to the indentor.

If the exact material or substitute material is not available, the requisition may be kept

pending for issue later on receipt of material.

iv) Logging the record in issue counter: Before taking the material to the issue counter, the

issue clerk should update the material requisition and make an entry in the bin card and in

the stores ledger / ledger card.

v) Preparation of gate pass: Where the material is to be taken out by vendor, sub-

contractors, customers, a gate pass prepared giving the following details:

Description / code no. of the material

Quantity

Issue voucher no. and date

Name of the person/ organisation

vi) Disseminating the materials: Material should be collected by the indenter’s

representative from the issue counter after signing the issue voucher.

Where the materials are bulky / heavy, they may be delivered by the store on door-delivery

basis.

Essentials of Correct Issues

Essentials of correct issue are as follows:

Material should be issued only against written requisitions.

Material should be issued only against authorized requisitions.

Material should be issued only in pre-fixed quantity especially for C-class of items.

Material should be issued on the basis of FIFO principle (first-in-first-out), particularly for

the items of low shelf life.

Material should be issued in bags, cartons to avoid damage.

Materials should be issued only during the specified hours of the day.

Material requisitions should be received preferably a day in-advance.

§ 3.11 Stock Taking

Stock taking, also called stock verification, is the process of ascertaining – by counting, weighing

or measuring – whether the physical stock of materials tallies with the balances shown in the stock

records i.e. bin cards or stock ledger.

Purpose

Stock taking

Is required to correct discrepancies between physical stock and book balance and thereby

ensure better material control.

Is the primary requirement for the financial statements.

200

Is an indicator of overall stores efficiency and management control.

Helps early detection of obsolete and dormant stocks.

Helps to audit store procedures.

Acts as a form of performance check on stock record

Common Causes of Discrepancies

Some of the common causes of discrepancies between physical stock and book balance are:

i) Manual (clerical) error

ii) Materials handling error

iii) Incorrect stock taking

iv) Incorrect location of parts

v) Environmental factors

vi) Preservation error

vii) Poor storage conditions

viii) Theft and malpractices

§ 3.11.1 Methods of Stocktaking

There are three methods stocktaking:

i) Annual stocktaking

ii) Continuous (Perpetual) stocktaking

iii) Re-order point stock stocktaking

i) Annual stocktaking

Annual stocktaking is the process of making a once a year count of all materials, finished parts,

work-in-process, finished goods, tools and supplies. It should be completed on that period.

Advantages:

a) The method is simple.

b) Less costly.

c) Stock figures in the balance sheet are more correct since verification is done at the time of

preparation of balance sheet.

d) It is done once that’s why clerical task is also very less.

ii) Continuous (Perpetual) stocktaking:

It is the process of taking physical counts of few items daily and thus covering each item in store

room at least once a year, important items should be verified twice, thrice or even monthly basis.

Advantages:

a) It can be done in more orderly manner.

b) Since it is done in orderly manner, it does not affect regular and routine activities.

c) Discrepancies can be detected very early.

d) Cost is less because regular personnel can do this job.

iii) Re-order point stock stocktaking:

It is the process of physical verification of an item when its stock falls below the re-order level.

§ 3.12 Identification, Codification, Verification

201

§ 3.12.1 Identification

Any organization stores a large no. of items. There should be some means of identifying them.

The normal way of identification of stores by simple description. But, an item can be described

in many ways.

Example: An electrical firm found that a simple item of a screw with a width of 3/8” and length 6”

had as many as 118 names, depending on types of usage and department using the screw.

A proper codification removes 117 stocking points (names).

§ 3.12.2 Codification

Definition: Codification in an industry is the systematic concise representation of equipment, raw

materials, tools, spares, supplies, etc. in an abbreviated form complying alphabets, numerals,

colors, symbols etc.

Objective of codification:

a. To classify and codify the items on some logical basis to suit the objective of the

organization.

b. To assist the process of standardization and variety reduction.

c. To facilitate proper functioning of the store house.

d. To ensure that each item is kept under one unique code.

e. To prepare a catalogue – nomenclature list to reduce ambiguity.

f. To make available the catalogue to all concern dept.

Benefits of codification:

1. Accurate and logical identification:

Codification distinguishes one item from another item.

Helps in accurate identification which eliminates any confusion.

2. Avoid long description:

Codification reduces the chance of using long description of items which leads to incorrect

and wrong typing of item name.

3. Prevention of duplication:

Items in absence of codification require to be described by brand names, trade names, or,

technological names and as such they often requisitioned by different personnel under

different names.

This can result in stocking of an item at different places under different names.

Codification system prevent duplication.

4. Product simplification:

A basic reason for codification is the simplification (i.e. reducing unnecessary variety) and

standardization (i.e., regulating variety).

Objectives

a) For proper codification, grouping of identical items is essential.

The most commonly used method is to take up an item group. Within its main classification

list down variety in use, identify variations among the variety and prepare the vocabulary.

202

b) Vocabulary (i.e., manual on codification) lists down all the items in stock according to the basic

characteristics which provides a quick reference for the personnel from design and planning to

know what variety already exists.

5. Smoothening the purchase activities:

Codification makes the purchase activity efficient due to the following :

i) It helps to avoid long clerical activities.

ii) Codes avoid the ambiguities.

iii) Buying instructions to the suppliers become easy and quick if there is proper understanding

of codification by the supplier.

iv) Codification classifies the items in to groups which in a large sized firm enable section wise

organization of purchase department based on group codes.

v) Purchase records too can be maintained according to the group codes and different

documents can also be filed accordingly.

6. Efficient storekeeping:

Codification facilitates locating and indexing of the materials in the main stores, sub stores,

finished parts stores and warehouses.

7. Accurate and reliable recording and accounting:

Codification leads to effective store control, efficient recording and result-oriented accounting.

8. Others:

Codification –

a. Helps to look for alternative at a time when the stock of a particular item is nil.

b. Ensures proper quality description of the item which assists in efficient inspection.

c. Simplifies costing and pricing since, due to codes cost can be calculated job wise for which

different cost heading can be provided.

d. Assist production since manufacturing runs can be planned on the concept of group

technology.

e. Assists management in their efforts to earn a good return on its investment. This being

possible due to the various benefits of codification enumerated above.

3Stock Verification

It is the process of physically counting, measuring or weighing the entire range of items in the

stores and recording the result in a systematic manner.

Stock verification is usually carried out by the material audit department, reporting to either the

material manager or the internal audit.

Purpose of stock verification:

a) To support the value of stock shown in the balance sheet by physical verification.

b) To verify the accuracy.

c) To disclose fraud, theft or loss of or, deterioration.

d) To reveal the weakness of the system in regard to safe custody.

Various methods of stock verification:

203

i) Periodic stock verification.

ii) Perpetual / continuous verification.

iii) Blind stock verification.

i) Periodic stock verification: Under this method of stock verification the whole stock

should be verified in periodical manner in one financial manner.

ii) Perpetual / continuous stock verification: Under this method, verification is done

throughout the year as per a pre- determined plan of action. ‘A’ item may be verified thrice

a year, ‘B’ item twice a year and ‘C’ items once a year.

iii) Blind stock verification: In this system, the stock verifiers are given the location, but not

details about code numbers, description and stock record. After verification, the report of

verified compared with the actual record.

Process of verification:

1) Stores personnel first locate the stock item.

2) Verifier verifies stock with the help of sales personnel.

3) If any discrepancy found, reports it in discrepancy voucher.

4) Reason of discrepancy.

5) Re-verification, if necessary.

§ 3.12.3 Store Accounting / Valuation of Stock

In relation to the estimation of the cost of the product for pricing decision, store accounting

assumes a key role.

Material costing is very important in terms of the valuation of the cost of materials consumed by

the production department as well as in terms of the estimation of the value of the materials held in

stock.

Costing of the issues to production:

1. First In First Out (FIFO)

2. Last In First Out (LIFO)

3. Highest in First Out (HIFO)

4. Next in First Out (NIFO)

5. Weightage average cost

6. Simple average cost.

7. Base stock method

1. First In First Out (FIFO)

The assumption made here is that the oldest stock is used first. Therefore at the time of issue, the

rate of pertaining to that will be applied.

It is logical for the products which deteriorate with time

Date Receipt Issues Stock on hand

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

204

1.2.2007

1.3.2007

14.3.2007

28.3.2007

1000

2000 - -

1.00

1.10 - -

1000

2200 - -

- -

500

1500

500 1000

- -

1.00

1.00 1.10

- -

500

500 1100

1000

1000 2000

500 2000

-

1000

1.00

1.00 1.10

1.00 1.10

-

1.10

1000

1000 2200 3200

500

2200 2700

-

1100

Advantages Disadvantages 1. Simple to understand and easy to

operate. 2. Material cost represents actual cost

which should be charged to a product. 3. Closing stock will be as closely

representative of current prices as possible.

1. In case of fluctuating price this method leads to clerical error.

2. In case of price change, comparison of one job with another can not serve any useful purpose.

3. When price rise, it will give low charges to product. It leads to many problem related to price of product.

2. Last In First Out (LIFO)

The basic assumption here is that the most recent receipt are issued first. We can apply LIFO

system to the example discussed earlier.

It is logical for the products which deteriorate with time

Date Receipt Issues Stock on hand

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

1.2.2007

1.3.2007

14.3.2007

28.3.2007

1000

2000 - -

1.00

1.10 - -

1000

2200 - -

- -

500

1500

- -

1.10

1.10

- -

550

1650

1000

1000 2000

1000 1500

1000

1.00

1.00 1.10

1.00 1.10

1.00

1000

1000 2200 3200

1000 1650 2650

1000

Advantages Disadvantages

1. Material cost will represent

current price as far as possible.

2. It minimizes losses in inventory.

3. When there is wide fluctuation in

price level LIFO tends to

1. In case of fluctuating price this

method leads to clerical error.

2. In case of price change,

comparison of one job with

another can not serve any useful

purpose.

3. When price are falling it will lead

205

minimize unrealized gain to low charge to production.

3. Highest in first out (HIFO)

When it is desired that issues shall be charged at the highest cost of purchase in stock so that

closing stock may represent purchases at lower rates, the method may be termed “HIFO”. This

method did not gain any importance. Only in monopoly concerns and in case of cost plus

costings, since, the closing stock represent lower cost it helps to create secret reserve.

4. Next in first out (NIFO)

Under this method the issue is charged at the rate of next purchase which is yet to arrive. The

object of the method is to see that the charge corresponds to the market price. This is therefore

similar to market price method, but is easier in application than that method, as the rate of next

purchase can easily known from the purchase order placed.

5. Average cost method or Weightage average method:

In this method, the issues to the production department are spit in to equal batches from each

shipment at stock.

It is logical for the products which deteriorate with time

Date receipt Issues Stock on hand

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

1.2.2007

1.3.2007

14.3.2007

28.3.2007

1000 (Q 1)

2000 (Q2)

1.00

1.10

1000 (V1)

2200 (V2)

- -

500

1500

- -

1.067

1.067

- -

533

1600

1000

3000

2500

1000

1.00

1.067 *

1.067

1.067

1000

3200

2667

1067

* Average price = (V1+V2) / (Q1+Q2) = (1000+2200) / (1000 +2000) = 3200/3000 = Rs. 1.067.

Weightage average Price = Value of material stock / Quantities in stock.

Advantages Disadvantages

1. In case of fluctuating price, it

will smooth out the fluctuation.

2. New issue price need not be

calculated each time issues.

1. Tedious calculation.

2. Material cost does not represent

actual cost price.

6. Simple average cost method:

In this method, the issues to the production department are spit in to equal batches from each

shipment at stock.

It is logical for the products which deteriorate with time

206

Date receipt Issues Stock on hand

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

Qty Rate (Rs.)

Value (Rs.)

1.2.2007

1.3.2007

14.3.2007

28.3.2007

1000 2000

1.00

1.10

1000

2200

- -

500

1500

- -

1.05

1.05

- -

525

1575

1000

3000

2500

1000

1.00

1.05 *

1.05

1.05

1000

3150

2625

1050

* Average cost = (1.00+1.10) / 2 = 2.10 /2 = Rs. 1.05.

It can be used in following situations:-

1. Materials are received in uniform lot quantities.

2. Difficult to identify each issue of materials.

3. Purchase price does not fluctuate.

Advantages Disadvantages

1. Simplicity. 1. Material cost does not

represent actual cost price.

2. In case of fluctuating price it

gives very incorrect result.

7. Base stock method

Under this method a fixed quantity of materials is always maintained at original cost and all issue

take place out of stock in excess of that fixed quantity using either FIFO OR LIFO. The fixed

quantity so maintained at original cost is called base stock.

From the following information for the Month of Mar. 06

01.03.06 Purchase 2000 units at the rate of Rs. 10/-

07.03.06 Issue 600 Units

11.03.06 Purchase 1000 Units at the rate of Rs. 12/-

14.03.06 Issue 1200 Units.

18.03.06 Issue 300 Units

24.03.06 Purchase 1,200 Units at the rate of Rs. 11/-

26.03.06 Issue 1,300 Units

30.03.06 Purchase 700 Units at the rate of Rs. 13/-

Prepare store ledger Accounts assuming that base stock is 300 Units at the rate of Rs. 10/- Per

Unit. Prepare store ledger under FIFO & LIFO.

Solution:

207

A) Store Ledger Under Base Stock Method (Under First In First Out System) For The Month Of

Mar’06

B) Store Ledger Under Base Stock Method (Under Lifo System) For The Month Of Mar-06

Material

Description …………. Maximum Level ………….

Code …………. Minimum Level ………….

Re-Ordering Level .…………

Danger Level ..……….

208

Other Methods:

1. Market Price Method

Market price is a price at which materials issued can be replenished. It means the market price.

Because replenishment can be done by purchase at market price. Charging of issues at market

price,

Therefore, ascertainment of market price whenever an issue take place.

2) Standard Price Method

Under this method all factors that may affect prices are considered and standard materials for the

materials is generally fixed before the actual purchase. Materials issued are valued at the

standard, price. For determination of standard price, following points should be consider :-

a) Increase in price due to possible changes in market conditions.

b) Discount, if any, may be available form suppliers depending upon quantity ordered.

c) Expenses on purchase i.e. Freight, Carriage, Import duty, brokerage, Godown rent etc.

If there is any difference between standard price and actual price, the difference is known as

material variance.

3) Inflated Price Methods

In general the material cost is consider as Invoice price + carrying cost i.e. Freight, Insurance

carriage, godown rent etc but ordering cost has not been, considered. When ordering cost has

been included the cost is known as inflated cost and issues are charged on that cost. Hence,

Inflected price will be :-

Invoice price + Carrying Cost + Ordering Cost -Discount

Comparison of FIFO and LIFO in profit center point of view:

Raw materials:-

Opening stock =400 units @ Rs. 10/-

Purchases = 1000 units @ Rs. 15/-

Closing stock = 500 units

Wages ,etc. = Rs. 2000/-

Sales = Rs. 20,000/-show the profit if raw materials issued are priced at a) FIFO & b) LIFO.

Raw material consumed

209

a) FIFO b) LIFO

Opening stock

400 units @ Rs. 10/-=Rs. 4000/-

+ 1000 units @ Rs. 15/-=Rs. 15000/-

400 units @ Rs. 10/-=Rs. 4000/-

+ 1000 units @ Rs. 15/-=Rs. 15000/-

Less closing stock Add wages etc

Rs.19000 - Rs. 6000

( 400 units @ Rs. 15/-)*

Rs.19000 - Rs. 4000

(400 units of Rs. 10/-) **

Rs. 13000 Rs. 2000

Rs. 15000 Rs. 2000

Cost of production Sales

Rs. 15000

Rs. 20,000

Rs. 17000

Rs. 20,000

Profit Rs. 5,000 Rs. 3,000

* In case of FIFO the stock in hand ( closing stock) will be charged according to last receipt price.

** In case of LIFO the stock in hand ( closing stock) will be valued according to first receipt price.

Store Record

For proper control over material, it is necessary to record the physical movement of materials

regularly. The main function of store – keeper is to maintain proper records regularly regarding

receipts, issue and balance of various items of materials. Bin Card and store – ledger are the main

tools to maintain proper record of stores.

Bin Card

Bin Card is a record maintained in respect of each item of materials to show the quantity in, the

quantity out and quantity in stock after each transaction. The stock at any time as shown in Bin

Card, may be verified with actual stock taking / verification.

The bin cards provides a continuous records of stock of each item and assist the stores-keeper to

control the store. For each material the maximum stock to be held are noted on the Card. Where

the materials are of a kind requiring advance ordering, an ordering level is also indicated there in

so that fresh supplies may be ordered before minimum level is reached. These cards also provide

an independent check on the stores ledgers.

Stores Ledger

Store ledger is a document kept by the cost department for each item of material. The ledger is generally

maintain under loose – leaf or Card type form. In the stores ledger every movement of material , either

inward or outward, is recorded in quantity, rate and value and the balance of material, after each movement,

is simultaneously struck out in quantity rate and valve. It is therefore, a duplicate of Bin Card so far as the

quantity is concerned and is also a step forward so far as the rate and valve are concerned.

Distinction Between Bin Card And Store Ledger

BIN CARD STORES LEDGER

210

1. Bin Card is maintained by store Department. 2. It records the Quantity of inward and outward movements and extract the balance after each transaction. 3. Entries are made in Bin Card when purchases or returns come in and when issues go out. 4. The officer-in-Charge of Bin Card is responsible for any Discrepancy in material 5. Posting in Bin Card is made for each individual transactions. 6. Bin Card cannot supply inventory Valve for preparation of financial Profit / Loss Statement.

1. Store Ledger is maintained by cost department. 2. It records both quantity and Valve of the material in case of each inward and outward and extract the balance both quantity and Valve after each transaction. 3. Entries are made in respect of Purchase, return and issue, but after recording in Bin Card. 4. The personnel-in-Charge ofstore ledger is not responsible for any such discrepancy as he has no connection with the materials. 5. Posting may be made on the basis of summary of several transactions in the same material for a particular period. 6. Store ledger can supply inventory Valve to help in preparing financial Profit / Loss A/c.

Inspection and Quality Control

Materials manager is very much concerned about the quality of incoming materials, as he is

responsible for the supply of the right quality materials to the user department.

Kimball and Kimball define inspection as it is an art of comparing materials, products or

performances with established standard. There can be no intelligent inspection without

definite standard. In any such items that are to be inspected , some will fall outside a liberal

allowance of variation from the standards, some will be well within the limits of errors ad

others will e very close to the limits. Inspection is the art of selecting these three classes of

products those which will be satisfactory for the work.

W.R. Spiegel defined inspection as the process of measuring the qualities of a product or service

in terms of a product or service in terms of established standard.

According to Alford and Beatty, “inspection is the art of applying tests, preferably by the aid of

measuring appliances to observe whether a given item of product is specified limits of variability.”

Objective of inspection:

a) Maintenance of quality: The fundamental purpose of inspection is to maintain the quality

of the product. This function is performed by comparing materials, semi-finished goods,

men and machines and tools with the established standard.

b) Improving product quality: By comparing the quality of the product against the set

standard, the defective items are located and probable reasons for the defects are

established. Necessary adjustments are done for future by removing the reasons for

defects and thus the quality of the product is improved steadily and regularly. It helps in

safeguarding the prestige and confidence of the organization in the eyes of consumer.

211

c) Reduction in costs: As raw materials are inspected to see whether they are as per

standards or not the defective raw materials are thus not allowed to be used in production.

Thus it saves the organization from loss if any and reduces the costs of production.

Problems on inspection:

Where manufacturer is quality conscious, the inspection is a very important function in the quality

control process. He faces the following the following problems:-

1. Where to inspect: The first problem before the management regarding inspection is to decide

about the place where inspection should be carried out to ensure the quality of the product so

that it can be done efficiently and at a low cost . Inspection can be done at various places

which are:

a) Inspection at purchaser’s or vendor’s place

b) In-process inspection.

c) Final inspection

d) Post-sale quality evaluation

2. When to inspect: It is practical to inspect each pat after each operation nor it is usually

desirable merely to subject the final product to an overall inspection prior to sales. So, it is

necessary to fix up the points in the production process at which inspection can be done so

that effective quality control can be maintained at the minimum cost.

3. How much to inspect: The next decision regarding inspection is about the quality to be

inspected. In this regard, the general policy is to inspect the least quantity consistent with

efficient quality control. The quantities to be inspected depend upon the nature of the product

and the degree of accuracy desired by the management. In some line of production where

there is a great scope for variation in the quality of the product 100% inspection is necessary .

in a large majority of cases it is enough to have a sample check. The selection of items to be

inspected should be on the basis of random sampling.

4. How to inspect: The next problem of inspection is how to inspect i..e, what techniques are

employed for screening the articles. Generally two methods are used : i) variable inspection

method where samples are chosen out from the lot and their size, weights, measures, etc. are

compared with standards. Ii) attributes inspection where the attributes are measured with

standards and if the properties of standard are not found.

5. Cost of inspection: Since the cost of inspection forms the part of total cost of production, the

manufacturer should also consider the question of cost of inspection. It should be kept to the

minimum without surrendering the quality of the product otherwise the inspection is worthless.

This problem will also decide about the profitability of the concern.

Quality control /or statistical quality control

By inspection, quality of the product is conformed with standards and specification during or at the

end of the production process. It is imperative to have certain disturbances with cause the product

deviate slightly from the desired standard. This types of variability is inherent in the process and is

known as variability due to chance causes. causes of deviations like conditions of production

process , nature of raw materials, the behavior of operations , etc. such causes are assignable

causes. Due to these causes , defective item are produced which lower the quality of the product.

212

Inspection has rather a limited use. It does not provide the extent to which certain products

requiring high degree of precision conform to the strict standards set in this regard. Similarly, it

does not provide all the information on the basis of which substandard finished products can be

scrapped in the case of mass production industries, producing standardized product. These

imperfections of inspection in quality control makes the use of statistical quality control

indispensable in this cases.

Statistical Quality Control (SQC) is the application of statistical technique to determine how far

the product conforms to the standards of quality and precision and to what extent its quality

deviates from the standard quality. The purpose of statistical quality control is to discover and

correct only those forces which are responsible for variations outside the stable pattern. The

standard quality is predetermined through careful research and investigation.

Techniques of SQC:

The techniques of statistical quality control can be divided in to two major parts:-

1. Control chart and

2. Acceptance sampling

1. Control chart: Control chart is most important quality control technique. It is a chart and

depicts three lines on the chart. One line is the central line showing the average size. The

other two lines one below the central line and other above the central line, indicate the limits of

the tolerances, within which deviation from standards permissible. The actual measurement

values which fall outside the tolerance limits are considered to be out-of – control points and

assignable cause may be said to exist. This will enable the manufacturers to know the causes

of variation or causes of trouble which he could amend.

2. Acceptance Sampling: It can be described as the post – mortem of the quality of the product

that has already been produced. Under this technique, a sample is selected at random to

examine whether it conforms to the standards laid down. It can be assumed that a certain

percentage of goods will not conform to the standards. So, certain percentage of defective

products in a ot may be specified. This technique has all the limitations of sampling technique.

There are two limiting levels of quality in an acceptance sampling plan.

i. The Acceptable Quality Level (AQL) that represents the lowest percentage of defectives

which buyer is expected to accept and seller is expected to supply.

ii. The Lot Tolerance Percentage Defective (LTPD) that represents a limit at which the

buyer wants to be quite certain that the lot will not be passed. the acceptance sampling

inspection may be of the following types: i) inspection by attributes, ii) inspection by

variable, iii) inspection by number of defects per unit.

Importance or Benefits of Statistical Quality Control:

1. It saves on rejection: In absence of statistical quality control technique, many products

may be found defective and worthless at the end of the manufacturing process and may be

thrown away as scrap. SQC avoids such a situation and saves the cost of labor and

material involved in production of defective items. It measures the extent of defect and

defective products may be improved by re-working to the level of acceptable standard. It

also saves loss which will arise out of re-working on the items rejected – out rightly or

which cannot be brought to the acceptable standard.

213

2. It maintains high standard of quality: Statistical quality control ensures the maintenance

of high standard of quality because lower standard of quality products are not marketed.

They are improved, if possible, or rejected out rightly but in no case, substandard goods

sold in the market. Thus the concern gains in goodwill.

3. Reduced expenses of inspection: It reduces the expenses of inspection to a great extent

and enables the product to be manufactured at lower cost.

4. Ensures standard price: If certain products are not up to the desired standard of quality,

and cannot be improved without much expense, they can be down graded and sold

cheaper. SQC maintains the standard of the product, the producer is able to secure the

standard price for all standard products, thus it increases the profitability of the concern.

5. Feeling of responsibility among workers: Among workers, a feeling of responsibility

develops because they begin to under stand that their work is being inspected very

minutely, hence, they work carefully. It helps increasing their moral.

§ 3.16 Value Analysis

Origin :- Value engineering or Value analysis had its birth during the second world war .Needlessly

to say , this was a fertile period for its growth due to world wide shortage of essential materials.

Lawrence D. Miles was responsible for developing the technique and naming it . through its

application , G.E.C saved nearly 70 million dollars and after that it was a question of time before

the technique caught on and spread like wild fire . In recent years, it has also been known as

molecular engineering or vertical thinking.

Definition and Scope:

Value analysis has been defined as “an organized creative approach which has, as its objective,

the efficient identification of unnecessary cost – cost which provides neither quality nor use nor life

nor appearance nor customer features.” Value engineering focuses engineering, manufacturing

and purchase attention to one objective – equivalent performance at a lower cost. In other words,

functional performance remains unaffected. Other techniques are as follows:

a) Organized cost reduction analysis by which accountant analyze costs in products or

procedures, the ranking of their elements in a descending order of magnitude and in

informed challenge to each , starting with most important .

b) Development as practiced in many firms where it follows the realization of a design and

combining through the specification to remove costs by substituting standard and relaxing

tolerance and finishes.

c) Purchasing analysis which systematically searches for cheaper bought-out components

or services, probably by seeking alternatives or a fresh basis for price negotiation.

d) Method study the part of work study that studies and analyzes work of any kind in a

discipline manner that leads to improvement in methods.

Quality Definition Joseph Juran ~ Quality is fitness for use. Juran’s definition, though very simple, is very much generic in nature. It covers also all the basic elements of all other definitions. A best quality walking shoe does not serve any good purpose of a ‘sports-shoe’. Each product or service has some specific purpose(s) to serve. That product or service which serves its intended purpose better, is taken to be of better quality. The driving force which determines the level of quality is the customer. As their needs and expectations change, so should the level of quality be changed. This fact led Feignbaum (Total Quality Control) to say that “Quality is a customer determination, not an Engineer’s determination, or a general Management determination. It is based upon this customer’s actual experience with the Product or service, measured

214

against his/her requirements – stated or unstated, conscious or merely sensed, technically operational or entirely subjective – and always operating a moving target is a competitive Market.” Dimensions for Tangible Product:

i) Performance ~ Colour and picture quality as well as audio-reproduction (Operation characteristic)

ii) Features ~ Remote and other available controls (What the product provides)

iii) Reliability ~ How frequently the repairing is needed. (Product survivability)

iv) Maintainability/Serviceability ~ How difficult/expensive to repair (Ability for repair)

v) Durability ~ How long it will last (i.e., life span)i.e., Economic length of use

vi) Conformance ~ How well it meets the design specifications (Physical characteristic)

vii) Aesthetics ~ How does it look.

viii) Perceived Quality ~ Brand image, Feeling confident about quality from past experience.( Subjective Assessment)

Introduction

Total Quality Management (TQM), a buzzword phrase of the 1980's, has been killed and

resurrected on a number of occasions. The concept and principles, though simple seem to be

creeping back into existence by "bits and pieces" through the evolution of the ISO9001

Management Quality System standard.

Companies who have implemented TQM include Ford Motor Company, Phillips Semiconductor,

SGL Carbon, Motorola and Toyota Motor Company.

The latest changes coming up for the ISO 9001:2000 standard’s "Process Model" seem to complete

the embodiment. TQM is the concept that quality can be managed and that it is a process. The

following information is provided to give an understanding of the key elements of this process.

Total Quality Management (TQM)

Total = Quality involves everyone and all activities in the company.

Quality = Conformance to Requirements (Meeting Customer Requirements).

Management = Quality can and must be managed.

TQM = A process for managing quality; it must be a continuous way of life; a philosophy of

perpetual improvement in everything we do.

TQM Compared to ISO 9001

ISO 9000 is a Quality System Management Standard. TQM is a philosophy of perpetual

improvement. The ISO Quality Standard sets in place a system to deploy policy and verifiable

objectives. An ISO implementation is a basis for a Total Quality Management implementation.

Where there is an ISO system, about 75 percent of the steps are in place for TQM. The

requirements for TQM can be considered ISO plus. Another aspect relating to the ISO Standard is

that the proposed changes for the next revision (1999) will contain customer satisfaction and

measurement requirements. In short, implementing TQM is being proactive concerning quality

rather than reactive.

TQM as a Foundation TQM is the foundation for activities which include;

Meeting Customer Requirements

Reducing Development Cycle Times

Just In Time/Demand Flow Manufacturing

Improvement Teams

Reducing Product and Service Costs

215

Improving Administrative Systems Training

Ten Steps to Total Quality Management (TQM)

The Ten Steps to TQM are as follows:

1. Pursue New Strategic Thinking 2. Know your Customers 3. Set True Customer Requirements 4. Concentrate on Prevention, Not Correction 5. Reduce Chronic Waste 6. Pursue a Continuous Improvement Strategy 7. Use Structured Methodology for Process Improvement 8. Reduce Variation 9. Use a Balanced Approach 10. Apply to All Functions

Principles of TQM

The Principles of TQM are as follows: 1. Quality can and must be managed. 2. Everyone has a customer and is a supplier. 3. Processes, not people are the problem. 4. Every employee is responsible for quality. 5. Problems must be prevented, not just fixed. 6. Quality must be measured. 7. Quality improvements must be continuous. 8. The quality standard is defect free. 9. Goals are based on requirements, not negotiated. 10. Life cycle costs, not front end costs. 11. Management must be involved and lead. 12. Plan and organize for quality improvement.

Processes must be Managed and Improved Processes must be managed and improved! This involves:

Defining the process

Measuring process performance (metrics)

Reviewing process performance

Identifying process shortcomings

Analyzing process problems

Making a process change

Measuring the effects of the process change

Communicating both ways between supervisor and user

Key to Quality The key to improving quality is to improve processes that define, produce and support our

products.

All people work in processes.

People Get processes "in control"

Work with other employees and managers to identify process problems and eliminate them

Managers and/or Supervisors Work on Processes Provide training and tool resources

Measure and review process performance (metrics)

Improve process performance with the help of those who use the process

216

Planning a Change

217

TQM Process Improvement and Problem Solving Sequence

PLAN

(PLAN A CHANGE)

DO

(IMPLEMENT THE

CHANGE)

CHECK

(OBSERVE THE

EFFECTS)

ACTION (EMBED THE

FIX INTO

THE

PROCESS

FOR GOOD)

DEFINE

THE

PROBLEM

IDENTIFY

POSSIBLE

CAUSES

EVALUATE

POSSIBLE

CAUSES

MAKE

A

CHANGE

TEST

THE

CHANGE

TAKE

PERMANENT

ACTION

1. Recognize that what you are doing is a "PROCESS" 2. Identify the

commodity

being

processed.

- Process

Inference

3. Define some

measurable characteristics

of value to the

commodity.

4. Describe the

"PROCESS"

o Process

Flow

Analysis's

o Flow charts

o List of steps

5. Identify the

"Big" problem

o

Brainstorming o Checklists

o Pareto

analysis

6. "BRAINSTORM" what is causing the problem. 7. Determine

what past data

shows.

o Frequency

distribution

o Pareto charts

o Control charts

- sampling

8. Determine the relationship between cause and effect o Scatter diagrams o Regression analysis 9. Determine what the

process is

doing now

o Control

charts

- sampling

10. Determine what change would help

Your knowledge of the process

Scatter diagrams

Control Charts - sampling

Pareto analysis

****Then make

the change.

11. Determine what change worked (confirmation).

Histograms

Control charts - sampling

Scatter diagrams

12. Ensure the fix is embedded in the process and that the resulting process is used. Continue to monitor the process to ensure: A. The problem is fixed for good. and B. The process

is good enough

o Control charts

- sampling

****To ensure

continuous

improvement,

return

to step 5.

Dimensions for Tangible Product / Concept of QUALITY IN SERVICE

• TIME • TIMELINESS • COMPLETENESS • COURTESY • CONSISTENCY • ACCESSIBILITY • ACCURACY • RESPONSIVENESS

Determinants of Quality A key issue is how to achieve ‘Quality’. There are three distinct but very much interrelated aspects of Quality. These are (i) Quality of design, (ii) Quality of conformance (iii) Quality of performance.

218

Quality of design is the degree of achievement of purpose by the design itself. The more sophisticated a design, the more it cost. Quality of conformance is assessed by the faithfulness with which the actual product or service conforms to the design-specification. It is obvious that both the quality of design and the quality of conformance must tally to make a good quality product. Quality performance is another name for Reliability, which is determined by his probability that an item will perform its intended performance without failure is a given period of time under the specified environmental conditions. A product or service most meet all the three requirements so that it is deemed to be of good quality. OBJECTIVES

• Quality Management is the scientific search for the most effective way to deliver the best care to the patients; is about saving lives and money

• Quality can continuously improved over time. • When standards of care are met, the standards are raised, and the improvement continues, and

costs continue to decrease. • Quality involves: appropriateness, availability, continuity, effectiveness, efficacy, efficiency,

respect and caring, safety and timeliness. (Tabish, OUP, CH 76 p599) Characteristics of Quality:

• QUALITY IS: – Defined By Customer – A Measure Of Achievement Of Customer Satisfaction – Fulfilling The Customers’ Needs / Requirements – Keeping One’s Word – Ensuring No Defects – Ensuring Fitness Of Use – Image Of The Company And Customer Confidence In The Organisation – A Precise And Measurable Variable – Utility To Society

Quality management principles

To lead and operate an organization successfully, it is necessary to direct and control it in a systematic and transparent manner. Success can result from implementing and maintaining a management system that is designed

to continually improve performance while addressing the needs of all interested parties. Managing an organization encompasses quality management amongst other management disciplines.

Eight quality management principles have been identified that can be used by top management in order to lead the organization towards improved performance.

a) Customer focus Organizations depend on their customers and therefore should understand current and future customer needs, should meet customer requirements and strive to exceed customer expectations. b) Leadership Leaders establish unity of purpose and direction of the organization. They should create and maintain the internal environment in which people can become fully involved in achieving the organization's objectives. c) Involvement of people People at all levels are the essence of an organization and their full involvement enables their abilities to be used for the organization's benefit. d) Process approach A desired result is achieved more efficiently when activities and related resources are managed as a process. e) System approach to management Identifying, understanding and managing interrelated processes as a system contributes to the organization's effectiveness and efficiency in achieving its objectives.

219

f) Continual improvement Continual improvement of the organization's overall performance should be a permanent objective of the organization. g) Factual approach to decision making Effective decisions are based on the analysis of data and information. h) Mutually beneficial supplier relationships An organization and its suppliers are interdependent and a mutually beneficial relationship enhances the ability of both to create value. These eight quality management principles form the basis for the quality management system standards within the ISO 9000 family. INTERNATIONAL STANDARD ISO 9000:2000 Quality management systems — Fundamentals and vocabulary 1. Scope: This International Standard describes fundamentals of quality management systems, which form the subject of the ISO 9000 family, and defines related terms. This International Standard is applicable to the following: a) organizations seeking advantage through the implementation of a quality management system; b) organizations seeking confidence from their suppliers that their product requirements will be satisfied; c) users of the products; d) those concerned with a mutual understanding of the terminology used in quality management (e.g. suppliers, customers, regulators); e) those internal or external to the organization who assess the quality management system or audit it for conformity with the requirements of ISO 9001 (e.g. auditors, regulators, certification/registration bodies); f) those internal or external to the organization who give advice or training on the quality management system appropriate to that organization; g) developers of related standards.

2. Fundamentals of quality management systems

2.1 Rationale for quality management systems

— Quality management systems can assist organizations in enhancing customer satisfaction.

— Customers require products with characteristics that satisfy their needs and expectations. These needs and expectations are expressed in product specifications and collectively referred to as customer requirements.

— Customer requirements may be specified contractually by the customer or may be determined by

the organization itself. In either case, the customer ultimately determines the acceptability of the product. Because customer needs and expectations are changing, and because of competitive pressures and technical advances, organizations are

— driven to improve continually their products and processes.

— The quality management system approach encourages organizations to analyse customer requirements, define the processes that contribute to the achievement of a product which is acceptable to the customer, and keep these processes under control. A quality management system can provide the framework for continual improvement to increase the probability of enhancing customer satisfaction and the satisfaction of other interested parties. It provides confidence to the organization and its customers that it is able to provide products that consistently fulfil requirements.

220

2.2 Requirements for quality management systems and requirements for products

— The ISO 9000 family distinguishes between requirements for quality management systems and requirements for products.

— Requirements for quality management systems are specified in ISO 9001. Requirements for quality

management systems are generic and applicable to organizations in any industry or economic sector regardless of the offered product category. ISO 9001 itself does not establish requirements for products.

— Requirements for products can be specified by customers or by the organization in anticipation of

customer requirements, or by regulation. The requirements for products and in some cases associated processes can be contained in, for example, technical specifications, product standards, process standards, contractual agreements and regulatory requirements.

2.3 Approaches to measurement of Quality:

• QUALITY MANAGEMENT IS THE:

– Scientific way to deliver the best care to patients – About saving lives and money – Continuous improvement over time – Standards of care are met, the standards are raised, the improvement process continues,

the costs continue to decrease

• Application of quality management to clinical processes can reduce post operative infection and eliminate many adverse drug reactions, reducing costs to hospital and patients.

• QUALITY INVOLVES:

– APPROPRIATENESS – EFFICACY – EFFICIENCY – RESPECT AND CARING – SAFETY – TIMELINESS.

• CONTINUOUS QUALITY IMPROVEMENTS:

Customer-driven quality TQM has a customer-first orientation. The customer, not internal activities and constraints, comes first. Customer satisfaction is seen as the company's highest priority. The company believes it will only be successful if customers are satisfied. The TQM company is sensitive to customer requirements and responds rapidly to them. In the TQM context, `being sensitive to customer requirements' goes beyond defect and error reduction, and merely meeting specifications or reducing customer complaints. The concept of requirements is expanded to take in not only product and service attributes that meet basic requirements, but also those that enhance and differentiate them for competitive advantage. Each part of the company is involved in Total Quality, operating as a customer to some functions and as a supplier to others. The Engineering Department is a supplier to downstream functions such as Manufacturing and Field Service, and has to treat these internal customers with the same sensitivity and responsiveness as it would external customers. TQM leadership from top management TQM is a way of life for a company. It has to be introduced and led by top management. This is a key point. Attempts to implement TQM often fail because top management doesn't lead and get committed - instead it delegates and pays lip service. Commitment and personal involvement is required from top management in creating and deploying clear quality values and goals consistent with the objectives of the company, and in creating and deploying well defined systems, methods and performance measures for achieving those goals. These systems and methods guide all quality activities and encourage participation by all employees. The development and use of performance indicators is linked, directly or indirectly, to customer requirements and satisfaction, and to management and employee remuneration.

221

Continuous improvement Continuous improvement of all operations and activities is at the heart of TQM. Once it is recognized that customer satisfaction can only be obtained by providing a high-quality product, continuous improvement of the quality of the product is seen as the only way to maintain a high level of customer satisfaction. As well as recognizing the link between product quality and customer satisfaction, TQM also recognizes that product quality is the result of process quality. As a result, there is a focus on continuous improvement of the company's processes. This will lead to an improvement in process quality. In turn this will lead to an improvement in product quality, and to an increase in customer satisfaction. Improvement cycles are encouraged for all the company's activities such as product development, use of EDM/PDM, and the way customer relationships are managed. This implies that all activities include measurement and monitoring of cycle time and responsiveness as a basis for seeking opportunities for improvement. Elimination of waste is a major component of the continuous improvement approach. There is also a strong emphasis on prevention rather than detection, and an emphasis on quality at the design stage. The customer-driven approach helps to prevent errors and achieve defect-free production. When problems do occur within the product development process, they are generally discovered and resolved before they can get to the next internal customer. Fast response To achieve customer satisfaction, the company has to respond rapidly to customer needs. This implies short product and service introduction cycles. These can be achieved with customer-driven and process-oriented product development because the resulting simplicity and efficiency greatly reduce the time involved. Simplicity is gained through concurrent product and process development. Efficiencies are realized from the elimination of non-value-adding effort such as re-design. The result is a dramatic improvement in the elapsed time from product concept to first shipment. Actions based on facts The statistical analysis of engineering and manufacturing facts is an important part of TQM. Facts and analysis provide the basis for planning, review and performance tracking, improvement of operations, and comparison of performance with competitors. The TQM approach is based on the use of objective data, and provides a rational rather than an emotional basis for decision making. The statistical approach to process management in both engineering and manufacturing recognizes that most problems are system-related, and are not caused by particular employees. In practice, data is collected and put in the hands of the people who are in the best position to analyze it and then take the appropriate action to reduce costs and prevent non-conformance. Usually these people are not managers but workers in the process. If the right information is not available, then the analysis, whether it be of shop floor data, or engineering test results, can't take place, errors can't be identified, and so errors can't be corrected. Employee participation A successful TQM environment requires a committed and well-trained work force that participates fully in quality improvement activities. Such participation is reinforced by reward and recognition systems which emphasize the achievement of quality objectives. On-going education and training of all employees supports the drive for quality. Employees are encouraged to take more responsibility, communicate more effectively, act creatively, and innovate. As people behave the way they are measured and remunerated, TQM links remuneration to customer satisfaction metrics.

• TOTAL QUALITY MANAGEMENT: – IS A STRUCTURED SYSTEMATIC PROCESS FOR CREATING ORGANISATION WIDE

PARTICIPATION IN PLANNING AND IMPLEMENTING CONTINEOUS IMPROVEMENT IN QUALITY

Quality control /or statistical quality control By inspection, quality of the product is conformed with standards and specification during or at the end of the production process. It is imperative to have certain disturbances with cause the product deviate slightly from the desired standard. This types of variability is inherent in the process and is known as variability due to chance causes. causes of deviations like conditions of production process , nature of raw materials, the behavior of operations , etc. such causes are assignable causes. Due to these causes , defective item are produced which lower the quality of the product. Inspection has rather a limited use. It does not provide the extent to which certain products requiring high degree of precision conform to the strict standards set in this regard. Similarly, it does not provide all the information on the basis of which substandard finished products can be scrapped in the case of mass

222

production industries, producing standardized product. These imperfections of inspection in quality control makes the use of statistical quality control indispensable in this cases. Statistical Quality Control (SQC) is the application of statistical technique to determine how far the product conforms to the standards of quality and precision and to what extent its quality deviates from the standard quality. The purpose of statistical quality control is to discover and correct only those forces which are responsible for variations outside the stable pattern. The standard quality is predetermined through careful research and investigation. Techniques of SQC: The techniques of statistical quality control can be divided in to two major parts:-

3. Control chart and 4. Acceptance sampling

3. Control chart: Control chart is most important quality control technique. It is a chart and depicts three lines on the chart. One line is the central line showing the average size. The other two lines one below the central line and other above the central line, indicate the limits of the tolerances, within which deviation from standards permissible. The actual measurement values which fall outside the tolerance limits are considered to be out-of – control points and assignable cause may be said to exist. This will enable the manufacturers to know the causes of variation or causes of trouble which he could amend.

4. Acceptance Sampling: It can be described as the post – mortem of the quality of the product that has already been produced. Under this technique, a sample is selected at random to examine whether it conforms to the standards laid down. It can be assumed that a certain percentage of goods will not conform to the standards. So, certain percentage of defective products in a ot may be specified. This technique has all the limitations of sampling technique. There are two limiting levels of quality in an acceptance sampling plan.

iii. The Acceptable Quality Level (AQL) that represents the lowest percentage of defectives which buyer is expected to accept and seller is expected to supply.

iv. The Lot Tolerance Percentage Defective (LTPD) that represents a limit at which the buyer wants to be quite certain that the lot will not be passed. the acceptance sampling inspection may be of the following types: i) inspection by attributes, ii) inspection by variable, iii) inspection by number of defects per unit.

Importance or Benefits of Statistical Quality Control:

6. It saves on rejection: In absence of statistical quality control technique, many products may be found defective and worthless at the end of the manufacturing process and may be thrown away as scrap. SQC avoids such a situation and saves the cost of labor and material involved in production of defective items. It measures the extent of defect and defective products may be improved by re-working to the level of acceptable standard. It also saves loss which will arise out of re-working on the items rejected – out rightly or which cannot be brought to the acceptable standard.

7. It maintains high standard of quality: Statistical quality control ensures the maintenance of high standard of quality because lower standard of quality products are not marketed. They are improved, if possible, or rejected out rightly but in no case, substandard goods sold in the market. Thus the concern gains in goodwill.

8. Reduced expenses of inspection: It reduces the expenses of inspection to a great extent and enables the product to be manufactured at lower cost.

9. Ensures standard price: If certain products are not up to the desired standard of quality, and cannot be improved without much expense, they can be down graded and sold cheaper. SQC maintains the standard of the product, the producer is able to secure the standard price for all standard products, thus it increases the profitability of the concern.

10. Feeling of responsibility among workers: Among workers, a feeling of responsibility develops because they begin to under stand that their work is being inspected very minutely, hence, they work carefully. It helps increasing their moral.

What is Value?

Value is broad term often used to denote cost and price. however, we would go a step further and

223

introduce the concept of function as well into the definition of value. Value can be divided into the

following classification.

1. Use of functional value: the properties and qualities which accomplish a use , work or

service.

2. Esteem value: the properties, features and attractiveness which cause us to want to own

it.

3. Cost value: the sum of labor, materials and various other costs required to produce it.

4. Exchange value: its properties or qualities which enable us to exchange it for something

else we want

Based on this classification, value is defined as “an organized creative approach which has as its

objective – the achievement of the value of the product.” Value analysis aims at reducing the cost

value to the value of the product.

It should be borne in mind that:

1. Value is not inherent in a product, it is relative term, and value can change with time and

place.

2. It can be measured only by comparison with other products which perform the same

function.

3. Value is the relationship between what someone wants and what he is willing to pay for it.

4. In fact, the heart of value analysis technique is the functional approach. It relates to cost of

function whereas others relate cost to product.

Function

Value=Cost

In the ABC analysis, the products are classified according to their sales or consumption value

and ranked in descending order. The products which offer the result the maximum sales or

consumption value are selected. These would offer the best result in terms of returns when

analyzed. Critical and production holding items are to be subjected to value analysis in order to

examine the rigidity of the specification.

Value Analysis Framework:

The basic framework for value analysis approach is formed by the following question, as given by

Lawrence D. Miles.

a. What is the item?

b. What does it do?

c. What does it cost?

d. What else would do the job?

e. What would the alternative cost be?

Value analysis requires these questions to be answered for the successful implementation of the

technique. Value analysis is also applied through by MISS technique, i.e., Modify, Improve,

Subdivide, Substitute, with regard to the product under study.

Implementation and Methodology:

In order to answer the above questions, three basic steps are necessary:

1. Identifying the function – any useful product has some primary function which must be

identified, a bulb to give light , a refrigerator to preserve food , etc . in addition it may have

secondary functions such as withstanding shock, etc. these two must be identified.

224

2. Evaluation of the function by comparison – value being a relative term, the comparison

approach must be used to evaluate functions. The basic developed. In order to develop

effective and identify unnecessary cost the following thirteen value analysis principles must

be used.

i) Avoid generalities.

ii) Get all available costs.

iii) Use information only from the best sources.

iv) Brain –storming session.

v) Blast, create and refine – in the blast stage, alternative products, materials, processes

or ideas are generated. The ideas would qualify for at least satisfying the

accomplishment of the function partly and economically. In the ‘create’ stage the idea

generated in the blast stage are used to generate alternative which accomplish the

function almost totally. In refining stage the alternative generated are shifted and

refined so as to arrive at the final alternative to be implemented.

vi) Identify and overcome the blocks.

vii) Use industry specialist to extend specialized knowledge.

viii) Key tolerance not to be too high.

ix) Utilize and pay for vendor’s skill and techniques.

x) Utilize vendor available functional products.

xi) Utilize speciality processes.

xii) Utilize applicable standard.

xiii) Use the criterion “would I spend my money this way?”

Implementation and Job Plan

In order to successfully implement a value analysis programme Lawrence D. Miles has formulated

a Job Plan which consists of the following even phases :

The orientation phase: is set by asking relevant questions like: What is to be done? What is it

that the customer really wants or need? What are the durable characteristics regarding weight,

size, color, etc.

Information phase: in this phase all pertinent information regarding costs, quantities, vendors,

and specification is collected. The basic methods of manufacturing process are studied.

Creative phase: during this phase, creative thinking and imagination are used to generate

alternative methods for performing the function. All ideas regardless of their seeming impractibility

must be recorded. This phase is extremely important in that it helps to evaluate an idea objectively

and to study the effect of an idea on various or all related fields.

Analysis and evaluation: in this phase suggested alternatives are analyzed and evaluated

regarding costs, probability of applicability etc.

Program planning phase: the program or plan for studying the various alternatives in greater

depth is laid down.

Execution phase: during this phase all the alternatives, with the cost and benefits, are studied

according to the plan or program, to finally arrive at the best alternative.

Presentation and implementation: during this phase all relevant data are presented to the

decision –making body or authority. The accepted ideas are then implemented and closely

followed to study the actual benefits derived.

Organization for Value Analysis

225

It indicates that value analysis focuses the attention of design , purchase , packaging, production,

finance(costing) and sales management to one objective – equivalent performance at a lower cost.

This means that representation from each of these department is essential to form a value

analysis team.

Stores Management and Computer: Any business that sells products needs a reliable method for inventory management. With bar codes, point-of-sale software and warehouse tracking, computerized inventory management systems make it easy for businesses to stay updated consistently. As with any new system implementation, business owners should consider the advantages and disadvantages of using a computerized inventory system before writing a check.

Automated Reordering and In-Stock Information Computerized inventory informs employees and customers within seconds whether an item is in stock. Because the inventory is synced with sales, there is a running tally of what is in stock and what isn't. This helps flag reordering needs and provides better service to customers. As inventory drops below a specific threshold, new orders are placed with vendors and tracked to let customers know when the new products will arrive.

Integration With Accounting Many of the computerized inventory platforms integrate with accounting software to track cash flow. This makes the process of transferring inventory costs and assets between programs seamless

and reduces the need for additional bookkeeping costs. Financial statements are more easily generated with shared data between inventory and bookkeeping.

Forecasting and Planning Inventory management software does more than track where inventory is located and when to reorder it. A data collection system is used to create needed forecasting and strategic planning reports. Business owners review trends regarding which products do well in certain months or during specific cyclical seasons. Business owners use this data to plan for growth and order inventory intelligently to best utilize cash flow resources. What is a Distribution Channel ?

It is a set of interdependent organizations involved in the process of making a product or a service available for use or consumption by the consumer or the business user

Web of capabilities embedded in extended enterprise. Objective of channel intermediaries : 1) Transportation and storage 2) Replenishment 3) Market coverage

i) Reduce time gap ( temporal closure) ii) Reduce space gap ( spatial closure)

4) Anticipation of demand. 5) Minimize the cost. 6) Provide market information 7) Distribution of resource. 8) Good relationship with manufacturer and consumer 9) Promotion or self place promotion. 10) Control over channel members 11) Issue of adaptability – with the change in market channel has to be changed. 12) Service out-put level

i) lot size ii) waiting time iii) spatial convenience iv) product variety v) other services.

226

Why are marketing channels used ?

Marketing channels are used for their greater efficiency in making goods available to target markets because of their contacts, experience, specialization and scale of operations. They can offer the producer more than it can achieve on its own

Channel intermediaries can provide economies. The use of channels implies fewer relationships to manage & hence intermediaries reduce the amount of work that must be done by producers & consumers

Marketing intermediaries transform the assortment of products made by producers into assortments wanted by consumers

Producers produce narrow assortments of products in large quantities, but consumers want broad assortment of products in small quantities

The channel intermediaries buy moderately large quantities from many producers & break them down into smaller quantities & broader assortments which are bought by consumers. Thus, channels play an important role in matching demand & supply

Role and function of Distribution system :- 1) storage 2) logistics 3) replenishment 4) promotion 5) After sales service. 6) Financial service. 7) Provide market information about product , customer, price stability and competitors. 8) Risk taking 9) Good relationship.

Functions of distribution channel members Information : Gathering & distributing info about producers’ offers to consumers, collecting market

intelligence from consumers & providing them to producers for their planning & control

Promotion : Persuading target consumers to buy products & services produced by the producers

Contact : Locating & communicating with prospective buyers

Matching : Shaping the offer to suit the buyers’ requirements

Negotiating : Reaching a negotiated price & other terms of the offer so that ownership can be transferred

Physical storage & distribution

Financing : Funding the cost of channel work

Risk taking : Bearing & sharing the risk of carrying out channel functions The different channel functions create different flows through the marketing channels :

Physical Flow (Forward Flow) Title Flow (Forward Flow) Payment Flow (Backward Flow) Information Flow (Forward & Backward Flow) Promotion Flow (Forward Flow)

Channel Levels A) Consumer Marketing Channels Zero – level (Direct marketing channels) : Manufacturer → Consumer One – level : Manufacturer → Retailer → Consumer Two – level : Manufacturer → Wholesaler → Retailer → ConsumeR Three-level : Manufacturer → Wholesaler → Jobber →Retailer → Consumer B) Industrial Marketing Channels Zero – level : Manufacturer → Industrial Consumer One – level : Manufacturer → Industrial Distributor → Consumer Two – level : Manufacturer → Manufacturer’s Rep → Industrial Distributor → Consumer Different intermediaries perform different functions : Wholesalers & Retailers buy, take title to & resell merchandise. They are Merchandisers

Manufacturer’s representatives, brokers, sales agents search for customers & may negotiate on behalf of the manufacturer, but do not take title to the goods. They are called Agents

227

Transportation companies, independent warehouses, banks, ad agencies assist in the distribution process but do not take title to the goods & do not negotiate purchase or sale. They are called Facilitators

Healthcare Solutions > Healthcare Resources > Hospital Logistics Share:|

The main task of all hospitals is the improvement of the patient’s state of health. The provision of the

medical treatment and patient care – core processes of the hospital, create demand for patient-related

support services. These secondary processes can be of medical or non-medical nature.

Additional services summarized in tertiary processes are not directly linked to patients, but are necessary for

proper operation of the healthcare facility.

Hospital Processes

Tasks of Hospital Logistics

Hospital logistics is coordinated cross-departmental with the flow of goods and information as well as a part

of patient care. Examples of logistics tasks can be found in secondary and tertiary processes:

Logistics tasks in patient-related medical

secondary processes

Patient logistics

Drug management

Laboratory logistics

Management of medical goods

Logistics of sterile goods

Information and documents

Disposal of hazardous waste

Logistics tasks in patient-related non-medical

228

secondary processes

Food management

Management of linens

Management of beds

Logistics tasks in patient remote tertiary processes

Management of administration

demands

Mail service

Disposal of non-hazardous

waste

Automated Hospital Material Transport

In many processes of hospital logistics, material transport plays a decisive role. According to requirements,

hospital material transport is either scheduled (planned) or on-demand (un-scheduled).

Compared to industrial applications, the quality of material transport in healthcare facilities must be of the

highest quality. Wrong or inaccurate deliveries could have fatal implications for patients, hospital employees,

and visitors. .

Automated Drug Management

The conventional drug management in hospitals is typically a manual process. The preparation of the

individual patient daily medication is managed by nurses on the wards. Therefore, hospitals operate many

drug storages in several departments. In addition, the preparation processes in the hospital pharmacy are

characterized by manual handling. Automated drug management in the hospital pharmacy (pharmacy

automation) and on hospital wards supports and increases patient safety.

Health care absorbs such a large proportion of public finances that it’s not surprising the health system hasn’t escaped

cutbacks. For instance, the health sector accounts for about a third of the Quebec government’s budget and about 7.5%

of the province’s GDP.

There’s a pressing need to review health care practices to improve hospital operations and bolster their efficiency and

effectiveness. Improved operations should provide better cost control, while maintaining the quality of care delivered to

the public. Support processes are excellent targets because they don’t necessarily have a direct impact on the quality of

care provided. Hospital logistics is one such process, the goal of which is to efficiently deliver medical supplies and

pharmaceutical products to the final consumer, the patient.

Comparative analysis, or benchmarking, is an improvement process that compares practices used by several

organizations to identify best practices. Organizations use this management tool to identify both the problem areas in their business processes and opportunities for improvement.

A benchmarking process targeting hospital logistics was recently initiated in five Quebec hospitals. The aim of the

study was to develop and test the validity of an analytical model and data collection tool tailored to hospital logistics.

With these tools, the costs of current hospital practices and their impact on the quality of care could be evaluated.

Eventually this could offer a clear set of benchmarked best practices for large hospitals.

Hospital logistics

A poorly understood and often unappreciated process, logistics accounts for a sizeable portion of a hospital’s operating budget. Studies have shown that from 30% to 46% of hospital expenses are invested in various logistical activities, and

that almost half of the costs associated with supply chain processes could be eliminated through the use of best

practices.

In hospitals, logistics cover not just support services such as purchasing, stores and the pharmacy, but also health care

services such as patient care units and operating rooms. Many activities that could be carried out by support personnel

are often on the list of duties performed by health care personnel. The result is that the internal supply chain within a

hospital is often highly fragmented.

229

Logistics is a complex process. The people involved vary with the type of products in question: for example, stores

manage medical and office supplies; the pharmacy looks after pharmaceutical products; and food services manages the

procurement and processing of food products.

Two major management methods are applied by hospitals. Certain products are managed and stored in the hospital’s

stores (or pharmacy) before being distributed to specific departments: these are called inventory products. Other items

are ordered directly by specific departments from the purchasing department, which oversees the purchases as needed

and delivers them upon receipt to the departments: these are non-inventory or direct purchase products. The latter are generally not stored in the institution’s stores.

Pharmaceutical products, meanwhile, are divided under two main headings: general products and prescription drugs.

The inventory and non-inventory distinction doesn’t apply to pharmaceuticals because all requisitions must go through

the pharmacy.

Figure 1 summarizes the main players and their role in the replenishment of two critical items, medical supplies and

pharmaceutical products. These relationships may differ at certain institutions. The pharmacy and stores order their

products directly from suppliers in some cases. Yet, in other hospitals, ordering is taken care of by a purchasing

department.

Figure 1 also shows the people who store medical supplies and pharmaceutical products, and indicates the two types of

flows between them: the flow of materials and information. These two flows were studied in the project to benchmark hospital logistics processes.

Benchmarking

To benchmark hospital performance, performance measures for material and information flows had to be established.

However, the information technology systems in place for support services in the health sector are very limited. In

Quebec, few hospitals have an integrated system with extensive information retrieval capabilities. Moreover, this information is rarely standardized, which further complicates data collection and analysis. Given these limitations, a

strictly results-oriented comparison was not feasible, so a process-based approach was taken.

230

Three steps were taken to provide structure to the benchmarking process. First, the hospital logistics process was

divided into several components to facilitate the analysis. Second, an analytical model and related data collection tool

was developed. The model identifies the performance measures used. And third, a data collection approach was

selected to get the project up and going.

Breaking down the process

The hospital logistics process was divided into three main sub-processes, namely Ordering and Managing Supplies,

Receiving Orders, and Replenishing User Departments. These sub-processes were also divided into various activities to

obtain a sufficient amount of detail without unduly complicating data collection. The processes associated with

inventory and non-inventory products are similar, with the exception of three activities not used in processing non-inventory items. Table 1 presents the breakdown of the logistical processes, with the activities not used in processing

non-inventory items identified in italics.

Analytical model

The analysis hones in on two types of performance measures — efficiency and quality. Breaking down these processes

into a number of specific activities offers a more detailed cost analysis. It is then feasible to assess a hospital’s efficiency for each activity as well as the overall process. These costs become the primary point of comparison for

identifying hospitals with the best practices. Since labour accounts for about 60% of a hospital’s costs, the primary

element affecting cost calculations is the time spent by personnel in carrying out various logistical activities. A second

element, technology maintenance expenses, was also considered to build a more thorough picture of the situation.

The quality of the logistics process was also considered in the measurements of hospital performance. The health sector

stands out specifically because of the critical nature of the service levels associated with logistical activities: the lack of

an item or a drug in the operating room could, for example, greatly compromise the work performed by health care workers and threaten the health of a patient. The quality of support services must be maintained. Table 2 lists the

service quality performance measures used in this study.

231

The study then examined various contextual elements such as hospital budgets, number of beds and type of specialties, as well as process-related elements (the current administrative practices in the hospital).

The analytical model helps identify best practice hospitals while shedding light on why the institutions perform well.

Analyzing costs and quality through the practices employed by hospitals also leads to an understanding of the

effectiveness and efficiency of various hospital-specific practices. It should be noted that the methodology identifies

optimal practices for large hospitals, not residential and extended care centres.

Data collection

The data collection combined case studies of five hospitals, which provided an in-depth study of a limited number of

sites, and questionnaires, which delivered the advantage of reaching a large number of respondents at a reasonable cost,

but didn’t allow for an in-depth analysis of these hospitals. This hybrid method thus identifies the practices deployed by

institutions and determines their performance level.

The method doesn’t, however, explain the nuances among hospitals with the same practices, because such hospitals are

grouped together in the analysis. A second data collection phase specific to the most promising practices will therefore be needed to identify the impacts of implementing these practices. This phase will be conducted on a much more

limited scale, since only the most promising hospitals will be visited.

In the current context, where health institutions must carefully manage public funds, where public accountability is

becoming more and more pressing, and where governments are trying to motivate hospitals by rewarding high

performing ones and penalizing those that are not performing as well, improving the logistics process through the

implementation of best practices has become a must. Identifying best practices by benchmarking the hospital logistics

process can help hospital managers find cures for the ailing health sector. Logistics in hospitals The concept of using logistics’ principles within UK hospitals is not new and the wide spread use of small bore pneumatic tube systems to distribute pharmaceutical products and test tubes is evidence that the optimisation of material movement, including the potential costs savings these systems generate, has been considered. However, the continuously increasing requirements imposed on existing developments mean that the ‘logistics’ components of the operation are increasingly seen as a way to not only reduce costs but

232

also improve the effectiveness of the day-to-day processes, including the use of IT, and the service provided. A further driver for the development of logistics concepts within hospitals is the use of the PFI procurements route. Operators of these new developments now have a financial horizon of 25-30 years making longer pay-back periods that may not be suitable to NHS trusts, on new processes or technology acceptable. They also have strong incentives to ensure that the layout of any new development, however integrated to existing buildings, provides the most cost effective solution for the delivery of FM services, whether in terms of space take up, shortest delivery routes, maximization of lift usage, etc, and that the operational processes proposed follow corporate sustainability targets. This paper looks at some of the logistics concepts that can be applied to the development of new hospitals and technologies used to provide the service required. Topics include site planning and the relationship with internal logistics, how internal logistics can be reviewed as horizontal or vertical distribution concepts and the impact on building layout and movement segregation. Automation and its use are described; covering small and large bore hole pneumatic tube systems, automated guided vehicles, track vehicle units and automated storage and retrieval systems. Site planning The logistics strategies used to define delivery routes, separation of flows, use of automation, etc, must start with a suitable strategy for the overall site planning. This should ensure that vehicles, used for goods and people, drop off at the closest possible point of usage, whether the main entrance or FM storage or the A&E department, to reduce travelling distances within the building. Any site planning should therefore start with the rationalisation of site entrances, ensuring that road access leads towards these entrances and suitable car parking is provided close to each entrance. Site access and car parking seem to be issues regularly raised by hospital staff; either because of the lack of car parking, complexity of road infrastructure and the impact on way finding, unsatisfactory blue light access or the mixture of staff access with FM deliveries, patients, visitors and blue light. Some recent PFI projects have provided the opportunity to re-assess site planning in terms of providing clear access and parking by creating visitor ‘front of house’ and staff and FM ‘back of house’ areas. If this separation can be matched by the provision of alternative access roads then this solution ensures that the front of the hospital is not seen as a pool of cars (as 70 to 80% of car parking is typically allocated to staff which would be at the back) and traffic can be controlled around the site with vehicle flows being separated before the entrance of the site. The suitable location of barriers also ensures that rat-runs around the site are avoided. The rationalisation of entrances to the buildings and site access also impacts on the level of double handling that may exist. In this context double handling is used to describe the process of offloading from a delivery vehicle and re-loading the goods onto a smaller vehicle, to be offloaded again at another entrance, etc. By the rationalisation of entrances, it is intended that not only visitors be directed to a single point of entry, but also FM deliveries be taken to a single FM industrial zone. This industrial zone could include a catering distribution point, pharmacy bulk storage and manufacturing, security hub, telephone operators, porters, waste rooms, gas storage, etc. From this central FM zone, ideally, all goods would be broken down and re-packed into containers ready for their end point of use, therefore avoiding any middle processing or storage spaces. In some instances, the goods should be delivered in a format already suitable to be taken directly to other departments, such as linen cages. Rationalisation of roads? Internal logistics The outcome of a logistics review of internal routes should be to ensure that goods and people can reach their final destination in the shortest and most direct possible route but still maintain any required segregation, such as between the public and patients in beds going to and from theatres. Visitors would therefore enter the main reception and then be directed towards main departments such as the day treatment centre, women and children’s unit, wards and A&E. Each with clear signage and a clear identity to facilitate way finding. Goods would be taken directly to the point of use from the central FM building through FM corridors and service lifts that provide direct access into the support spaces of each department without, for example, having to be taken through wards. It is obvious that in some instances it will not be possible to affect the layout of existing hospitals to such an extent that all double handling and cross-overs are removed and, in fact there may times when they are required as part of the normal operation, particularly if the central FM area is used to then distribute to a number of other buildings possibly on other sites.

233

Within the building, there are two principle methods of setting out the distribution routes and achieving the required movement segregation: horizontally and vertically. Horizontal segregation is based on providing separate corridors for the different types of activities; so for example, if the intention was to segregate between front of house (visitors and the general public) and back of house activities (FM, patients in beds and staff) then two corridors could be provided linking into each of the departments. This is illustrated on the sketch below.

Horizontal segregation is in fact the hardest to achieve, not necessarily because it is difficult to ensure the corridors do not cross but, because the corridors would run the length of the building in several locations, it would be much harder to integrate this strategy with the requirements for daylight. There is also a risk of simply creating too much circulation space. Vertical segregation makes use of lifts to bring the different flows of goods and people into appropriate spaces on each floor. It is still necessary to provide the horizontal access routes to access these lifts, but the corridors are only duplicated on one floor and also possible to have them at different levels. This is by far the easiest to integrate with the requirement for daylight, but has a considerable impact on the number of lifts that need to be provided. Vertical segregation is therefore not particularly suited to large sprawling developments with only two or three floors, but can easily be fitted when several departments such as wards are located above each other with identical access points. The use of vertical segregation is shown on the following sketch.

In practice the chosen solution is most likely to be a combination of both strategies to suite the site layout and access, and any existing buildings. In smaller hospitals, it may also be that there is in fact very little

234

choice in terms of the solutions that can be put forward. The sketch below makes use of vertical distribution for FM deliveries with a back of house corridor at ground floor, whereas the public is taken to a central core of lifts and distributed on each individual floor. The central lift core ensures that lift usage is maximised, which can reduce the number of lifts required compared to the vertical solution.

The choice of distribution strategy has a fundamental impact on where service spaces are located. For the horizontal distribution, FM spaces are located on each individual floor, as in the example given above, and link into each department on each floor across the corridor on that floor. In the vertical distribution, FM spaces are centralised on level A and are located remotely from the areas they serve. This should not have an impact on the level of service provided and response times, but changes the interaction between ward/department staff and FM support staff. The vertical distribution option should also reduce the FM space required as functions are centralised. There are clearly a number of alternatives as to what spaces can be centralised and others that should be physically close to the various departments and each needs to be reviewed to ensure the most suitable solution is selected. Automation Various types of automation have been used in the UK healthcare industry for several years, but the NHS has shied away from some types because of the payback periods involved and capital investment. The use of different procurement routes such as PFI, where a contractor has say a 25 year contract to run the building, bring new opportunities to look at automation and understand the benefits. The descriptions below give a very broad-brush view of payback periods and need to be estimated for each specific project. However the other drivers for using automation should not be underestimated, these are:

Improvement of service provision

Better use of existing staff

Reduction in the wear and tear of the building

24 hour availability The improvements in service provision are typically centred on increased speed of response and flexibility. A single test tube can be transported several hundred meters within minutes and without a second thought to the need for manpower, with results coming straight back once ready. Similarly dirty linen and waste can be collected during the night when the hospital is quite and re-scheduled within minutes without having to re-organise staffing. The shift of goods portering functions from man based to automated also means that porters’ interface can be moved from dealing with deliveries to patients. This not only moves resources to dealing with patients and the public, but also creates a much more rewarding working environment. A benefit of automation that is harder to quantify is the reduction in wear and tear. The movement of trolleys, cages, etc around corridors and in lifts creates considerable damage to finishes and transferring these movements to automated solutions can considerably reduce the impact of FM activities. Other benefits are the reduction in lift usage and subsequent reduction in wear and tear of the mechanical drives, car finishes, etc. Below is a short description of different types of automation that can be used for the distribution of goods. Small bore hole pneumatic tube systems

235

These systems are commonly used in the UK and abroad. They basically consist of a PVC tube network that links a number of the hospital departments and into which carriers can be inserted for the distribution of pharmaceutical goods, specimens, Xrays, documents, etc. The movement of the carriers is achieved by one or more fans pressurising various runs of the tube network and either blowing or sucking air to move the carrier. The tubes are typically 110mm, 160mm, 200mm or 300mm in diameter depending on what needs to be distributed, however the smaller system is the most common in the UK. The design of pneumatic tubes is well understood, however hospitals sometimes complain about the waiting time of a carrier before it is actually sent. This is normally caused by bottlenecks in the system, usually at the bridge between two or more zones, or simply because there is insufficient spare capacity on the system. The capacity is limited by the number of fans (or zones) available, as one fan is able to push or pull one item at a time, two fans can move two items at a time and so on. Therefore if the fans are busy, any new carrier has to wait until the system has cleared any backlog and is free again. Most manufacturers now produce linear transfer stations, also called linear coupler servers, that can move carriers from one tube network to another and also store them when the network is very busy. As a rule of thumb, these should be considered if three or more zones are required. It is also normal to design a network to run at 50 to 70% of its capacity, which should ensure maximum waiting times of 5 to 10 minutes. A simple system will cost approximately £3,750 per station. So for a hospital with say 16 stations (i.e. 10 wards, pharmacy, pathology unit, A&E, theatres, etc) on two zones, the cost will be in the region of £60,000. If it is used to replace three daily bulk deliveries from each station taking 15minutes each, the system is saving 12 man-hours a day, which means a possible pay back period of 2 years. This is extremely crude and the pneumatic tube system should hopefully provide a much better service than the equivalent of three bulk deliveries every day. Payback periods are however reasonably easy to calculate and short enough to justify the usage of these systems in most large NHS developments. Intergartion of this system with an automated pharmacy dispensing unit & optimisation of the use of the dispensing system? Large bore hole pneumatic tube systems These systems are very similar to the ones described above but are, as the name suggests, larger and can therefore transport bulkier items. They are typically used to transport dirty linen and waste from various departments to central collection points that can be up to a mile away, and are therefore particularly suitable to either very large sites or high buildings. There is, as far as we are aware, not a single system in operation in a UK hospital despite this being reasonably old technology regularly used in airports and high-rise residential buildings. Arup are involved with two installations in Ireland and feedback from the users is so far very positive. These systems are considerable more expensive than their smaller counterparts and, for example, a unit taking waste and linen from 16 areas (i.e. two networks running in parallel) to a central collection point with around a mile of pipe-work will be in the region of £450,000 to £500,000. If the FM team are expected to collect 3 waste containers and two linen cages from each area twice a day, then with a 15 minute travel time the system is saving approximately 40 man hours a day. The payback period is therefore much longer than the small diameter pneumatic systems, around 5 years in this example, which may be too long term for NHS trusts to consider their usage. Such payback periods would however be perfectly reasonable with longer service agreements, such as on PFI projects, and it is anticipated that new procurement routes will encourage their use within new developments. Automated Guided Vehicles AGVs are small robotic platforms approximately 400mm wide, 1500mm long and 300mm high that can lift and carry a variety of containers to pre-set destinations. They are programmed to carry out particular tasks at defined times, such as collecting waste containers and delivering catering boxes, and use the same corridors as staff, as they are fitted with anti-collision protection to ensure they do not collide with other moving objects or people. There are several types of guidance systems but the least obtrusive to install into existing buildings use laser technology that can locate walls and obstructions, which enables them to

236

determine where they are and where they are going. AGVs will also call for a lift and request a floor ensuring that any point accessible through corridors and lifts can be reached. Doors also need to be fitted with actuators to ensure the unit can open them when approaching. There are, as far as we are aware, no AGVs currently used in hospitals in the UK, although they are common in hospitals in the US, Germany, etc, and are used in many other industries such as manufacturing and aviation. Their main drawback is the payback period, which typically ranges between 5 to 7 years. Manufacturers do quote amortisation periods as low as 3 years, but these estimates clearly need to be done project by project. As a guide, the CAPEX for a large system using 20 vehicles to distribute around an 800 to 900-bed hospital will be around £2 to £2.5m including containers. Another important factor is the ease with which they can be introduced to existing developments. As noted previously, they can be mixed with staff and are able to control lifts, but routes need to be clearly defined and they may not be ideal in developments where buildings are at different levels accessed via stairs and corridors are consistently blocked by doors. A further item that needs to be resolved early on is the type of container that will be moved. AGVs can usually deal with the weights involved in FM deliveries but having a wide variety of containers can be an issue. The AGV has a preset dimension and the choice of containers needs to be suitable to fit under the AGV so that it can be moved. Most AGVs can be modified to take other containers than those specified by the manufacturer but there is limited flexibility. The rationalisation of container sizes is probably a good thing in any logistics review, but the affects need to be understood throughout the supply chain (i.e. why have clean linen delivered in cages if it needs to be transferred to something else once at the hospital?). Monorails and track vehicle systems Track systems exist in many different formats ranging from the smaller units used for document handling and hospital distribution (typically around 30kg) to the systems used in manufacturing that can handle loads up to 500kg (some industrial units will move higher loads). The smaller track systems are slower than pneumatic tube systems and generally more cumbersome because of the space requirements. Their main advantage is their capacity to transport goods of different sizes in one container horizontally and vertically, making them suitable for constant flows of larger deliveries. For individual projects, the choice will come down to either the monorail or the pneumatic tube systems and different diameters of pipe need to be reviewed to compare like for like. It may be that a mixed solution is the most suitable with the monorail used to deliver the larger containers between particular departments. The larger monorail systems are marketed as being suitable to distribute FM containers for catering and linen. These systems need to be planned in at the early stages of design because they take up considerable space and do interfere with people movement if high ceilings are not available. As with the smaller systems they need to be reviewed against AGVs when looking at automation options, however their impact on the building infrastructure is a considerable disadvantage. Pharmaceutical storage and dispensing systems There are typically three different types of storage and retrieval systems: mini loaders, vertical carousels and dispensers. A mini loader is a small version of the Automated Storage and Retrieval Systems (ASRS) found in distribution centres and warehouses. Systems vary between manufacturers but typically products are stored and retrieved by a two-axis robot mounted on a rail system that operates between two rows of shelving. The tight shelving means that product density is maximized and use of the robot ensures fast picking (450 to 900 products / hour). The automated storage software will also deal with channel allocation, stock management (including expiry date) and lot tracking. Vertical carousels consist of vertical shelving units that rotate around a conveyor belt to ensure that the shelf with the product required is located at the picking face. They usually come with various module heights to suite the quantity of items than need to be stored. Pick-to-Light displays highlight the item that is requested so that the operator does not have to check all the labels available on one shelf. As with the mini loader, software is available for full stock control. Dispensers use the same principle as the mini loader but items are stored vertically within a sealed container. One unit should be able to dispense approximately 300 units every hour, with a storage capacity dependent on the height available. They are usually smaller than the min loaders and therefore suite slightly different applications. Again they are able to provide full stock control. The choice of storage and dispensing system needs to be based on the required storage, the number of dispensing points to be covered and the handling speed. Once these parameters have been defined, it should be easy to make a comparison between the various options.

237

Exception Management Exceptions are special cases that deviate from the normal behaviour in a business process and need to be cared for exceptionally, normally by human intervention. Their cause might include: process deviation, malformed data, infrastructure or connectivity issues, poor quality business rules, etc. Exception management is the practice of investigating, resolving and handling such occurrences by using skilled staff and software tools. Good exception management can contribute to efficiency of business processes.

Need:- Logically, any company attempting this does so to alleviate perceived problems with recurring errors, things like rework, slow cycle times and information defects. The theory is that a formulaic approach

will drive down process variability with benefits similar to how a standard tooling process will drive down

defects and scrap in manufacturing. Unfortunately, this is not without its costs. Scalability is a critical component to most successful organizations. In many ways, the same could be said for individual

consultants and their respective consulting firms. However, in order to effectively scale and drive revenue, a

consultant needs to possess an excellent foundation in project management principles and techniques.

Exceptional project management skills help a consultant avoid being in a constant state of “catch up” and

instead focus on managing an engagement, anticipating risk, resolving issues, and refining his/her ever-

expanding library of best practices. It is these exact best practices that will help a consulting firm win

business over a competitor during a competitive RFP process. While it is not always the case, a firm that is able to convey value, experience, and credibility through repeated success will end up well-positioned in

good and not so good economic periods. BLOOD BANK:-

Blood transfusion is an essential therapeutic intervention. We all may need blood in an emergency, and some of us need regular transfusions. The purpose of a transfusion is to provide the blood component(s) that will improve the physiological status of the patient. Various blood components can be harvested from a single donation of whole blood. Most blood banks are able to separate red cells and plasma components. Others are able to prepare components such as platelet concentrates and cryoprecipitate. All these components, prepared by centrifugation, are often referred to as ‘wet or labile products’. Other plasma products, generally referred to as plasma derivatives, can be harvested from plasma by a pharmaceutical process called plasma fractionation, which renders their properties stable. The collection of blood from donors may take place within the blood transfusion centre or hospital blood bank. It is also often collected from donors during mobile blood collection sessions. The blood is then taken to a laboratory for testing and processing into components and for storage and distribution as the need arises. Safe storage of blood:- Whole blood and red cells must always be stored at a temperature between +2 °C and +6 °C. The main reasons for giving a blood transfusion are to restore or help to maintain the body’s oxygen-carrying capacity and the volume of blood circulating around the body. If blood is not stored at between +2 °C and +6 °C, its oxygen-carrying ability is greatly reduced. The anticoagulant/preservative solution in the blood bag contains nutrients for the blood during storage and stops the blood from clotting. The red cells can only carry and deliver oxygen if they remain viable: that is, if they retain the same properties as they have during their normal circulation in the body. The most important substances in maintaining the viability of red cells are glucose and adenosine triphosphate (ATP). Packing and transportation of blood and blood components An efficient system must be in place to ensure that all blood and blood components shipped by or received into a blood bank or blood transfusion service have been maintained within the correct temperature ranges. Red blood cell components must be kept at a temperature of +2 °C to +10 °C during transportation. All components routinely stored at +20 °C to +24 °C should be kept at these temperatures during shipment. All frozen components should be transported in a manner to maintain their frozen state. The transit time for blood and blood components should not normally exceed 24 hours Whole blood and packed red cells must always be stored at +2 °C to +6 °C and transported between +2 °C and +10 °C.

Blood components and plasma derivatives should never be stored in unmonitored equipment.

Red cells, platelets or whole blood must never be allowed to freeze.

The optimal storage temperature for conditions for fresh frozen plasma and cryoprecipitate is –30 °C, and they must always be frozen solid. They can be stored at lower temperatures, but must never be warmer than –20 °C.

Platelets must be stored at +20 °C to +24 °C with constant agitation and transported at temperatures within this range.

238

During transportation, frozen components must be maintained at a temperature that ensures they will remain frozen.

It is important to use a temperature monitor during transportation in order to check temperature ranges on receipt of the shipment.

To assist the maintenance of temperatures for blood components, it is often useful for hospital wards to possess a refrigerator for short-term storage of issued blood from the blood bank.

A database is a collection of persistent data that is used by the application systems of a given enterprise. Traditional databases are organized by fields, records, and files. A field is a single piece of information; a record is one complete set of fields; and a file is a collection of records. To access information from a database, we need a database management system (DBMS). This is a collection of programs that enables the service providers and clients to enter, organize, and select data in a database. Presently in Bangladesh 113 Safe blood transfusion centers are providing safe blood to the clients. The effective management of blood transfusion program encompasses a good number of areas and one of the areas is development of data base for the safe blood transfusion centers and also for the donors. The development of a data base always needed good documentation. Objectives of Data base • To develop and maintain an appropriate integrated blood donor tracking database system for the efficient and effective recording and management of blood donor data and blood donor retention • To significantly improve the quality of recording and management of information about blood donors to facilitate the effective tracking of repeat blood donors and the establishment of a reliable pool of regular repeat blood donors • To significantly improve the accuracy, efficiency and effectiveness of tracking information on blood donations, and ensure blood safety through accurate labeling and identification of blood units at every stage • To ensure sustainability through capacity building, staff skills training and the integration of plan and operations. • Obtain the best available information on blood transfusion services in the country • Assess the country situation on blood safety • Monitor trends and progress • Identify problems and needs in order to provide appropriate technical assistance • Identify the areas and issues for providing support. Data base software of Blood bank transfusion system The Blood Bank Transfusion System consists of seven separate but interrelated application software modules: • Blood Processing • Patient Processing • Inventory Management • Recipient History • Reports • Purge Processing • File Maintenance Blood donation, also called blood banking, refers to the process of collecting, testing, preparing, and storing whole blood and blood components intended primarily for transfusion. Blood registry refers to the collection and sharing of data about donated blood and donors. Donors who have been determined to be temporarily or permanently ineligible to donate blood are listed in a confidential national data base known as the Donor Deferral Register. A possible definition is that a database is a collection of records stored in a computer in a systematic way, so that a computer program can consult it to answer questions. For better retrieval and sorting, each record is usually organized as a set of data elements (facts). The items retrieved in answer to queries become information that can be used to make decisions. The computer program used to manage and query a database is known as a database management system (DBMS). The central concept of a database is that of a collection of records, or pieces of knowledge. Typically, for a given database, there is a structural description of the type of facts held in that database: this description is known as a schema. The schema describes the objects that are represented in the database, and the relationships among them. There are a number of different ways of organizing a schema, that is, of modeling the database structure: these are known as database models (or data models). Strictly speaking, the term database refers to the collection of related records, and the software should be referred to as the database management system or DBMS.

Blood Bank Management Software Blood Bank Management Software, readily scalable and adaptable to meet the complex need of Blood

239

Banks Who are Key Facilitator for the Healthcare Sector, it also supports all the functionalities of Blood Bank

Features of Blood Bank Management Software • Generating reports on Stocks-Blood Group wise, Area wise and Expiry date wise. • Donor Database-Blood Group wise and Area wise • Maintain and update Unique Donor Identifications. • Complete Key Consumables Inventory Management. • Track and maintain all the Donor Types-Voluntary, Exchange and Directed. • Improve the Effectiveness and efficiency of Blood Bank-Faster Response Time and Better Control • Accurate database/Record Management. • Blood Cross Match and Result Storage Facility. • Digital Record archival backup and restoring facility-Better Housekeeping and Record Maintenance. • Rejected Donor Database for Donor Control and Identification-Blood Transfusion related disease control and prevention. • Searched Facility for Destroyed and Expired Blood. • Comprehensive Donor database with Search Facility. • Unique Donor ID and Patient record ID for managing future list. • Improve Blood Bank processes by providing efficient and continuous software support A comprehensive application software called Blood Transfusion Management System is required to implement by incorporating blood screening data, blood donor profile, valid documentation of laboratory testing , schedule for regular blood donation and motivational camp, schedule for training program, management of routine blood supply, monitoring of transfusion hazard, quality control of blood and its product, procurement and finance related activities. By establishing networking system between the centers will enhance optimum use of information and data exchange to oversee, monitor and evaluate the quality of the services of the centers from a National Reference Center and dissemination of collective information worldwide through Website on Safe blood Transfusion Program of Bangladesh. Software features To fulfill the entire need of computer based operation, the following application modules to be developed and implemented in each computer c enter of the department : • Donors Health Profile Management Module • Recipient Health Profile Management Module • Blood Screening Data Management Module • Cross-Matching Data Management Module • Medicine Inventory Control Management Module • Blood Stock Inventory Management Module • Check-List Management Module • Investigation and Surgical Management Module • And other module as required

VARIOUS TYPES OF LAUNDRY SERVICES Laundry and Linen are one of the important supportive services in a hospital. The word Laundry is derived from Launderer/ Laundress which literally means washerman or washerwoman. Hospital linen means clothing made up of cotton, wool, synthetic fibers. Linen is comprised of basic fabrics which are spun into yarn and finally woven into cloth. Hospital having its own laundry or in – plant system. Justified and applicable in large hospitals, teaching hospitals as it is very expensive. In this system hospital has its own linen and laundry and all activities of laundry services like

Collection

Washing

Pressing

Distribution Marking

Drying

Folding

Controlling Sorting

Ironing

Storing Are done in hospital laundry and premises.

240

Rental Linen Supply System: a) In this hospital hire laundered linen from the contractor

b) Contractor is responsible for everything i.e laundering of patient and staff linen as well as replacement. c) Hospital does not have to spend on inventory of Linen.

Contractual System: a) Hospitals own their linen but no means of laundering.

b) Washerman or Dhobi in contract takes the linen and after laundering brings back.

c) If hospital is providing the platform for washing area and water a subsidized contract type of system can

be introduced.

Co-operative System: a) When a group of small hospitals pool together and adopt a single laundry cooperative system.

b) Economical if adopted for small government hospitals also as they share services of highly

qualified laundry manager/ supervisor, back up by modern machineries and automation.

c) Can evolve common policies of purchase, supplies, maintenance of standardization of linen after pooling their resources.

PURPOSES OF AMBULANCE SERVICES:- Early detection Members of the public, or another agency, find the incident and understand the problem Early reporting The first persons on scene make a call to the emergency medical services and provide details to enable a response to be mounted Early response The first professional (EMS) rescuers arrive on scene as quickly as possible, enabling care to begin Good on-scene care The emergency medical service provides appropriate and timely interventions to treat the patient at the scene of the incident Care in transitthe emergency medical service load the patient in to suitable transport and continue to provide appropriate medical care throughout the journey Transfer to definitive care the patient is handed over to an appropriate care setting, such as the emergency department at a hospital, in to the care of physicians

Treatment of material losses, obsolete, surplus and scrap management

Surplus: Surplus stocks are those materials which are procured and stocked in excess of an organization’s production and operation requirement. Surplus stock arises because of unplanned purchase, lack of coordination between production, maintenance and materials department or wasteful processes in production and unscientific inventory management. Scrap, Obsolete And Waste Scrap: Scraps are generated through production waste or as product of operations in the production shop floor through the production system. Obsolete: Because of technological changes and advancement every organization may have to adopt the latest operational practice or production method. In such case any material, part, component, assembly, sub assembly required to be kept in the sore to meet up the demand of consumption for previous product is called obsolete. Waste: Waste is known as discarded substances having no value or very low value Reasons of Waste

1) Changes in product design: These may lead to some items getting invalid so far as the final product is concerned. Hence, the entire stocks of such items become obsolete.

2) Rationalization: Sometimes raw materials rationalized to minimize variety and simplify procurement. The rationalization process renders some items as surplus or obsolete.

3) Cannibalization: When machine breakdown occurs, sometimes it is rectified using parts of an identical machine which is not functioning due to various reasons. This process is called cannibalization. It is common in many Industries.

241

4) Faulty planning and forecasting: the marketing department may have a projected a sales forecast which might be on higher side. It causes obsolete.

5) Faulty purchase practices: Decisions like buying in bulk to take care of discount and transportation economy without taking in to account factors such as shelf life, storage space requirement and technological changes once again lead to the accumulation of surplus and obsolete stock.

6) Other causes: Many items are held as insurable spares for many years without any consumption. Faulty store-keeping, without adequate preservation, lead to spoilage. Improper codification, poor manufacturing methods and inferior materials handling are also result in obsolete, surplus and scrap item.

Rules of Disposal of scrap: Movement Analysis:

The process of combining the stock records and movement analysis has been found very effective in locating such stocks in the total inventory.

Disposal of Scrap:

Disposal of scrap when handled in an imaginative manner can result in handsome returns to the organization.

Continuous market survey on the prices of various categories of scrap generated in the plant is necessary

Disposal action follows when the scrap cannot be utilized within the organization. In practice, it is profitable to dispose the scrap directly to end-users rather than to middlemen.

Management of Waste, scraps, and obsolete:

Waste is known as discarded substances having no value or very low value. Waste may arise due to the inherent nature of materials, chemical reaction, evaporation drying, sublimation of goods etc.

Wastes are also be in the form of smoke, gas slag or dust which arises in the course are manufacturing process. The waste may be visible or non-visible. The waste can be:

(a) Normal waste and (b) Abnormal waste

a) Normal Waste: It is due to natural causes, it cannot be checked only it can be minimized by exercising strict control. The effect of such waste is to reduce the quantity of output and to calculate the cost per unit of the output.

b) Abnormal Waste: Any loss caused by unexpected or abnormal conditions such as sub-standard materials, carelessness, accident etc. or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal waste. Scrap of materials and scrap at works (factory): Scrap is discarded material having some values. It represents fragments or remnants of material that are left from certain type of manufacture There are three types of scrap, namely (a) legitimate scrap, (b) administrative scrap, (c) defective scrap.

a) Legitimate scrap arises due to the nature of operation like turning, boring, punching, etc. This type of scrap can be pre-determined and efforts should be made that it should not be more than the pre-determined quantity.

b) Administrative scrap arises due to administrative action, such as, a change in the method of production.

c) Defective scrap arises because of use of inferior quality of material or bad workmanship or defective machines. Such type of scrap is abnormal because it arises due to abnormal reasons.

Treatment of Scrap: The useful methods for the treatment of scrap are as follows:

1. When realizable value of normal scrap is insignificant (i.e., legitimating scrap administrative scrap) it may be credited to Profit and Loss Accounts like other income. This method is not suitable effective control over scrap because

The sale value of scrap may be deducted from the cost of material consumed or factory overhead Defective output: Defective products or units are those which do not meet with dimensional or quality standards and are reworked for rectification of defects by application of material, labour and/or processing and salvaged to the point of either standard product or sub-standard product to be sold as seconds. So defectives are that portion which can be rectified at some extra cost of re-operation. Defectives may arise

242

due to the following reasons:

a) Sub-standard materials. b) Poor workmanship. c) Poor maintenance of machines. d) Wrong tool setting. e) Faulty design of products. f) Bad supervision. g) Careless inspection. h) Poor working conditions. i) Lack of control, such as humidity, furnace temperature etc. j) Excessive short runs.

Treatment of Cost of Rectification of Defectives: The following methods may be adopted for the treatment of this cost:

When the defective production is identified with a specific job or department, the cost of rectification is charged to that specific job or department.

Spoilage of Production: Spoilage refers to production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is junked and sold for a disposal value. So it occurs when goods are so damaged in course of manufacturing process as to become not rectifiable Treatment of cost of Spoilage: The treatment of cost of spoilage depends upon the nature of spoilage. If the spoilage is normal, the cost is borne by good units of output. In case of abnormal spoilage, cost of spoilage is transferred to Costing Profit and Loss Acount Control of Wastage, Scrap, Defectives and Spoilage: Every effort whould be made to reduce the cost of production by exercising control on wastage, scrap, defectives and spoilage. The following steps may be taken in this direction.

Biomedical Waste Introduction: The waste produced in the hospital in the course of health care activities carries a higher potential for infection and injury than any other type of waste. Therefore, it is essential to have safe and reliable method for its handling. Inadequate and inappropriate handling of health care or bio-medical waste may have serious public health consequence and significant impact on the environment. Hospital generates 75-90 percent of non-hazardous general waste and rest 10-25 percent is the hazardous waste generated by hospital. Definition: According to bio-medical waste (management and handling) rules, 1998 of India, Bio-medical waste means any waste, which is generated during the diagnosis, treatment or immunization of human beings or animals or research activities pertaining thereto or in the production or testing of biological, and including categories mentioned in schedule-I. Categories of biomedical waste: Hazardous, toxic and bio-medical waste should be segregate into following categories for the purpose of its safe transport in a site and fir specific treatment or disposal. The categories are as follows: 1. Human Anatomical Waste: This contains human tissues, organs, body parts etc. 2. Animal waste: This contains animal tissues, organs, body parts, bleeding parts, fluid, blood and

experimental animal used research. This waste generated in veterinary hospital and animal house. 3. Microbiological and biotechnological waste: This contains waste from laboratory culture, stocks and

specimens of microorganism live or vaccines, human or animal cell culture used in research. 4. Sharp waste: This contains needles, syringes, scalpels, blades, glass, etc 5. Discarded medicine and cytotoxic waste: This contains waste comprising of out date, contaminated

and discarded medicine. 6. Soiled waste: this contains item contaminated with blood and body fluids, including cotton, dressing,

soiled plaster casts, linens, bedding and other material contaminated with blood. 7. Solid waste: This contains waste generated from disposable items, other than the waste sharps, such

as tubing, catheters, intravenous sets, etc. 8. Liquid waste: this contains waste generated from laboratory and washing, cleaning, housekeeping

and disinfecting agents. 9. Incineration waste: this contains ash from incineration of any biomedical waste. 10. Chemical waste: this contains chemicals used in production of biological, and chemical used in

disinfection and insecticides, etc. Collection, segregation, storage and transportation of biomedical waste:

243

A. Segregation of waste: Segregation of biomedical waste is very important part of hospital waste management department. The operation of segregation consist:

1. It should be done at the sources of generation of biomedical waste, e.g. the entire patient care active area; diagnostics services area Operation Theater, labor room, treatment room, etc.

2. Responsibility of Segregation should be with the generator of biomedical waste i.e. doctors, technicians etc.

3. Bio-medical waste shall be segregated into color coded containers / bags at the point of generation. 4. Whenever possible, biomedical waste must not be mixed with chemical, radioactive or other laboratory

trash. This may be unavoidable (i.e. radioactive e carcasses) and in such instances special handling may be required.

5. The various types of biomedical waste should be segregated from each other. 6. Fluid waste should be contained separately from solid waste B. Collection of Biomedical Waste: Collection of biomedical waste varies for different services or departments depending upon waste generation practices, available resources or management approaches. Collection of biomedical waste should be done as per biomedical waste (management and handling) rules 1998. However, a separate container with color code shall be placed at every point of generation. The trolleys, which are used to collect hospital waste, should be designed in such a way that there should be no leakage or spillage of biomedical waste while transporting to designated site. Type of container and color code for collection of biomedical waste

Sl Category Type of container Colour coding Treatment/ disposal

1 Human anatomical waste

Plastic bag Yellow incineration\ deep burial

2 Animal Plastic bag Yellow incineration\ deep burial

3 Microbiological and biotechnology waste

Plastic bag Yellow\ red Local autoclaving, microwaving, incineration

4 Waste sharps Plastic bag, puncture proof container

Blue\white\translucent Disinfection(chemical treatment, autoclaving, microwaving, mutilation/shredding

5 Discarded medicines and cytotoxic waste

Plastic bag black Incineration, destruction & drugs disposal in secured land fills

6 Solid waste (soiled) Plastic bag, puncture proof container

Yellow\ red Incineration, autoclaving, microwaving

7 Solid waste (plastic) Plastic bag Blue\white\translucent Disinfection by chemical treatment, autoclaving, microwaving, mutilation/shredding

8 Liquid waste Plastic bag Disinfection by chemical treatment and discharge into drains

9 Incineration ash Plastic bag black Disposal in municipal land fill

10 Chemical waste(solid)

Plastic bag black Chemical treatment and discharge into drains for liquids and secured land fill for solids.

C. Storage of waste: Storage refers to the holding biomedical waste for a certain period of time. Although biomedical waste should be treated as promptly as possible it can be held temporarily. Treatable waste should not be allowed to accumulate. Waste that is to be disposed off-site should be stored in designated areas which are secure and access is limited to delegated individuals. Guide line for storage of biomedical waste are:

1. No untreated biomedical waste shall be kept or stored beyond a period of 48 hours. 2. The authorized person must take the permission of the prescribed authority, if for any reason; it

becomes necessary to store the waste beyond 48 hours. 3. The authorized person should take measures to ensure that the waste does not adversely after human

health and the environment, in case; it is kept beyond the prescribed limit.

D. Transportation: after collection, segregation and storage biomedical waste needs to transfer to disposal site. There are two type of transport, like: 1) transportation within the hospital and 2) outside the hospital. The parameters of transport are as follows:

1. Transportation within the hospital:

244

Within hospital, waste routes must be designed to avoid the passage of waste through patient-care areas as far as

possible.

Separate time should be fixed for transportation of biomedical waste to reduce changes of its mixing up with

general waste as far as possible.

Dedicated wheeled containers, trolleys or cars should be used to transport the waste bins\ plastic bags to the site

of storage/ treatment.

Trolleys or carts should be thoroughly cleaned and disinfected in the event of any spillage.

The wheeled containers should be designed in such a way that the waste can be easily loaded, remains secured

during transportation, does not have any sharp edges and easy to clean and disinfect.

2. Transportation of clinical waste treatment or disposal site outside the hospital:

Untreated biomedical waste shall be transported only in such vehicles as may be authorize for the purpose by

the competent authorities as specified by government under the motor vehicle act 1988.

The counters for transportation must be leveled as given in schedule-III and IV of BMW 1998.

Conclusion: The hospital waste, in addition to the posing risk to the patients and personnel who handle these wastes, is also a threat to the public health and environment. It is emerging as a health hazard to the community at large. Keeping in view, inappropriate management of biomedical wastes, the Ministry of Environment and Forests notified the “Bio Medical Waste (Management and Handling) Rules 1998.” These rules are meant to protect the society, patients and health care workers. The most imperative component of the waste management plans is to develop a system and culture through education, training and persistent motivation of the health care staff. Why is safe disposal of biomedical waste important? Introduction: The problem of bio-medical waste disposal in the hospitals and other healthcare establishments has become an issue of increasing concern, prompting hospital administration to seek new ways of scientific, safe and cost effective management of the waste, and keeping their personnel informed about the advances in this area. The need of proper hospital waste management system is of prime importance and is an essential component of quality assurance. The safe disposal of biomedical waste important because exposure to hazardous health care waste can result in disease or injury due to one or more of the following characteristics: a) It contains infectious agents, b) it contains toxic and hazardous chemicals or pharmaceuticals c) it

contains sharps, d) it is genotoxic, e) it is radioactive. Unscientific handling of bio-medical waste is the risk for the groups like: 1. Medical staff: doctors, nurses, sanitary staff and hospital maintenance personnel; 2. In and out patients receiving treatment in healthcare facilities. 3. Visitors of hospitals. 4. Workers in support services linked to healthcare facilities such as laundries, waste handling and

transportation services. 5. Workers in waste disposal facilities, including scavengers. 6. The general public and more specifically the children playing with the items they can find in the waste

outside the healthcare facilities when it is directly accessible to them.

Objectives of safe disposal of Bio Medical Waste Management are:

1. Inappropriate treatment and disposal of bio-medical waste contributes to environmental pollution. To prevent environmental pollution safe disposal of Bio Medical Waste important.

2. To prevent transmission of disease from patient to patient, from patient to health worker and vice versa. 3. To prevent injury to the health care worker and workers and workers in support services, while handling

biomedical waste. 4. To prevent general exposure to the harmful effects of the cytotoxic, genotoxic and chemical biomedical

waste. 5. The proper bio-medical waste management will help to control nosocomial diseases (hospital acquired

infections)

245

6. Reduces HIV/AIDS, sepsis, and hepatitis transmission from dirty needles and other improperly cleaned / disposed medical items

7. Prevent illegal repackaging and resale of contaminated needles, cut cycles of infection and avoid negative long-term health effects like cancer.

8. To maintain healthy public health safe disposal of Bio Medical Waste needed.

Conclusion: From the above discussion it is found that improper management of biomedical waste has serious effect on environment, occupational and public health and to maintain the hygiene and health environment, occupational and public health safe disposal of biomedical waste is very important. Disposal process: Answers is in K. Park or Madhuri Sharmas support and utility 1. All the items sent to incineration\ deep burial (categories 1,2,3 and6) should be placed in yellow

coloured bags. 2. All the biomedical treatment should be placed in red coloured bags. 3. Any waste, which is sent to shredder after autoclaving/microwaving\chemical treatment, is to be packed

in blue\white translucent bag. 4. Location of containers: all containers having different coloured plastic bags should be located at the

point of generation of waste i.e. near OT tables, injection room, diagnostic service areas containers\plastic bags used for collection of segregated biomedical waste should be identifiable.

5. Labeling: all the bags\ containers must be labeled according to the rules (schedule-III of biomedical waste rules, 1998).

6. Bags: it should be ensured that waste bags are filled up to three-fourth capacity, tied securely and removed from the site of generation regularly and timely.

7. Certain categories of waste, which may need pre-treatment (decontamination\ disinfection) at the site of generation such as plastic and sharp materials. Etc. should be removed from the site of generation only after treatment.

8. The process of collection should be documented in a register. The coloured plastic bag should be replaced and garbage bin should be cleaned with disinfectant regularly

Classification of hospital waste

1. General waste: Largely composed of domestic or house hold type waste. It is non-hazardous to human beings, e.g. kitchen waste, packaging material, paper, wrappers, and plastics.

2. Pathological waste: Consists of tissue, organ, body part, human foetuses, blood and body fluid. It is hazardous waste.

3. Infectious waste: The wastes which contain pathogens in sufficient concentration or quantity that could cause diseases. It is hazardous e.g. culture and stocks of infectious agents from laboratories, waste from surgery, waste originating from infectious patients.

4. Sharps: Waste materials which could cause the person handling it, a cut or puncture of skin e.g. needles, broken glass, saws, nail, blades, scalpels.

5. Pharmaceutical waste: This includes pharmaceutical products, drugs, and chemicals that have been returned from wards, have been spilled, are outdated, or contaminated.

6. Chemical waste: This comprises discarded solid, liquid and gaseous chemicals e.g. cleaning, house keeping, and disinfecting product.

7. Genotoxic Waste: waste containing substance with genotosic properties e.g. waste containing cytostoxic durgs and genotoxic chemicals.

8. Pressurised container waste: gas cylinders, gas cartridges, aerosol cans, etc. 9. Radioactive waste: It includes solid, liquid, and gaseous waste that is contaminated with radionucleides

generated from in-vitro analysis of body tissues and fluid, in-vivo body organ imaging and tumour localization and therapeutic procedures.

AGREEMENT FOR SECURITY SERVICES

This Agreement is made and executed on the date and place set out in Annexure 1 hereto between the person(s) named in Annexure 1 hereto (hereinafter called “Service Provider” which shall mean and include its successors or assigns) of the ONE PART

246

AND

Mr._________________________________son of Mr ________________, an adult Indian

Inhabitant

M/s._____________________ a Partnership Firm through its partner Mr.

___________________________,

M/s.______________________, a Company formed and registered under the provisions of the

Companies Act, 1956 having its address at ___________________

________________________________________________________________________________

________________________________ Hereafter known as COMPANY

(which expression shall unless be repugnant to the context or meaning thereof mean and include

his heirs, legal representatives/successors/executors or Administrator)

(which expression shall unless it be repugnant to context or meaning thereof be deemed to mean

and include the partners constituting the said firm, the survivors or survivors of them and

executor, administrators or assign of the last surviving partner).

(which expression shall unless it be repugnant to the context or meaning thereof be deemed to

mean and include its successors and assigns) of the First Part. The First Party and the Second Party are hereinafter referred to collectively as “the Parties” and individually as “the Party”).

WHEREAS the Service Provider is doing business of providing safety, surveillance and security services viz., providing well managed & trained guard force strictly adhering to safety standards & norms. The Service Provider is committed to highest levels of ethics, honesty and integration and dedication for providing safe, reliable and efficient services for protecting person & property of COMPANY through watchman, Armed Guards (Gun man) {hereinafter referred to as Security Personnel} through its own personnel and on the assurance given by them that they will be able to provide the required number of trained Security Personnel at the site/location as desired by COMPANY and as may be mutually agreed from time to time between the parties in accordance with the terms and conditions of this agreement in the manner hereinafter appearing

1) The Service Provider is committed to recruit and provide qualified, experienced, well-trained, physically & mentally fit personnel in accordance with the Company’s standard, with basic training , safety procedures, fire fighting practices and weapons handling etc for COMPANY, duly verified by the local police Station as regards their antecedents and backgrounds.

2) The Service Provider shall ensure that, the Security Personnel deployed at the COMPANY shall be in good health, shall have proper eyesight and shall not have any medical problems which may endanger his life and the life of the other COMPANY employees appointed at the said location. The Service Provider shall ensure that, the Security Personnel deployed at the COMPANY shall be entirely responsible for the stock of the commodities stored at the said location. To ensure such safety, the Service Provider shall, before deploying any employee in the premises, shall have him medically examined by a registered medical practitioner at its own cost and expenses and produce a certificate from him certifying that the said employee is medically fit. It is further agreed that without such medical certificate, COMPANY shall not permit any such Security Personnel to work in its premises. It is further agreed that COMPANY may, from time to time, call upon the Service Provider to have all or any of its Security Personnel examined.

3) The Service Provider shall uphold the strictest disciplinary standards for all their personnel and any transgressions are dealt with immediately, and to the fullest extent that the law allows.

4) The Service Provider shall provide uniforms, issue identity cards bearing the name of the Service Provider to the Security Personnel and shall provide an authority letter to the Security Personnel and the Security Personnel shall carry the same when they are on duty at the COMPANY.

5) The Service Provider shall be absolutely responsible for security of premises, property (moveable/immovable), company personnel and safety of customers of COMPANY.

247

6) The Service Provider shall evaluate COMPANY existing security structure and accordingly perform its activities in most efficient manner

7) The Service Provider shall deploy such number of Security Personnel for each location as specified by COMPANY. The security personnel shall be performing their duties in 2 shifts of 12 hour each in not more than 2 shifts on all days including Sundays and holidays. However the timings of the shift may be changed by COMPANY depending on the circumstances and after due consultation with the Service Provider.

8) Whenever any Security Personnel goes on leave, the Security Agency will arrange for a suitable replacement immediately.

a. The Security Personnel are required to mark their attendance in the manual registers maintained at the COMPANY locations. Additionally, wherever COMPANY has installed manual/electronic attendance marking devices, the Security Personnel are required to mark their attendance in those devices also at the time interval decided by COMPANY. At the end of the month a copy of the attendance sheet along with the attendance cards of such devices should be forwarded to COMPANY for processing of payment to Security Agency by COMPANY. Without such attendance proof, no payment would be made.

9) The Service Provider shall fully guide, supervise and monitor the Security Personnel deployed in COMPANY locations by its Security Supervisors.

10) Security Supervisors will inspect every location at least once every 15 days during night to check the level of control exercised by Security Personnel. The Security Supervisors will take digital photographs of security personnel in the location during their inspection. The photographs will contain date and time stamp to identify the date the photographs are taken and send the photographs to COMPANY along with their inspection report on weekly basis.

11) The Service Provider agrees & undertakes to provide compensation to COMPANY for every dereliction of duty like unauthorised absence from duty, reporting to duty without uniform/lathi/whistle/name badge, sleeping during duty hours etc, reported by COMPANY staff and the compensation amount shall be equivalent to the one day payment made to the Security Personnel concerned for every occurrence of such reporting.

12) If more than 2 such reporting of dereliction of duty is reported from the same location in the same month, COMPANY reserves the right to cancel the arrangement in that location.

13) The Service Provider shall ensure that the Security Personnel posted by him at the COMPANY CMP observe discipline and good conduct. In the event of COMPANY finding any Security Personnel not observing proper discipline and / or proper conduct and / or committing misconduct, COMPANY shall direct the Service Provider to forthwith withdraw such Security Personnel from the COMPANY and upon COMPANY directing the Service Provider to remove such Security Personnel, such personnel shall be forthwith removed and the decision of COMPANY in this behalf shall be final.

14) The Service Provider shall also provide necessary proof of remittances of EPF ,Pension amount and ESIC for the previous month, along with their invoices for the current month to COMPANY. Without such proof, the invoices will not be processed for payment.

15) That the Security Personnel deployed by the Service Provider shall be employees of the Service Provider.

16) The Service Provider shall not sub-contract this contract without the prior written permission of COMPANY.

17) The Service Provider shall be solely responsible for payment of wages and all other dues payable or amenities to be provided under various statutes to its personnel deployed at COMPANY. The Security personnel deputed at COMPANY shall not be considered as employees of COMPANY at any point of time and COMPANY can not be held responsible for payment of any wages emoluments/benefits or other dues, if any, to the personnel of the Service Provider. The Service Provider shall maintain properly all record, registers and such other requirements as contemplated by the provisions of all the applicable statutes, Provident Fund Act, Employees State Insurance Act and Minimum Wages Act and all Rules framed under all the above statutes, and any other State and Local Act that might be applicable to the Service Provider.

18) No residential accommodation or reimbursements will be provided by COMPANY for the Security supervising the Security Personnel.

19) The Service Provider shall be liable for all loss/ damage caused or occurred to COMPANY at the location due to failure, negligence or slackness of the Security Personnel provided by the Service Provider. The Service Provider shall indemnify COMPANY for any losses which COMPANY may suffer due to the action/inaction/negligence/slackness of any Security Personnel of the Service Provider. The Service Provider shall keep COMPANY indemnified for all acts of omission/commission, fault, breaches and any claims, demands, liabilities, actions, proceedings, costs, charges, loss, injury compensation and expenses to which COMPANY may be put up to or

248

involved as a result of the Service Provider’s failure, omission, negligence to fulfill any of its obligation hereunder and/ or Statutes and or bye laws or Rules and Regulations formed there under.

20) Subject to the Limit of Liability, shall indemnify and hold harmless the COMPANY and its employees against any liability, claims, losses or damages sustained by it or them by reason of any breach of contract, wrongful act or negligence by SERVICE PROVIDER or any of its employees engaged in the provision of the Guarding Services to the COMPANY.

21) SERVICE PROVIDER shall not be liable in any way whatsoever and the COMPANY hereby expressly waives any right to, any loss, injury, damage, cost or expense of whatsoever nature directly or indirectly:

a. resulting from or in connection with any Act of Terrorism or any Biological or Chemical

Contamination or any Nuclear Risks;

b. consisting of, resulting from or in connection with any loss, damage, destruction, distortion, erasure, corruption or alteration of Electronic Data from any cause whatsoever (including but not limited to Computer Virus) unless such loss, damage, destruction, distortion, erasure, corruption or alteration of Electronic Data was due to an act or the negligence or default of SERVICE PROVIDER’s security personnel.

22) SERVICE PROVIDER will not be liable in any way whatsoever and the COMPANY hereby

expressly waives any right to any loss, injury, damage, cost or expense:

a. resulting from theft/loss (other than by SERVICE PROVIDER’s security personnel) of any moveable goods such as Keys, Laptop Computers, Mobile Phones, CD Rom’s, Hard Disks, Organisers or any other similar goods which are not specifically handed over to SERVICE PROVIDER in writing as part of the Assignment Instructions (Schedule I).

b. resulting from events caused by the acts of the COMPANY, its employees or agents.

c. Howsoever caused, which is not caused as a direct result of any wrongful act, negligence or

breach of contract by or on behalf of SERVICE PROVIDER in connection with the provision of the Guarding Services.

23) Without prejudice to above mentioned clauses and notwithstanding any other provision contained herein, SERVICE PROVIDER’s total liability to pay damages in respect of any direct, verifiable loss or damage suffered by the COMPANY or any third party as a direct result of any breach of contract, wrongful act or negligence by or on behalf of SERVICE PROVIDER in connection with the provision of the Guarding Services shall in no circumstances exceed the Limit of Liability, unless otherwise specifically agreed to the contrary by the Parties in writing and specified in Schedule I. The COMPANY will indemnify and keep indemnified SERVICE PROVIDER, its directors and employees against any liabilities, losses, expenses or other costs, SERVICE PROVIDER may incur in connection with any claims or enforcements against SERVICE PROVIDER by any third party, that would (a) cause the Limit of Liability to be exceeded or (b) fall outside the scope of SERVICE PROVIDER‘s liability as set forth in this Agreement. The limit of liability shall mean the amount equivalent to one month’s Charges for the Guarding Services, per incident or series of incidents arising out of the same event, and in the aggregate for all claims in any year of the Agreement.

24) SERVICE PROVIDER, its servants or agents, shall not be liable to the COMPANY in any circumstances or to any extent whatever in respect of any loss or damage suffered by the COMPANY unless: (i) written notice of the breach of contract, negligence or wrongful act on the part of SERVICE PROVIDER alleged to have resulted in the loss or damage is received by SERVICE PROVIDER within seven (7) days of its occurrence, and (ii) any claim or legal proceedings by the COMPANY against SERVICE PROVIDER arising hereunder in respect of any loss, damage or injury, is brought by the COMPANY to the notice of SERVICE PROVIDER, within four weeks from the date thereof.

25) SERVICE PROVIDER’s liability under this Agreement is subject to the COMPANY being up-to-date with its payments in accordance with Part VI of this Agreement. In the event the COMPANY is in material breach of any of its obligations under Part VI, SERVICE PROVIDER shall not be liable under this Agreement for any loss or damage howsoever caused, except for death or personal injury caused by its gross negligence or wilful misconduct or loss or damage caused as a direct result of any wrongful act.

249

26) The COMPANY will indemnify and keep indemnified SERVICE PROVIDER, its directors and employees against any liabilities, losses, expenses or other costs, SERVICE PROVIDER may incur in connection with any claims or enforcements against SERVICE PROVIDER by any third party, as a result of any breach by the COMPANY of its obligations under this Agreement, or negligence or wrongful act by the COMPANY.

27) Notwithstanding any other provision contained herein, neither SERVICE PROVIDER nor the COMPANY will be liable for any indirect, consequential, special or punitive loss or damages.

28) The remedies available to the COMPANY and third parties and the liability SERVICE PROVIDER accepts under this Agreement are, to the extent permissible by law, the only remedies of the COMPANY and the absolute limit of SERVICE PROVIDER’s liability arising under, out of or in connection with this Agreement. All other liability is expressly excluded.

29) The service provider shall take fidelity insurance for Rs.1,00,00,000/- (Rupees One crore Only) in the name of the employees and endorse the insurance in name of COMPANY.

30) The parties agree that any dispute arising out of this agreement shall be referred to arbitration and the procedure prescribed under the Arbitration and Conciliation Act shall be followed.

31) The parties agree that any legal action or legal proceeding arising out of or pertaining to this Agreement shall be adopted or instituted only in the competent Courts at Mumbai, to the exclusion of all other Courts otherwise competent and try such action or legal proceeding.

32) The duration of the agreement will be initially for period of twelve months. However the same may be renewed for a further period of 12 months if performance of the Service Provider is found satisfactory by COMPANY.

33) Parties to this agreement shall be at liberty to terminate this contract by giving one month notice in writing and in any event, the said contract shall come to an end on the expiry of the term as mutually agreed upon by the parties unless expressly renewed.

34) COMPANY shall be at liberty to terminate this contract forthwith on the Service Provider or its Security Personnel committing breach of the terms and conditions of this agreement or where, the Service Provider is, in the opinion of the COMPANY incapable of complying with the terms and conditions of this agreement. COMPANY upon finding any breach of the terms and conditions of this agreement shall serve a notice in writing on the Service Provider terminating this agreement and upon receipt of such notice; the Service Provider shall forthwith remove all its Security Personnel from the COMPANY.

35) The COMPANY shall pay the Service Provider invoices as per the Charges specified in Schedule I, within 7 working days after the date of receipt of the invoice by the COMPANY. Any objection by the COMPANY to any such invoice raised by the Service Provider should be made within 5 working days from the date of receipt of the invoice.

36) Payment by the COMPANY for the Guarding Services provided hereunder shall be a fundamental obligation under this Agreement. Any default of payment beyond thirty days (unless the subject of a notified bona fide dispute), shall entitle SERVICE PROVIDER (at its discretion) to suspend or terminate this Agreement. The COMPANY shall make the payment either by Account Payee Cheque, by Demand Draft or Bank Transfer to the bank account of SERVICE PROVIDER as may be notified by SERVICE PROVIDER to the COMPANY.

37) In the event that any of the payments due to SERVICE PROVIDER pursuant to this Contract are overdue (unless the subject of a notified bona fide dispute) beyond 30 days, SERVICE PROVIDER shall be entitled to claim interest on the outstanding amount at the rate of 2% per month as from the date the sum is due until the date payment is received.

38) During the Contractual Period, SERVICE PROVIDER may increase the Charges for providing the Guarding Services by giving one month’s prior notice (a) at any time after the completion of the first eleven (11) months of the Contractual Period, or (b) if and to the extent that SERVICE PROVIDER’s costs of providing the Guarding Services are increased for any reason whatsoever, including, without limitation, as a result of inflation, increase in minimum wage, or increase in costs due to changes in wage structure or any changes in law etc. after the Start Date.

39) In the event that SERVICE PROVIDER gives the notice as described in clause 39 above, the COMPANY may, within one month from the date of service of such notice, either negotiate an agreeable increase or give SERVICE PROVIDER a one month’s notice to terminate this Contract. During the period of such notice of termination, the proposed increase in the Charges shall not apply.

40) FORCE MAJEURE Neither party shall in any circumstances whatsoever be liable to the other party for any delay or failure to fulfill its obligations under this Agreement (other than the payment of money already due at the time) where any such delay or failure is caused in whole or in part by any Act of Terrorism, Biological or Chemical Contamination, Nuclear Risks, or to the extent that any such delay or failure arises from any other cause beyond its control, including, without limitation, fire, floods, acts of

250

God, acts or regulations of any governmental or supranational authority, war, riots. 41) In the event of a strike or other industrial action at the Premises by the COMPANY’s or a third

party’s employees, unless otherwise agreed between SERVICE PROVIDER and the COMPANY, SERVICE PROVIDER’s employees will not be required to carry out additional duties which do not relate to the security of the Premises or its contents, or perform any duties of a strike breaking nature

42) COMPANY shall pay the Service Provider(SERVICE PROVIDER) ‘service charges’ as per following schedule which shall be inclusive of all taxes excluding service tax if applicable.

SCHEDULE I (Services at Sonepat)

Type of Security Personnel Rate for each/12 Hr. shift/ Per Month (including tax) per person

1. Security Supervisor

2. Security Head Guard

3. Armed Guard(Gunman)

4. Security Guard

5. Yard Manager

IN WITNESS WHEREOF the parties hereto have hereunto set and subscribed their respective hands the day and year first hereinabove written. SIGNED AND DELIVERED by the within named COMPANY through ____________________________it’s authorized Signatory in the presence of: 1) 2)

AND SIGNED AND DELIVERED by the within named SERVICE PROVIDER ____________________________., through__________________________________, its Duly Authorised Signatory In the presence of: 1) 2)

251

Annexure – 1

A. Date and place of execution

Date :

Place :

B. Details of Service Provider

1. Name –___________________________________________________________________

2. Constitution – Under Companies Act

Individual / Proprietorship / Partnership firm / Company incorporated and registered under the provisions

of the Companies Act, 1956

3. Place of residence / Place of business / Registered office –

Registered office:

AMBULANCE SERVICE AGREEMENT

This Ambulance Service Agreement (“Agreement”) is entered into this 1st day of February 2018 by and between Pueblo, a municipal corporation (“City”), and American Medical Response of Colorado, Inc., a Colorado corporation (“Operator”).

RECITALS

WHEREAS, in order to assure that residents and visitors within the City limits receive the most efficient, cost effective and highest quality ground emergency ambulance service, the City is entering into this Agreement for the protection of the health and safety of the residents and visitors and establishment of an efficacious and monitored ground emergency ambulance service provided by a competitively selected, qualified ambulance service provider.

WHEREAS, Operator is experienced in the provision of ground emergency ambulance

services and was the responsible bidder whose proposal was determined by City to be most advantageous to the City pursuant to the Request for Proposal for the procurement of the services herein described.

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual

promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, City and Operator agree as follows:

252

TERMS AND CONDITIONS

1.0 DEFINITIONS. The following terms as used in this Agreement shall have the following meaning unless the context clearly indicates otherwise:

(a) “ALS” means Advanced Life Support.

(b) “EMS Services” means all ground emergency ambulance services and related

services in the City limits to be provided by Operator under this Agreement for

emergency medical dispatches through the PSAP.

(c) “Fire Chief” means the Fire Chief of the Department of Fire of

City. (d) “PFD” means the Department of Fire of City.

(e) “PSAP” means the Public Safety Answering Point operated by and for the City. 2.0 TERM OF AGREEMENT. The term of this Agreement shall be for a period of sixty

(60) months, commencing on February 1, 2018, at 12:00 a.m. and terminating on January 31, 2023 at 11:59:59, unless earlier terminated under this Agreement, or otherwise modified by mutual written agreement of the parties. The City shall have the unilateral right, upon thirty (30) days written notice to Operator, to extend this Agreement for up to one hundred and twenty (120) days beyond the end of the Term.

3.0 OPERATOR’S PERFORMANCE OBLIGATIONS.

3.1 Operator shall provide EMS Services twenty-four hours a day, seven days a week, three hundred sixty-five days a year for all emergency medical calls dispatched through the PSAP and requested by City. Operator’s response shall be without regard to the patient’s ability to pay.

3.2 Operator shall provide EMS Services in a timely manner and shall comply with all response time requirements as set forth in Exhibit “A” which is attached hereto and made a part of this Agreement.

3.3 Operator’s provision of EMS Services shall conform to the highest clinical and

professional standards. Operator shall comply with all applicable City, county, state, and federal laws, regulations and standards regarding the provision of Services. All persons employed by Operator shall be competent in the performance of their duties, and hold and maintain applicable and valid certificates/licenses/accreditations in their respective roles or profession. Operator shall be held accountable for employee performance, licensing, and actions. Operator shall conduct, comply with, cooperate with, and submit to individual and corporate investigations requested by the City.

3.4 Operator will provide field medical supervision necessary for effective oversight of EMS Services. Such supervisors shall have current credentials and certifications, as well as clinical field experience as necessary to oversee or provide support to field personnel. Such supervisors shall serve as the liaisons with the PFD.

3.5 Operator shall staff ambulance crews to provide continuity of personnel. Operator shall staff each ambulance with at least one (1) EMT-Basic or above and one (1) EMT-Paramedic. Both must be emergency vehicle operator course (E.V.O.C.) qualified drivers. When ALS care is being rendered, at a minimum the EMT-Paramedic (an EMT-Intermediate may also attend an ALS patient at the direction of an EMT- Paramedic) must always be with the patient in the patient compartment. During the initial six (6) month period of the Agreement, Operator

253

may utilize provisionally certified personnel on transporting ambulances. Following this phase-in period, no more than 20% of Operator’s workforce shall be provisionally certified at any one time. Within six (6) months of the date of execution of the agreement, and thereafter within six (6) months of any new employee's hiring date, all ALS ambulance personnel shall obtain and maintain current status in the following: (a) Advanced Cardiac Life Support (ACLS), (b) Pediatric Advanced Life Support (PALS), (c) Incident Management System (IMS) training and certification for line personnel: ICS 100, 200 and NIMS 700, 800, (d) Additional IMS training and certification for supervisors: ICS 300, (e) PFD Rehabilitation training in accordance with NFPA 1584, (f) E.V.O.C. or equivalent, (g) CPR, (h) Colorado State EMT certification. Additionally, field supervisors shall be training to Hazmat operations level.

3.6 Operator must ensure that all employees have been properly oriented before being placed on dedicated 9-1-1 ambulances. The orientation shall include but not be limited to: overview of the City's EMS system applicable policies, procedures, orders, and guidelines; all communications; navigation, mapping, hospital routes; and ambulance equipment utilization and maintenance; and knowledge of relevant City and PFD policies and procedures. Orientation curriculums will be a joint venture between Operator and PFD. Operator must maintain documentation of compliance with these requirements

3.7 Operator’s ambulance personnel shall at all times wear clean, professional uniforms. Name and level of training shall be identified as part of the uniform for all personnel. Operator acknowledges that EMS Services are often rendered under extremely stressful circumstances. Professional and courteous conduct and appearance is required at all times from Operator’s personnel.

3.8 Operator shall assure that its EMTs, and Paramedics, who are assigned to the ambulances, are in compliance with all continuing permits, licenses, certifications and educational requirements. Such educational requirements shall include mandatory training required by the City, the City's Medical Director, or the State of Colorado. Operator shall provide to the City the name, title, reporting relationship and limits of authority for the senior executive who will serve as Operator’s primary contact person with the City.

3.9 All 9-1-1 calls, including 10-digit emergency calls, within the City limits are routed through the City of Pueblo PSAP. If Operator receives a direct line call for emergency response, Operator will immediately process the call through the Pueblo Dispatch Center. The City currently uses an informal Priority Dispatch System to assign a response determinant and dispatch response units according to established guidelines. Operator will provide a dispatcher on an assigned channel for purposes of dispatching the dedicated 9-1-1 Operator ambulances. Operator shall provide continuous monitoring of the dedicated channel and shall institute internal dispatch and monitoring procedures as required to meet the response time requirements as set forth in this Agreement. The City at its sole discretion will assign the

response determinant of all requests for service processed through the City dispatch center. Operator shall begin to respond to the scene when requested by City dispatch, electronically, by radio, or by telephone. Operator shall respond as directed by the Pueblo Dispatch Communications Center. There may be prearranged protocols implemented, if both Operator and the PFD agree. At such time as the City requests, Operator will assign a unit number and designator to each ambulance unit which will allow them to interface with City’s d ispatch system. Operator ambulances shall remain on the assigned incident talk group and receive instructions from dispatch, the first due fire company officer or the incident commander. Ambulances are considered a resource assigned to the incident and are under the command and control of the PFD incident commander. Additionally, Operator agrees to provide at their expense an electronic link to the City’s automated dispatch system currently provided by U.S. Digital Design (USDD) of Phoenix Arizona. This system will serve as the primary alerting system between the City’s dispatch center and Operator’s dispatch center. Prior to installation, the electronic link, including all network and security equipment and protocols necessary to implement the electronic link, must be approved by City. The electronic link shall be maintained and

254

serviced solely by City, and Operator shall be obligated to reimburse City for all costs necessarily incurred by City in maintenance and service of the electronic link. Failure or disruption of the electronic link shall not otherwise relieve Operator from its performance obligations including response times when Operator is notified of the call and provided the address necessary to respond to the call. As an alternative to the aforementioned USDD communications link, Operator may negotiate with the City to embed Operator personnel in the City dispatch center. Accommodating the Operator staff in the City’s dispatch center is at the sole discretion of the City. Operator crews shall announce on the PFD assigned radio channel when they are responding and the time they arrive at their assigned location. If the Operator responding unit has reason to believe there will be an extended response time, that information shall be broadcast as well. When transporting a 9-1-1 patient, Operator crews shall announce verbally on the PFD assigned radio channel when they leave the scene. They shall provide PFD dispatch with their unit number and destination. All radio communications with the Pueblo Dispatch Communications Center and PFD shall include the ambulance's unit number.

3.10 Operator’s communications systems, including radios and other future communications system components, will fully interface with the radio and telephone systems within the City. For crew safety and continuity of patient care, Operator’s ambulances shall have the following communications devices which interface with City dispatch: a minimum of two (2) Portable and one (1) mobile 800 mhz radios per ambulance, and at such time as requested by the City, AVL, CAD to CAD interface, and Status Heads. In the event of any future system enhancements, Operator agrees to maintain at Operator’s expense, full interface with such future system as the City, at City's sole discretion, may institute.

3.11 Operator will actively participate with the City’s dispatch center to improve service to the community. Participation will consist of assuring an Operator representative is available to attend meetings and provide data as requested for the purpose of continuing quality improvement.

3.12 Operator will provide at its expense AVL software and hardware on its ambulances that interfaces with the City’s CAD system. The City is moving to an AVL system for their apparatus, once available the City and Operator shall work together to establish constant visibility of PFD and Operator resources to ensure that system resources are appropriately deployed to maximize efficiencies, decrease costs, and improve response times. The City and Operator shall share electronically (via interface) each other's computer aided dispatch data ("CAD"), automatic vehicle locator ("AVL"), and vehicle status updates in real time for all system resources. For clarity, all Operator resources and all PFD engines are ALS while PFD trucks are BLS, unless indicated otherwise in the real-time shared CAD data. The City will continue to send real-time incident information to OPERATOR via the CAD to CAD link for all incidents where Operator is requested to respond. The parties will synchronize CAD clocks to atomic time at least on a daily basis. Until such time that the city resources are equipped with AVL, Operator shall share their AVL data with the City through the SunGuard CAD system. Both parties shall provide technological resource(s) to facilitate the foregoing CAD and/or AVL interface. In the event the technology is not ready due to the City's inability to comply with the foregoing CAD and/or AVL interface, the Operator will not be required to

255

meet the previous section until The technology is available and Operator has enough time as is customary in the industry to repair and implement such changes.

3.13 Operator shall provide sufficient 9-1-1 ambulance response vehicles to meet all EMS Services to be performed under this Agreement, including a reserve capacity to cover maintenance, break-downs or exceeding peak service demands. For purposes of the following requirements, the term "ambulance" shall apply to both ALS and Quick Response Vehicles (QRV) ambulances.

(a) Ambulances must meet all applicable federal, state and local requirements and it shall be the responsibility of Operator to assure appropriate certifications from ambulance manufacturers and to assure that all ambulances are operated within federal (U.S. Department of Transportation), state and local laws, regulations and guidelines, including any Pueblo County local guidelines and/or requirements.

(b) Guidelines shall include all applicable limitations on gross vehicle weight. (c) Each Operator ambulance must be an ambulance that meets or exceeds Colorado

state and Pueblo County requirements for ambulances providing ALS services or, as applicable, the requirements and/or specifications for QRVs, as provided by applicable laws, regulations, and guidelines, and as mutually agreed upon between the City and Operator. QRV's shall, at a minimum, maintain the specifications and equipment set forth in Exhibit "E" to the Agreement.

(d) Each ambulance of Operator must have a patient compartment for two (2) patients, and two (2) care givers. In the front seat area, all ambulances must be able to accommodate one (1) family member of a patient (in the front passenger seat) and an Operator employee, as driver. Additionally, each ambulance should be equipped for the transport of a small child with a child safety seat or other industry standard device. Except in the case of a legitimate health or safety concern a family member must be allowed to accompany the patient in the ambulance.

(e) An ambulance unit's service shall not have more than 200,000 total miles in service. (f) Reserve or temporary replacement units shall not stay in front line regular 9-

1-1 response service for any consecutive period longer than ninety (90) days unless otherwise permitted by the City due to an exceptional circumstance.

(g) Operator shall monitor, through their established maintenance program, the condition, safety and reliability of all dedicated ambulances. Dedicated ambulances that accumulate 200,000 miles or reach sixty (60) months in total service time shall be replaced at Operator expense. Additionally, the City may approve for service an ambulance re-certified by Pueblo County if it is in good working order. The City shall not unreasonably withhold such approval; of any EMS Ambulance with mileage in excess of the mileage cap if Operator has replaced the engine, transmission, and performed overhauls of parts as necessary for the safe and effective operation of the ambulance. Operator will allow the City's mechanic to inspect any Ambulance that Operator wants re-certified.

(h) Operator has one hundred twenty (120) days from the date of either mileage or age occurrence to replace the identified ambulance.

(i) Operator shall provide a minimum of one bariatric ambulance. 3.14 While on or enroute to any scene, Operator’s employees shall operate under the PFD's command and control structure and policies. The PFD company officer, or his/her designee, has ultimate authority for command and control; whenever there is a question as to medical treatment of a patient, the final decision shall be made by the first EMT-Paramedic to make patient contact or on-line medical control. PFD paramedics and EMTs shall ride in/attend to the hospital any patient, at any time, when medically necessary, to include but not limited to patient continuity of care and assistance in administering patient care. Clinical practices of Operator will be subject to the direction of the Medical Director. Medical training, beyond the minimum required by the Medical Director, will be at the sole discretion of Operator. The

256

parties shall follow applicable laws, regulations and protocols regarding scene management. Personnel shall enter the scene upon arrival except when an immediate hazard is identified, or the law enforcement or ranking fire officer on-scene advises the scene is not safe for agency personnel. Patient care management shall be defined by the Medical Director, through the county emergency medical guidelines or its successor document.

3.15 Operator shall develop and conduct a comprehensive quality assurance/quality improvement (QA/QI) program. Operator’s QA/QI program shall interface, and work collaboratively with, the PFD's QA/QI program. The QA/QI program will be an organized, coordinated, multidisciplinary approach to the assessment of pre-hospital emergency medical response and patient care for the purpose of improving patient care services and outcomes. The QA/QI program should not be limited to clinical functions. Response times, customer satisfaction/complaints, system integration, performance measurement, identifying areas of improvement, and identifying methods to implement and evaluate changes should all be included. The Parties shall meet monthly to discuss clinical matters and shall have joint quarterly trainings.

3.16 Upon request by the City, Operator shall furnish courtesy stand by service at emergency incidents involving a potential danger to City personnel or the public at no charge to the City. Once dedicated to an incident, the Operator’s ambulance shall not be removed from the incident until released by the incident commander. On prolonged incidents, the standby crew will also provide support for the on-scene rehab division.

3.17 The City and Operator recognize that differences of opinion may arise during the delivery of Services under this Agreement. The parties shall develop and maintain a written conflict resolution process. Such process shall include methods and means to address medical procedural issues, inappropriate and/or illegal conduct, and any other operational issues. In the event of an impasse the Fire Chief in his sole discretion shall settle all disputes.

3.18 The City and Operator each provide medical direction services applicable to their respective roles in the service model. The City and Operator shall reasonably cooperate to utilize the same Medical Director to provide unified medical supervision, to promote consistency in medical supervision and to achieve efficiencies and synergies in the provision of medical supervision. In the event of an impasse on this decision the Fire Chief in his sole discretion shall settle all disputes.

3.19 Request for lift assists by the Operator will only be accommodated by the City when (3) or more Operator’s personnel are on scene and participating in the lift assist.

3.20 Operator will bring all necessary equipment to the patient, appropriate for the examination, based on the initial complaint reported.

4.0 PERFORMANCE SECURITY AND LIQUIDATED DAMAGES.

4.1 Operator shall provide to the City an automatically renewable, irrevocable Performance Bond or a Letter of Credit ("Performance Security") in a form and substance acceptable to the City. Such Performance Security will expressly provide for the direct draw by the City and the restriction of rights of both Operator and the provider of the bond to object and/or to refuse to honor a demand for payment by the City. The Performance Security is attached hereto as Exhibit "C" and made a part of this Agreement. The amount of the Performance Security will be one million dollars ($1,000,000.00). The Performance Security shall be issued by a federally insured (FDIC) banking institution and/or surety, authorized to do business in Colorado, with a substantial presence in the United States, having a rating acceptable to the City. The City may accept a letter of credit, as a substitute for the surety bond herein required; provided, however, that such letter of credit shall be in a form acceptable to the City in its sole and absolute discretion. Operator shall maintain the Performance Security and the provider of the

257

Performance Security will agree to renew the Performance Security throughout the term(s) of this Agreement and for a reasonable time thereafter. Operator shall ensure that written evidence of the Performance Security provided to the City is updated at least annually.

4.2 The parties agree that the failure to comply with performance requirements will result in damages to the City and that determining actual damages caused by some failures would be difficult or impractical. Therefore, the parties agree that the liquidated damages as set forth in the attached Exhibit "D" and made a part of this Agreement are not a penalty but are reasonable estimates of actual damages that will occur. Payment of liquidated damages will be due thirty (30) days from the date of invoice. If payment is not received within thirty (30) days from the date of the City's invoice, such invoice shall be considered a notice of default, and the City may thereafter withdraw such invoiced amount from the Performance Security. Assessment and collection of liquidated damages does not limit the City's rights or ability to exercise any other remedy provided in this Agreement or in law or equity.

4.3 The City and Operator agree that the unique nature of the EMS Services which are the subject of this Agreement require that in the event of Operator’s material default leading to termination of this Agreement by the City, liquidated damages shall be awarded in the amount of the Performance Security. While costs and damages are not easily calculated, the work and expense to achieve another agreement and to conduct an RFP process is extensive. It may be difficult to distinguish the costs of restoration of the EMS Services on an interim or permanent basis and award a new contract. Costs to the City to implement the restoration of the EMS Services on an interim or permanent basis and award a new contract are estimated to equal the Performance Security. Upon declaration by the City of a termination of the Agreement, the City shall take immediate possession of the Performance Security and all of Operator’s rights and interest in and to the Performance Security shall be waived as a liquidated damage to offset the City's expense in providing interim services. The City's draw of the Performance Security under this section shall not act as a bar or limitation on the City's ability to seek other remedies or to recover additional damages from Operator as a result of the material default and termination of the Agreement.

5.0 UTILIZATION. Provided Operator is in compliance with the terms and conditions

of this Agreement and unless expressly authorized otherwise under the terms of this Agreement, City shall exclusively use Operator to provide EMS Services in the City limits. In events where the Operator has an extended response or is at level zero (no available units) the City may at its sole discretion request an ambulance from any other source available.

6.0 REIMBURSEMENTS TO CITY. The City will incur various costs related to

Operator’s rendition of EMS Services as identified in the Fee Schedule attached hereto as Exhibit "B" and made a part of this Agreement (“City’s Annual Costs”). Operator shall reimburse the City for City’s Annual Costs. If, during the term of this Agreement, the City pays for additional costs associated with the rendition of the EMS Services by Operator, such costs may be added to Exhibit "B" by mutual written agreement of the parties. The reimbursements provided for hereunder shall not violate 42 U.S.C. Section 1320a-7b (the federal Anti-Kickback Statute. Moreover, the City represents that its actual costs incurred for its services provided hereunder will be greater than the reimbursements from Operator. Accordingly, the City shall review its incurred costs annually and shall provide adjustments, as necessary, to assure that the total amount of reimbursements by Operator does not exceed the City's actual costs for the services it provides. Operator shall pay one twelfth of the reimbursement of the City's Annual Costs each month. The monthly reimbursement payment shall be due on the first day of each month that this Agreement is in effect. Reimbursements not received by the City by such due date accrue interest at a rate of 8% per annum until paid. The City shall be entitled to annual increases in the total amount reimbursed for City incurred costs, as more particularly described in Exhibit “B.”

7.0 OPERATOR PROVIDED EQUIPMENT, MATERIALS AND SUPPLIES. 7.1 The City will not provide any equipment, materials and/or supplies for use by Operator

258

without reimbursement.

7.2 Operator is required to use the same or similar medical equipment with the same capabilities as used by the PFD. If the PFD anticipates an equipment change or addition, Operator will be provided a sufficient time frame to implement the change. Operator shall maintain detailed lists of equipment, materials and supplies and shall provide for the management and replacement of its equipment, materials, and supplies.

7.3 Operator shall reimburse the City for equipment, materials and supplies used and consumed by the

City in providing medical services related to Operator’s rendition of EMS Services.

7.4 When possible Operator will resupply PFD expendable medical supplies as listed in Exhibit E on a one for one basis at the time of the call. When circumstances do not allow for immediate restocking, PFD shall be permitted to restock from a different Operator unit at a later time, or by such other means as mutually agreed. It is understood that it is difficult to regularly exchange certain expendable supplies and medications. Operator will provide direct access to a shared ordering system that will allow the PFD to order replacement supplies that are not replaced directly through on-scene exchange. All supplies will be shipped directly to a single address designated by the PFD. Ordering will take place on a twice monthly basis. Pricing will be based on Operator’s actual cost and the total yearly requests shall not exceed $10,000. Operator and the City shall cooperate in controlling costs of supplies and the City agrees that all requests for supplies will be reasonable and justifiable. The provisions set forth in this Subsection can be modified upon mutual agreement by the parties.

7.5 Controlled medications will not be replaced or replenished due to laws that regulate their use. All other medications can be exchanged after use or between 90 and 120 days of their expiration date.

7.6 A system will be put in place for the exchange of medical oxygen cylinders. Operator agrees to exchange on a one for one basis expended cylinders for full cylinders.

7.7 Operator shall provide a mechanism to dispose of all bio waste generated by the PFD in providing medical services related to Operator’s rendition of EMS Services. Operator and the City will work to develop a plan that is safe, reliable and easily accessible.

8.0 TRAINING. As a system enhancement and to improve patient care, Operator will

permit PFD employees to participate in classes that Operator may offer to its own employees

such as CPR, ACLS, PALS and Paramedic and EMT refresher courses, and PFD will permit

Operator’s employees to attend training of like kind that PFD may provide to PFD employees.

With respect to any such training, Operator and PFD shall be responsible for the costs of any

materials and/or certification materials for their own employees.

9.0 MATERIAL DEFAULT. Conditions and circumstances that constitute a material

default by

Operator pursuant to this Agreement include:

(a) Failure to operate in a manner which enables the City and/or Operator to remain in compliance with federal, state and local laws, regulations and rules.

(b) Falsification of information supplied subsequent to this Agreement.

(c) Creating or otherwise falsifying ambulance responses or transports so as to inflate the volume or value of services.

259

(d) Repeated failure to provide data to the City that is reasonably required to be generated in the course of operations, including by way of example, dispatch data, patient report data, complaint data, response time data, financial data, training data, billing and collection data, and other performance data and records.

(e) Repeated failure to address and take corrective action with employees with documented professional or behavioral complaints.

(f) Repeated failure to maintain ambulances and equipment in accordance with manufacturer recommended maintenance procedures and as required by applicable laws, regulations and rules.

(g) Failure to cooperate with and assist the City if a default warranting termination of this Agreement is asserted by the City.

(h) Acceptance by Operator and/or Operator’s employees, subcontractors or agents of any bribe, kickback or consideration of any kind that could be reasonably construed as a violation of federal, state or local law.

(i) Payment by Operator and/or any of Operator’s employees, agents or subcontractors of any bribe, kickback or consideration of any kind that could be reasonably construed as a violation of any federal, state or local law.

(j) Failure to maintain insurance required by this Agreement.

(k) Failure to meet response time requirements as set forth in the Agreement in an Emergency Priority 1 response time measurement for three (3) consecutive months or for four (4) months in any twelve (12) month consecutive period.

(l) Failure to maintain the Performance Security required by this

Agreement. (m) Repeated failure to submit reports and information.

(n) Failure to cooperate fully with audits, investigations and inspections in accordance with this Agreement.

(o) Making a general assignment for the benefit of creditors; filing a voluntary petition in bankruptcy or suffered the filing of an involuntary petition by creditors; having a receiver appointed to take possession of all or substantially all of its assets; obtaining the attachment or other judicial seizure of all, or substantially all, of its assets, or admitting in writing or electronically its inability to pay debts as they come due.

(p) Failure to cure a minor breach after written notice from the City and reasonable opportunity to cure which shall be no less than thirty (30) days.

(q) Any failure of performance required in the Agreement, which is determined by the City in its sole discretion to constitute a substantial and imminent threat to the public health and safety.

The use of the term "repeated failure" in this section shall be determined by the City on a case-by-case basis and may include any instance of three or more failures to comply with the above requirements, as determined in the City's sole discretion.

260

10.0 REMEDIES IN THE EVENT OF MATERIAL DEFAULT. The City shall have all rights

and remedies available at law or in equity. The City's remedies shall be cumulative and the exercise of any rights and remedies shall be in addition to the exercise of any other rights and remedies available to the City (including liquidated damages).

11.0 NOTICE OF MATERIAL DEFAULT AND TERMINATION.

11.1 In the event of a default under Section 9 which has been found by the City to be a substantial and imminent threat to the public health and safety, the City may provide Operator with a reasonable opportunity to cure, or the City may immediately terminate the Agreement to initiate an emergency takeover of the Operator’s system in accordance with Section 12 of this Agreement. For all other defaults under

Section 9, the City will give Operator thirty (30) days written notice setting forth the nature of the default and an opportunity to cure.

11.2 Operator will be permitted to submit a written plan to cure such default; provided, however, the 30- day cure period will not be extended while Operator prepares a written plan. In the event Operator fails to timely cure, as determined in the City's sole discretion, the City may terminate this Agreement.

11.3 Upon termination, Operator will cooperate fully and immediately with the City to affect a prompt and orderly transfer of all responsibilities. The City shall determine the process by which the emergency takeover of the Operator’s system will occur. Operator may dispute a default asserted by the City; however, such dispute will not delay, in any manner, the transfer of operations as required by the City. Moreover, such dispute by Operator as to whether a default has occurred will not delay or in any way limit the City's right to payment of the Performance Security if the City terminates the Agreement. Operator agrees that all rights and remedies (including drawing against the Performance Security) afforded to the City in the event of termination are reasonable and necessary for the protection of the public health and safety.

11.4 Operator’s cooperation with and support of the City's termination of this Agreement, as well as the City's draw on the Performance Security, will not be construed as an admission or agreement by Operator as to the City's finding of a material default.

12.0 CONTINUOUS SERVICE DELIVERY UPON MATERIAL DEFAULT/TERMINATION.

12.1 In the event of material default by Operator, Operator will use its best efforts to assure continuous delivery of the Services required under this Agreement regardless of the underlying cause or consequence of such default. Operator agrees that there is a public health and safety obligation that requires that the City to provide uninterrupted service delivery in the event of default, even if Operator disagrees with the determination of default.

12.2 Assuring continuation of the Services may require the City to deliver the EMS Services. Operator agrees that if it is notified by the City of termination due to Operator’s default, the City will have the right to execute an emergency takeover of Operator’s operations within the City, including the portion of Operator’s communications facility that serves th is Agreement. Operator will be required to cooperate fully with such takeover and will challenge or appeal the matter only after such takeover has been completed. This cooperation will include allowing the City to directly operate Operator’s systems for a period of up to twelve (12) months following the termination of Operator.

261

12.3 Upon termination of the Agreement by the City, Operator shall lease its ambulances, equipment, support vehicles and the City-dedicated portion of the communications facilities to the City for a period of up to twelve (12) months at fair market value to the City. The City shall maintain and repair such equipment and facilities using the same standards as required of Operator under this Agreement. Operator further agrees to make available to the City all means to contact Operator’s employees who had been providing services under this Agreement so that they may be retained on an emergency basis by the City for operations.

12.4 The City will negotiate a fair market price for the use of all ambulances and equipment with Operator should the City retain the use of the equipment or facilities longer than twelve (12) months.

13.0 INSURANCE.

13.1 Operator shall provide insurance coverage during the term of this Agreement, including comprehensive general and automobile liability coverage with limits no less than one million dollars ($1,000,000) per occurrence and three million dollars ($3,000,000) annual aggregate; medical professional liability coverage with limits no less than three million dollars ($3,000,000) per occurrence and five million dollars ($5,000,000) annual aggregate; and workers' compensation insurance in statutorily required amounts. To the extent the policies for liability or medical professional liability coverage are claims made policies, Operator shall provide continuing coverage after the expiration or termination of this Agreement for a period of three (3) years. Operator’s insurance shall include waivers of subrogation against the City, and its officers and employees. All policies, except for workers' compensation and professional liability, shall name as additional insureds the City, the Pueblo City Council, and their employees, agents, representatives, and successors or assigns. All coverage furnished by Operator shall be primary, and any insurance held by the City shall be excess and non-contributory

13.2 Operator shall maintain umbrella/excess liability insurance on an occurrence basis in excess of the underlying general and automobile liability insurance which is as least as broad as the underlying policies. The policy shall have minimum limits of not less than Five Million Dollars ($5,000,000) per occurrence. The policy shall have as additional insureds the City, the Pueblo City Council, and their employees, agents, representatives, and successors or assigns,

13.3 Within ten days after execution of this Agreement by the last of the Parties to sign, Operator shall provide the City with a Certificate of Insurance and copies of insurance policies complying with the insurance and indemnification provisions in this Agreement. Operator shall provide additional or renewed copies of the Certificates of Insurance and policies upon thirty days written notice from the City. In the event that either of the insurance policies that Operator is required to maintain under this Agreement is cancelled or terminated, Operator shall immediately notify the City in writing and procure replacement policies forthwith, furnishing the City with copies of the same.

14.0 INDEMNIFICATION.

14.1 Operator shall indemnify, defend, and hold harmless the City, its Fire Department and their officers, agents, employees, and attorneys from and against any and all loss, damages, injuries, claims, cause or causes of action, or any liability of any kind whatsoever resulting from, or arising out of or in connection with the EMS Services, equipment, materials and supplies provided by Operator pursuant to this Agreement.

14.2 Operator will assume full responsibility for its own defense and the defense and indemnity of the City with respect to any claims for infringement of patents, copyrights or

262

trademarks, or claims of unfair competition, that may arise from Operator’s performance of this Agreement. The City may be represented by, and actively participate through, its own attorneys, with all such costs and reasonable attorneys' fees to be paid by Operator.

14.3 This indemnification obligation will survive the expiration or termination of this Agreement.

15.0 STANDARDS FOR EQUIPMENT, MATERIALS AND SUPPLIES.

15.1 Any specifications for equipment, materials and supplies set forth in this Agreement must be acceptable in accordance with standards established and/or adopted by the City. Equipment, materials and supplies provided by Operator shall meet or exceed Agreement requirements. The City may sample and test equipment, materials and supplies. An Equipment Schedule is contained in Exhibit "E."

15.2 Operator shall at a minimum carry all equipment and supplies listed in attached Exhibit “E”. The City reserves the right to require Operator, at Operator’s expense, to provide additional equipment to its ambulances during the term of this Agreement as determined by the City in its sole discretion; provided that such additional equipment does not interfere with important operations of ambulance units. The City will give Operator ninety (90) days' notice of its intent to require such additional equipment. Such request(s) shall not require expenditures of more than $3,000.00 per ambulance, per calendar year (excluding costs of routine maintenance and repairs).

16.0 BILLING, CUSTOMER FEE SCHEDULE AND PATIENT INFORMATION.

16.1 Operator shall be solely entitled to perform and be responsible for performing all billing of patients and third-party payers for EMS Services provided by Operator under this Agreement. Operator shall comply with all applicable laws governing billing and collection, including but not limited to laws and regulations applicable to patients covered by Medicare, Medicaid, Tricare and other public or private reimbursement programs. The City shall not bill for any EMS Services. All charges billed by Operator to patients or third-party payers for EMS Services provided by Operator under this Agreement shall be comparable with charges for similar services provided in Pueblo County and surrounding areas. Upon execution of this Agreement, Operator shall provide a list of the uniform charges used for EMS Services provided by operator under this Agreement and shall promptly notify City of any revision to the charges during the term of this Agreement. If City believes any such charges are not comparable with charges for similar services provided in Pueblo County and surrounding areas, City may give notice of same and the recommended changes to such charges. If such changes create an adverse and material financial impact upon Operator, Operator and the City agree to negotiate in good faith a revision to Operator’s charges. In the event the parties are unable to reach agreement within thirty (30) days following a request from Operator for modification of the fee structure, the matter shall be submitted for private, non-binding mediation with the parties to bear equally the costs of the mediation. A retired Colorado, District Court Judge, as mutually agreed by the parties, shall serve as the mediator. The parties agree to participate in good faith in the mediation and negotiations related thereto for a period of thirty (30) calendar days. The substantive and procedural law of the State of Colorado shall apply to the proceedings. If the Parties are not successful in resolving the dispute through mediation, then the Parties shall be free to litigate the matter, and agree that in the event of such litigation, the exclusive venue for such litigation shall be the Pueblo County District Court, Pueblo, Colorado, and if necessary, for exclusive federal questions, the United States District Court for the District of Colorado. The mediation requirement provided herein shall apply only to disputes under this Section of the Agreement and not further or otherwise

16.2 In accordance with applicable laws (including but not limited to, HIPPA). Operator may request information about patients (including payor information). Notwithstanding the foregoing,

263

no attempt will be made to solicit such information or to collect services or fees from a patient, the patient's representatives or any other payor until the patient has been accepted at a receiving medical facility for patients who are critical and in instances that would materially impact patient care.

16.3 In accordance with applicable laws (including but not limited to, HIPPA). Operator and the City may perform a customer service survey of patients transported pursuant to this Agreement. All such survey information shall be shared by the parties.

16.4 Nothing herein shall be construed to prohibit Operator from requesting authorization for transport, so long as the request of such authorization does not compromise or detrimentally affect patient care. Operator shall indemnify, defend, and hold harmless the City from any claim arising from or related to Operator’s billing and maintenance of patient information under this Section of the Agreement.

17.0 CITY AUDITS AND INSPECTIONS.

17.1 In accordance with applicable laws (including but not limited to, HIPPA). Authorized City representatives will be permitted with reasonable advance notification, to observe Operator’s operations, including the operators of its offices, communications center and related equipment, maintenance facilities, stations, ambulances and any other facility, location or activity utilized and/or conducted in the performance of this Agreement.

17.2 Operator’s records (hard copy, as well as computer readable data), and any other material deemed necessary by the City to determine compliance with, and/or to establish performance of, this Agreement, will be open to inspection and subject to audit and/or reproduction by the City's authorized representatives upon reasonable advanced request. The City shall comply with the same privacy and security standards imposed under state and federal law, applicable to Operator for purposes of maintaining and safeguarding such records.

17.3 All of Operator’s records concerning this Agreement must be maintained for a period of five (5) years after expiration or termination of this Agreement. The City's authorized representatives shall be afforded access, at reasonable times and places, to all of Operator’s personnel throughout the duration of this Agreement.

17.4 As permitted by applicable law, City representatives and/or medical direction representatives (including but not limited to the City's Medical Director) may ride as observers on any Operator ambulance at any time. The City and its medical direction representatives shall conduct themselves professionally and shall not interfere with the duties of Operator’s employees, and shall at all times be respectful of Operator’s employees and shall comply with Operator’s policies and protocols.

17.5 In accordance with applicable laws (including but not limited to, HIPPA). The City's representatives and/or medical direction representatives shall have the right to audit medical, billing and all other reports and data that Operator is required to have, maintain and/or provide to any authority.

17.6 The City representatives may from time-to-time review Operator’s System Status Plan, Patient Care Report form, and Complaint Policy and recommend changes to the same which changes shall be implemented by Operator.

17.7 Operator will require each subcontractor, insurer, material/equipment and supply provider to permit the City to audit and inspect their records in the same manner as the City may audit and inspect Operator and its records under this Agreement. The reasonable, actual costs of any City audit and inspection shall be reimbursed to the City by Operator as a part of the costs of contract administration paid by City, in addition to any amount set forth in Exhibit "B."

17.8 Except as otherwise provided, Operator will complete and submit all reports

264

required to be submitted under this Agreement to the City by the 15th day of each month for the previous month. The information in the reports will be attained from the CAD program data and reported in a layout determined by the City. Additionally, the data will be provided to the City in a comma delineated format.

18.0 MODIFICATION OF THE RESPONSE ZONES. At least annually, and on an ongoing

basis, the City, in coordination with Operator, will conduct a geographical analysis to monitor Operator’s adherence to the response time standards and to determine whether changes are needed to the response zones. If, during the term of this Agreement, the City determines, in its sole discretion, that a specific community or area requires a modification in the Services from Operator due to changes in areas of growth, then Operator agrees to make adjustments to the response zones. Any such modification will be made on an annual basis, unless the City determines an immediate need for the modification exists.

19.0 NO MULTI-YEAR FISCAL OBLIGATION ON CITY. This Agreement is expressly

made subject to the limitations of the Colorado Constitution. Nothing herein shall constitute, nor deemed to constitute, the creation of a debt or multi-year fiscal obligation or an obligation of future appropriations by the City Council of Pueblo, contrary to Article X, § 20 Colorado Constitution or any other constitutional, statutory or charter debt limitation. Notwithstanding any other provision of this Agreement, with respect to any financial obligation of the City which may arise under this Agreement in any fiscal year after the fiscal year in which this Agreement is executed, in the event the budget or other means of appropriations for any such year fails to provide funds in sufficient amounts to discharge such obligation, such failure shall not constitute a default or breach of this Agreement, including any sub-agreement, attachment, schedule, or exhibit thereto, by the City.

20.0 CONFIDENTIALITY OF RECORDS. Subject to federal and state confidentiality and privacy laws, Operator will establish and maintain procedures and controls that are acceptable to the City, including the City's designated HIPAA officer, for the purpose of assuring that no information contained in its records or obtained from the City or from others used in carrying out its functions under this Agreement will be used by or disclosed by Operator, its agents, officers , or employees, except as required to perform its duties under this Agreement. Operator will ensure that the City's representatives are properly authorized and are in all respects in compliance with HIPAA laws and regulations or otherwise satisfy a permitted use and disclosure as set out in 45 C.F.R. §164.512 of HIPAA.

21.0 PROHIBITED INTEREST/REFERRALS. No official, employee or agent of the City shall

have any financial interest or benefit, direct or indirect, arising from the negotiation, execution or implementation of this Agreement and any of its provisions, or any amendments thereto. No former official, former employee or former agent of the City who may become employed by the Operator shall have any involvement with the performance of this Agreement, nor shall such person, on behalf of the Operator, have any communication with any City participants or City participating agencies relating to the Agreement without the City's prior written consent. It is the intent of the parties that any remuneration, benefit, or privilege provided for in this Agreement shall not influence or in any way be based on the referral or recommended referral by either party or the purchasing, leasing, or ordering of any services other than the specific services described in this Agreement. Any payments specified in this Agreement are consistent with what the parties reasonably believe to be a fair market value for the services.

22.0 EQUAL EMPLOYMENT OPPORTUNITY. Operator shall follow applicable affirmative action guidelines, laws, regulations and rules in order to assure that employees and applicants applying for employment with Operator will not be discriminated against because of race, color, religion, sex, sexual orientation or national origin. Operator shall comply with the Americans with Disabilities Act (ADA) and similar state and local laws and will not discriminate against disabled persons in accordance with applicable laws, regulations and rules.

23.0 NON-DISCRIMINATION. Operator will not discriminate against any employee or

265

applicant for employment because of race, color, sex, national origin, religion, age, handicap, veteran status, or genetic information. Operator will, where appropriate or required, take affirmative action to ensure that applicants and employees are treated without regard to their race, color, sex, or national origin.

24.0 DRUG FREE WORKPLACE.

24.1 OPERATOR shall, within 30 days after the Effective Date of this Agreement:

(a) Publish a statement notifying its employees that the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance is prohibited in Operator’s workplace and specifying the actions that will be taken against employees for violations of such prohibition.

(b) Establish an ongoing drug-free awareness program to inform such employees about the following:

(i) The dangers of drug abuse in the workplace,

(ii) Operator’s policy of maintaining a drug free workplace,

(iii) Any available drug counseling, rehabilitation, and employee assistance programs, and

(iv) The penalties that may be imposed upon employees for drug abuse violations occurring in the workplace.

(c) Provide all employees engaged in performance of this Agreement with a copy of the statement required by paragraph (a) of this Section.

(d) Notify such employees in writing in the statement required by paragraph (a) of this Section that, as a condition of continued employment on this Agreement, the employee will:

(i) Abide by the terms of the statement and

(ii) Notify the employer in writing of the employee's conviction under a criminal drug statute for a violation occurring in the workplace no later than 5 days after such conviction.

(e) Notify the City in writing within 10 days after receiving notice under paragraph d (ii) of this Section, from an employee of otherwise receiving actual notice of such conviction. The notice shall include the position title of the employee.

(f) Within 30 days after receiving notice under paragraph d (ii) of this Section of a conviction, take one of the following actions with respect to any employee who is convicted of a drug abuse violation occurring in the workplace:

(i) Taking appropriate personnel action against such employee, up to and including termination; or

(ii) Require such employee to satisfactorily participate in a drug abuse assistance or rehabilitation program approved for such purposes by a federal, state, or local health, law enforcement, or other appropriate agency; and

266

(g) Make a good faith effort to maintain a drug-free workplace through implementation of paragraphs (a) through (b) of this Section.

24.2 Operator’s drug free workplace policy shall also provide for pre-employment, reasonable suspicion and post-accident drug and alcohol testing in accordance with its established drug and alcohol testing policy. As allowed by applicable law, the data received from such testing (with confidential or private information redacted) shall be made available to a City representative for audit and compliance purposes.

24.3. In addition to other remedies available to the City, Operator’s fa ilure to comply with the requirements of this section will constitute a default under this Agreement.

25.0 RELATIONSHIP OF PARTIES.

25.1 Nothing in this Agreement is intended to, or shall be deemed to constitute, a partnership or joint venture between the Parties, or to create any agency or partner relationship between the Parties. Neither Party shall hold itself out as a partner, joint venture, agent, or representative of the other under this Agreement.

25.2 Operator understands and agrees that Operator and Operator’s employees, agents, servants or other personnel are not employees of the City. Operator shall be solely responsible for payment of salaries, wages, payroll taxes, unemployment benefits and any other form of compensation or benefit to Operator or any of Operator’s employees, agents, servants or other personnel performing the service or work or supplying equipment or materials specified herein, whether it be of a direct or indirect nature. It is expressly understood and agreed that for such purposes neither Operator nor Operator’s employees, agents, servants, subcontractors or other personnel shall be entitled to any payroll, insurance, unemployment, worker's compensation, retirement or any other benefits whatsoever from the City.

26.0 ASSIGNMENT/AFFILIATED RELATIONSHIPS/SUBCONTRACTOR.

26.1 Operator shall not assign or transfer any portion of this Agreement without the prior written consent of the City. Any purported assignment or transfer without such consent will terminate this Agreement at the option of the City, as determined in the City's sole discretion, and will not convey any rights to the assignee/transferee. A significant and material change in ownership of Operator will, for the purposes of this Agreement, be considered a form of assignment or transfer that is prohibited under this Agreement.

26.2 Except for ancillary services provided by Operator’s affiliates or subcontractors for billing and collection, legal, etc., Operator may not enter into any agreement or arrangement of any kind for the direct or indirect performance of this Agreement by an affiliate or subcontractor of Operator without the prior written consent of the City. The parties' intention is for Operator, and not an affiliated entity or subcontractor, to directly perform the EMS Services described in this Agreement. Upon request, Operator shall provide the City with a list of affiliates and subcontractors of Operator that provide ancillary services for this Agreement.

27.0 TAXES. Operator shall be responsible for complying with all federal, state and local tax

laws, regulations and rules applicable to its performance of this Agreement.

28.0 NON-EXCLUSION. Each party represents and certifies that neither it nor any practitioner or employee who orders or provides services on its behalf hereunder has been convicted of any conduct that constitutes grounds for mandatory exclusion as identified in 42 U.S.C.§ 1320a-7(a). Each party further represents and certifies that it is eligible to participate in federal health care programs or in any other state or federal government payment program. Each party agrees that if DHHS/OIG excludes it, or any of its practitioners or employees who

267

order or provide services, from participation in federal health care programs, the party must notify the other party within five (5) days of knowledge of such fact, and the other party may immediately terminate this Agreement, unless the excluded party is a practitioner or employee who immediately discontinues ordering or providing services hereunder.

29.0 END TERM PROVISION. Operator shall have ninety (90) days after termination or expiration of this Agreement in which to provide to the City all requested audited financial statements and all other documentation necessary to facilitate the close out of this Agreement.

30.0 COMPLIANCE WITH FEDERAL, STATE AND LOCAL LAW, REGULATIONS AND LAWS. At all times during the performance of this Agreement, each party shall observe

and conform to all applicable federal, state and local laws, rules, regulations, and orders that have been or may hereafter be established. Specifically, and without limitation, the parties shall comply with the Immigration Reform and Control Act of 1986 (IRCA), Medicare and Medicaid Regulations, the federal Anti-Kickback Statute, OSHA Regulations, including Title 29, Section 1910.1200 "Hazard Communication," and the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Furthermore, Operator shall comply with and perform this Agreement in accordance with the provisions of all applicable rules, written guidelines, protocols and written policies established by the City. Operator will make available to the City a copy of its Code of Conduct, Anti-Kickback policies and other compliance policies, including any and all changes which may be made from time-to-time. Operator warrants that its personnel shall comply with Operator compliance policies, including training related to the Anti-Kickback Statute.

31.0 PERMITS, LICENSES AND CERTIFICATES. Operator shall obtain and hold any and all federal, state and local permits, licenses and certificates required to fully perform this Agreement. Operator shall make all necessary payments for such permits, licenses and certificates. Operator will assure that all necessary renewals of such permits, licenses and certificates are timely made. Operator shall assure that all of its personnel hold valid federal, state and local permits, licenses and certificates required in order for Operator to meet its responsibilities under this Agreement. City personnel engaged in providing reimbursable services will maintain or keep in effect any certifications required for the performance of their duties.

32.0 NOTICE OF LITIGATION AND CLAIMS/COMPLAINT PROCESS. Operator shall

notify the City within five (5) calendar days of any material litigation or claims which arise out of, or are related in any way to, Operator’s performance of this Agreement. To the extent permitted by law, Operator will disclose in writing or electronically to the City all litigation matters involving Operator’s related organizations or affiliates, owners of Operator (having a 10% or greater interest in Operator) and key personnel of Operator that may have a material impact on the Operator ability to continue performance of this Agreement. Operator shall maintain at all times and fully comply with its written complaint resolution policy, which shall be made available to the City upon request, related to Operator’s performance under this Agreement.

33.0 FORCE A JEURE.

33.1 Except as may be otherwise provided in this Agreement, neither party shall be liable in damages or have the right to terminate this Agreement for any delay or default in performance if such delay or default is proximately caused by conditions within the City beyond its reasonable control and occurs without the party's fault or negligence including, but not limited to, Acts of God, fire, storm, flood, war, rebellion, insurrection, riot, strike and/or any other cause beyond the reasonable control of the party whose performance is affected (each, a "Force Majeure Event").

33.2 Neither party shall be liable for any failure or delay in performance under this Agreement (other than for delay in the payment of money due hereunder) to the extent such failures or delays are proximately caused by a Force Majeure Event, provided that, as a condition to

268

the claim of nonliability, the party claiming nonliability due to a Force Majeure Event shall give the other prompt written notice, with full details, following the occurrence of the cause relied upon. Failure to give notice within seven (7) days from the occurrence of the Force Majeure Event shall act as a waiver of the party's right to claim nonliability due to the Force Majeure Event.

33.3 To the extent any dates by which performance obligations under this Agreement are scheduled to be met, such dates will be extended for a period equal to the time lost due to any delay caused by a Force Majeure Event for which timely notice is provided.

34.0 AGREEMENT MODIFICATION.

34.1 Any amendments or modifications of the terms of this Agreement shall be in writing and will be effective only after the approval and signing of the parties to this Agreement.

34.2 The City may, at any time, order changes within the scope of this Agreement without invalidating this Agreement. In such event, equitable adjustment of Agreement provisions may be authorized by the City. Such Agreement changes must be in writing in accordance with this Section. If such changes promulgated by the City create an adverse and material financial impact upon Operator, Operator and the City agree to negotiate in good faith a revision to the fee structure. In the event the parties are unable to reach agreement within thirty (30) days following a request from Operator for modification of the fee structure, the matter shall be submitted for private, non-binding mediation with the parties to bear equally the costs of the mediation. A retired Colorado, District Court Judge, as mutually agreed by the parties, shall serve as the mediator. The parties agree to participate in good faith in the mediation and negotiations related thereto for a period of thirty (30) calendar days. The substantive and procedural law of the State of Colorado shall apply to the proceedings. If the Parties are not successful in resolving the dispute through mediation, then the Parties shall be free to litigate the matter, and agree that in the event of such litigation, the exclusive venue for such litigation shall be the Pueblo County District Court, Pueblo, Colorado, and if necessary, for exclusive federal questions, the United States District Court for the District of Colorado. The mediation requirement provided herein shall apply only to disputes under this Section of the Agreement and not further or otherwise.

35.0 NOTICE. Any notice to the parties required under this Agreement shall be in writing delivered to the person designated below as Contract Coordinator at the indicated address unless otherwise designated in writing. Notices shall be personally delivered, sent by certified mail return receipt requested or sent for next day delivery by a nationally recognized next day courier service to:

269

FOR THE CITY FOR OPERATOR

Contact: Fire Chief Contact: Regional Director American Medical Response of Colorado, Inc.

Address: 1551 Bonforte Blvd Address: 922 S. Santa

Fe Ave.

City/State: Pueblo, CO City/State: Pueblo, CO

Zip: 81001 Zip: 81006

WITH MANDATORY COPY TO: WITH MANDATORY COPY TO:

Contact: City Attorney Contact: Legal Department American Medical Response, Inc.

Address: One City Hall Place Address: 6363 S. Fiddler’s Green

Circle

Pueblo, CO 81003 14 th Floor

Greenwood Village, CO 80111

36.0 STATE-IMPOSED MANDATES PROHIBITING ILLEGAL ALIENS FROM

PERFORMING WORK.

36.1 At or prior to the time for execution of this Agreement (which may be referred to in this

section as this “Contract”), Operator (which may be referred to in this section as “Contractor”) shall

submit to the Purchasing Agent of City its certification that it does not knowingly employ or contract

with an illegal alien who will perform work under this Contract and that the Contractor will participate

in either the “E-Verify Program” created in Public Law 208, 104 th Congress, as amended and

expanded in Public Law 156, 108th Congress, as amended, that is administered by the United States

Department of Homeland Security or the “Department Program” established pursuant to §8-17.5-

102(5)(c) C.R.S. that is administered by the Colorado Department of Labor and Employment

in order to confirm the employment eligibility of all employees who are newly hired for

employment to perform work under this Contract.

36.2 Contractor shall not knowingly employ or contract with an illegal alien to perform work under

this contract;

36.3 The following state-imposed requirements apply to this contract:

(a) The Contractor shall have confirmed the employment eligibility of all employees who

are newly hired for employment to perform work under this Contract through participation in

either the E-Verify Program or Department Program.

(b) The Contractor is prohibited from using either the E-Verify Program or

Department Program procedures to undertake pre-employment screening of job applicants

while this Contract is being performed.

(c) The Contractor is required to comply with any reasonable request by the

Colorado Department of Labor and Employment (hereinafter referred to as “CDLE”) made in

270

the course of an investigation that CDLE is undertaking pursuant to its authority under §8-

17.5-102(5), C.R.S.

(d) Violation of this Section by the Contractor shall constitute a breach of contract and grounds for termination.

37. PERA LIABILITY. Operator shall reimburse the City for the full amount of any employer

contribution required to be paid by the City of Pueblo to the Public Employees’ Retirement Association

(“PERA”) for salary or other compensation paid to a PERA retiree performing contracted services for the

City under this Agreement. Operator shall fill out the questionnaire attached as Attachment “F” and

submit the completed form to City as part of the signed Agreement.

38.0 MISCELLANEOUS.

38.1 The captions of the Sections in this Agreement are set forth only for the convenience and reference of the Parties and are not intended in any way to define, limit or describe the scope or intent of this Agreement.

38.2 This Agreement shall be governed by the laws of the State of Colorado. Venue for any action arising under this Agreement or for the enforcement of this Agreement shall be in a state court with jurisdiction located in Pueblo County, Colorado.

38.3 The provisions of this Agreement pertaining to insurance, indemnification, payments to the City, and liability shall survive the expiration of the term of this Agreement and termination of this Agreement and continue in effect for a period of five years following the termination of this Agreement and for such further time as it may take to completely and finally negotiate, settle, or litigate any claim or suit concerning the same.

38.4 This Agreement represents the entire agreement between the Parties and supersedes all prior discussions and written agreements or understandings. If any provision of this Agreement is held invalid or unenforceable, no other provision shall be affected by such holding, and all of the remaining provisions of this Agreement shall continue in full force and effect. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together constitute one and the same agreement.

38.5 The Parties agree to execute any additional documents or take any additional action that may be necessary to carry out this Agreement.

38.6 Nothing in this Agreement is intended, nor should it be construed, to create any rights, claims, or benefits or assume any liability for or on behalf of any third party, or to waive any immunities or limitations conferred under federal or state law, including but not limited to the Colorado Governmental Immunity Act, § 24-10-101 et seq., C.R.S.

38.7 Each person signing this Agreement on behalf of a party represents and warrants that he or she has the requisite power and authority to enter into, execute, and deliver this Agreement on behalf of such party and that this Agreement is a valid and legally binding obligation of such party enforceable against it in accordance with its terms.

(Signature page follows)

Executed at Pueblo, Colorado, the day and year first above written.

CITY OF PUEBLO, A MUNICIPAL CORPORATION AMERICAN MEDICAL RESPONSE OF COLORADO, INC.

271

By By: President of the City Council

Attest: Title: City

Clerk

[ S E A L ]

APPROVED AS TO FORM:

City Attorney

EXHIBIT “A” RESPONSE TIME REQUIREMENTS

I. RESPONSE TIMES

For the purposes of calculating response times, the following definitions and measurements shall apply:

1. "Priority 1" responses shall be defined as an emergent response. Priority 2 calls require a less than emergent response. For clarity and to avoid doubt, only calls that originate through the City PSAP are part of this Agreement and only calls that originate through the PSAP are subject to response times.

2. The City currently utilizes two (2) 9-1-1 response priorities, emergent Priority 1, and less than emergent Priority 2. These response priorities are based on nature codes. Requests for service are assigned an applicable nature code by the City depending upon information obtained from those requesting service (e.g. chest pain, seizure, and structure fire). A current list of nature codes and their corresponding priority will be provided to operator. An updated list will be provided subsequent to changes in nature codes and or priority assignment. In situations where a call nature is not determined or assigned, a Priority 1 response will be initiated by the operator and the City

3. The City intends to transition to a recognized Medical Priority Dispatch System and the City, Operator and the City’s medical director will work to establish a new baseline for Priority 1 and Priority 2 calls. The City at is sole discretion will determine the assigned priority of all calls for service.

4. The City is continually updating, refining, and altering dispatching protocols including priorities and codes. Any such update, refinement or change will become effective following a 30-day written notice to Operator.

5. In this performance-based contract, Operator has flexibility to choose the means and methods for providing EMS services. Performance that meets or exceeds the response time requirements is the result of Operator’s expertise and choice of the means and methods, and therefore is solely their responsibility. An error or failure in one portion of Operator’s operation does not excuse performance in other areas of operation. Further the City does not require the use of lights and siren for any call.

6. Response zone designations are depicted in Appendix "A" to this

272

Exhibit “A.”

a. Twelve (12) response zones are defined per the City Response Zones Map (Appendix "A") and provided to operator by the City in the form of an electronic shape file. The parties shall agree in writing on any changes in the Response Zone Map before changes take effect. The response zones will be reviewed annually by the Fire Chief and Operator with changes implemented as deemed necessary by agreement of the parties. It is Operator’s responsibility to be familiar with the geographic considerations and changes to response zones.

b. In addition to the foregoing annual review of the Response Zone Map, Operator shall advise the Fire Chief of changes in the deployment of Operator assets relative to the most recent available PFD Statistical Abstract, to demonstrate how Operator’s asset deployment is improving and contributing to the achievement of the 90th percentile compliance with the citywide 8 minute Priority 1 response standard, in the URBAN ZONES as defined in (Appendix “A”). The City and Operator shall cooperate in compiling statistics to show the joint PFD/ Operator annual total response time by response zone and Citywide measured according to the first ALS resource on scene.

7. For the purpose of measuring response times, the official clock will be the time displayed at the City of Pueblo Communication Center. Operator shall be required to synchronize its clocks with the City’s Communications Center clock. Response times shall be determined in accordance with 10.a. below.

8. Fractile response time measurements for system response times are a key measurement of performance. This measurement is the determining factor, which drives the placement and redeployment of the system's resources throughout the entire system. Performance will be measured using a fractile distribution reported to the 90th percentile.

a. For the purpose of calculating response times each incident will be counted as a single response regardless of the number of ambulance units that respond. The dispatch time of the 1st ambulance dispatched and the on scene time of the first arriving qualified resource will be used to compute the response time for the incident. Subsequent responding ambulances will be exempt from the response data.

b. Operator shall use its best efforts to minimize variations or fluctuations in response time performance.

c. Compliance with response times in this Agreement is measured by meeting the performance criteria Citywide.

9. Arrival time:

a. For Priority 1 calls, arrival means the moment an ALS resource crew notifies the communications center that the unit is fully stopped at the location where the response vehicle will be parked while the City or Operator personnel attend the patient.

b. For Priority 2 calls, arrival means the moment an Operator ALS or QRV resource notifies the communications center that the unit is fully stopped at the location where the response vehicle will be parked while City or Operator personnel attend the patient.

c. In those situations, where the City or Operator have responded to a location other than the scene (e.g. staging), arrival shall be the time the qualified unit arrives in the designated staging area.

273

d. In the event either Operator, PFD or other system resource fails to report non-scene, the time of the next communication will be used as the arrival time, unless Operator can verify the on-scene time through other verifiable means.

10. Response times shall be determined as follows:

a. For Priority 1 calls, the response time for Operator’s response shall commence when Operator’s dispatch center is notified of the nature of the call and is provided with the address necessary to respond to the call and shall conclude upon the arrival of an Operator ALS resource, PFD ALS resource, or other ALS system resource.

b. For Priority 2 calls, the response time for Operator’s response shall commence when Operator’s dispatch center is notified of the nature of the call and is provided with the address necessary to respond to the call and shall conclude upon the arrival of an Operator’s ALS or QRV resource:

11. Minimum response time requirements:

90th Percentile time

basis: Priority

Citywide

ALS 1st Response

1 8:00 / 8:01 is late

2 13:00 / 13:01 is late

First Operator unit on scene maximum response time

Priority Urban Special Zone

1 13:00 / 13:01 is late 18:00 /18:01 is late

2 18:00 / 18:01 is late 23:00 / 23:01 is late

After January 1, 2019, and if mutually agreed by the parties in a written amendment, alternate response times may apply to non-emergent Priority 3 calls.

a. The foregoing response times shall not apply under conditions where police and fire personnel are operating under a modified response protocol or other disaster mode due to dangerous travel or other conditions that could impact the safety of responding personnel.

b. Response Time Exemptions: Operator shall maintain mechanisms for reserve production capacity to increase production should temporary system overload persist. However, it is understood that unusual circumstances and conditions beyond Operator’s reasonable control can produce response times that exceed the standards. If Operator believes that any run or group of runs should be excluded from the response time standards, a written request must be made to the Fire Chief. Any requests for exemption from response time standards shall be made with the Monthly Response Time Reports, as set forth in Section II.6(a) below. If no such request is received by the deadline required herein, no such request will be considered in compliance calculations. The Fire Chief has the sole discretion to exempt any call. Equipment failures, traffic

274

congestion, ambulance failures, Operator dispatch errors, inability to staff units, and units deployed on inter facility transports will not be grounds for granting an exception to compliance with the response time requirements.

c. Response times are critical to patient care. Operator is expected to meet the required response times to every call and failure to do so will result in liquidated damages as provided in Exhibit “D” to the Agreement. In addition, failure to meet the response time criteria citywide at least 90% of the time will result in additional liquidated damages as also provided in Exhibit “D.” Additional liquidated damages will apply as provided in Exhibit “D.” For purposes of determining citywide compliance,

d. An improvement in response time minimums is the goal of the City in this Agreement. The City and Operator will work together to increase response time reliability to 92nd percentile by August 1, 2018.

e. Operator must commit to use its best efforts to minimize variations or fluctuations in response time performance and to provide equalized response time performance throughout the various communities inside the service area.

f. For the purpose of calculating the 90th percentile an individual call without an arrival time will be excluded from the data pool. Example: A call in which all responding units are cancelled en-route and none actually arrive on scene before the cancelation.

12. Response priority change: Special circumstances may result in a change in call priority or designation. Calculations to determine compliance with response time requirements shall be completed as follows:

a. Upgrades: If an assignment is upgraded, prior to the arrival on scene of the first ambulance (e.g., Priority 2 to Priority 1), compliance with contract standards and liquidated damages will be calculated based on the shorter of:

(i) The time elapsed from call receipt to the time of upgrade plus the highest priority response time standard, or

(ii) The lower priority response time standard.

b. Downgrades: If an assignment is downgraded, prior to the arrival on scene of the first ambulance (e.g., Priority 1 to Priority 2), compliance with Agreement standards and liquidated damages will be calculated based on:

(i) The lower priority response time requirement, if the unit is downgraded before it would have been judged “late” under the higher priority response time requirement, or

(ii) The higher priority response time requirement, if the unit is downgraded after it would have been judged “late” under the higher priority response time requirement.

c. Cancellations: If an ambulance is cancelled by an authorized agent of the City, after an assignment has been made but prior to the arrival of the first ambulance, and no ambulance is required at the dispatch location. The response time clock will stop at the moment of cancellation. If the elapsed response time at the moment of cancellation exceeds the response time requirement for the assigned priority of the call, the unit will be judged “Late” for the purpose of Agreement compliance and calculation of liquidated damages. If the elapsed response time at the moment of cancellation is within the response time requirement for the assigned priority of the

275

call. The unit will be determined “on time” for the purpose of Agreement compliance and calculation of liquidated damages.

II. RESPONSE TIME AND DATA REPORTING REQUIREMENTS

1. The Pueblo Dispatch Communications Center is the central data source for all ambulance Agreement response time data.

2. Operator shall provide geographic location data on each ambulance using an Automatic Vehicle Locator (AVL) or Global Positioning System (GPS).

3. When technology permits the City must have the ability to access real time ambulance location and response time data of all ambulances involved in 9-1-1 responses under the Agreement.

4. The long term success of any EMS system is predicated upon the ability to measure, analyze, and report operational, clinical, and administrative data. Operator shall be responsible for data input and reporting in a manner which facilitates review by the City and any other entity authorized by law or contract to review data and reporting. All systems and reports must comply with City, state, and federal data collection and reporting requirements.

5. Operator will provide the City with a dedicated server, and replicate EMS call response data to that server in intervals the City desires. The server will house a Microsoft SQL server database engine where replicated data will be stored as table objects. There will be approximately five relational database tables to allow City analysts to write queries for information pertaining to all aspects of EMS ambulance requests for service in the City. The tables will store data listed below as well as any call edits performed. The raw data may then be queried directly from comma delineated files provided by Operator.

a. Data fields

Date and time of call received by Operator

Date and time of call received by City

Address of call

Response Zone

Responding Operator unit(s) number

Latitude and Longitude of responding unit(s) at time of dispatch

Operator call number

City call number

MPDS Code

MPDS received time

Operator unit dispatch time

Operator unit responding time

Operator on scene time

276

Operator leave scene time (transport)

First city ALS unit on scene time

Additional data fields may need to be added for the purpose of determining compliance at the sole

discretion of the Fire Chief. 6. All reports shall be electronically maintained and submitted in a format useful to

the City a. Monthly Response Time Report

Operator shall electronically submit to the City monthly response reports. Such reports must be transmitted no later than 5:00 p.m., five (5) business days following the receipt of the PFD’s response data from the previous month. Operator may request up to an additional seven (7) business days when Operator’s data analyst is unavailable due to emergency or is on paid time off. Failure by Operator to submit a report will be classified as an administrative failure and subject to liquidated damages, pursuant to Exhibit “D” to the Agreement. For each incident for which a response is dispatched, the monthly response time compliance report shall include, but not be limited to:

(i) A monthly summary of Operator’s number of calls into the service area by volume, nature and by Response zone, (ii) The unique call number generated by City dispatch, (iii) Number of transports (iv) Address received time (v) address of incident (vi) The matching unique number generated by Operator’s dispatch, (vii) Dispatch date, (viii) Time the call was received from Public Safety Answering Point (PSAP), (ix) MPDS code (x) MPDS received time, (xi) Dispatch time, (xii) Arrival time of the first Operator ambulance, (xiii) Arrival time of first ALS resource (PFD, Operator or other system resource), (xiv) Time transport from scene began, (xv) Time transport ended, (xvi) Identification number of the ambulance(s) that arrived on scene, (xvii) Response priority, linked to the dispatch and arrival times necessary to calculate the response time, (xviii) Response zone in which the call occurred, (xix) For calls canceled en-route, or up or downgraded, the aforementioned items shall be reported and any additional data necessary to calculate and verify response times (xx) For calls on which multiple ambulances arrive on scene, the responses of all ambulances that arrive on scene shall be reported, but only the first arriving ALS resource (PFD, Operator, or other system resource) shall be timed for compliance with performance requirements, (xxi) The Calculation to determine whether the performance standards for Priority 1 and Priority 2 responses have been met citywide. (xxii) Identification number of the ambulance(s) initially assigned to the incident if different than the ambulance(s) that ultimately arrived, and the reason for changed assignment. (xxiii) Latitude and longitude of responding ambulance(s) at time of dispatch.

277

b. Non-Compliant Response Report.

Operator shall submit a monthly non-compliant response report electronically to the City. Such reports must be transmitted no later than 5:00 p.m., five (5) business days following the receipt of the PFD’s response data from the previous month. Operator may request up to an additional seven (7) business days when Operator’s data analyst is unavailable due to emergency or is on paid time off. This report shall include all information outlined in Section II(6)(a) in addition it should include the number of ambulances in-service at the time of the exception, for all calls in which the response time requirements were not achieved. Repeated failure to submit a report will be classified as an administrative failure and subject to liquidated damages, pursuant to Exhibit “D” to the Agreement. The existence of a repeated failure shall be determined according to Section 9.0 of the Agreement.

7. Incident Reports

Operator will complete and submit to the City within 48 hours, or any shorter time if required by the Fire Chief, incident reports for actions considered non-conforming to policies and procedures and for any other incident if requested by the City. Non-conforming incidents include, but are not limited to, ambulance accidents or vehicle failures while on a call, equipment failures, patient injuries occurring after care is assumed from the City by ambulance personnel, and patient or facility complaints. A copy of all incident reports shall also be maintained on file at Operator’s administrative offices. Failure to submit a report will be classified as an administrative failure and subject to liquidated damages, pursuant to Exhibit “D” to the Agreement.

Incident reports must include but not be limited to the following information:

a. Date of incident, b. Incident number if applicable, c. Personnel involved, identified by employee number, d. Unit number if applicable, e. A detailed narrative of the event f. A summary of corrective action taken.

To the extent permitted under the Colorado Open Records Act, such reports, and/or the content of the same, shall be excluded from production requests.

8. Performance Improvement & Clinical Reports

Within fifteen (15) days following the end of each month, Operator shall provide a report electronically, summarizing quality improvement activities of the previous month. Repeated failure to submit a report will be classified as an administrative failure and subject to liquidated damages, pursuant to Exhibit “D” to the Agreement.

Within fifteen (15) days following the end of each month, Operator shall also provide clinical data in the form and format required by the City for the purposes of ongoing measurement of clinical care. This data will include, but not be limited to, the following information:

a. Changes in patient condition en-route to the hospital, b. Procedures performed,

278

c. Number of patients with specific complaints or clinical signs/symptoms, and d. Patient outcome, to the extent Operator possesses such information, but not to include data maintained by destination hospitals.

9. Community & Public Information Report

Operator shall provide a quarterly summary (based on the calendar year) of all community education and public information activities including a description of the activities, number of attendees, and number of staff hours provided, due within fifteen (15) days after the end of the quarter. Repeated failure to submit a report will be classified as an administrative failure and subject to liquidated damages, pursuant to Exhibit “D” to the Agreement.

10. Record Requests Operator shall complete, maintain, and if requested by the City, provide access to or copies of the following records and reports (including supporting data if requested) within fifteen (15) working days of the request:

a. Equipment failure records, b. Vehicle maintenance records, c. Accounting and billing records sufficient to verify accurate billing in accordance with the

Agreement, d. Deployment planning records, and e. Continuing education and training reports.

30

EXHIBIT “B” FEE SCHEDULE

PAYMENT FOR REIMBURSABLE ITEMS

Operator shall pay to the City reimbursements in monthly installments for all amounts required to be furnished by the City related to Operator’s delivery of the services.

Operator shall reimburse the City in the amount of $471,000 per year, but not exceeding the amount of the City's actual costs, related to the City providing the following:

(a) Communications/dispatch services

(b) Contract administration and compliance

(c) Hospital ride-ins

(d) PFD ALS first response stopping the clock for Priority 1 responses

Operator shall remit the reimbursement stated above to the City, without any billing or invoicing,.

In the event of increases in the actual reimbursed costs, beginning with the budget cycle for 2019, the City may submit adjustments for reimbursed costs to Operator, which adjustments shall not exceed the amount allowed for inflation, being measured according to the Consumer Price Index for Denver-Boulder-Greely. Such adjustment shall be made not more frequently than once per year, and they shall only be made as a part of the City's annual budget process for 2019 and in years thereafter.

EXHIBIT “C” PERFORMANCE SECURITY Bond Number

KNOW ALL MEN BY THESE PRESENTS :

That we a

(Name of Operator) (Corporation, Partnership, or Individual)

hereinafter called "Principal" and

( Surety) of , State of , hereinafter called the "Surety", are held and firmly bound unto the City of Pueblo, a Municipal Corporation,

hereinafter called "City", in the penal sum of Dollars

($ ) in lawful money of the United States, for the payment of which sum well and truly to be made, we bind ourselves, our heirs, executors, administrators, and successors, jointly and severally, firmly by these presents.

THE CONDITION OF THIS OBLIGATION is such that Whereas, the Principal entered into a

31

certain contract captioned “Ambulance Service Agreement” with the City, dated the 1st day of February 2018, a copy of which is hereto attached and made a part hereof.

NOW, THEREFORE, if the Principal shall well, truly and faithfully perform its duties, all the

undertakings, covenants, terms, conditions and agreements of said contract during the original term thereof, and any extensions thereof which may be approved by the City, with or without notice to the Surety, and if Principal shall satisfy all claims and demands incurred under such contract, and shall fully indemnify and save harmless the City from all costs and damages which it may suffer by reason of failure to do so, and shall reimburse and repay the City all outlay and expense which the City may incur in making good any default, then this obligation shall be void; otherwise to remain in full force and effect.

PROVIDED, FURTHER, pursuant to Section 4 of the contract, Principle and Surety expressly

stipulate and agree to the City’s right to payment of any direct draw by the City as provided in the contract and the restriction of rights of both Principle and Surety to object and/or to refuse to honor any such demand for payment by the City.

PROVIDED, FURTHER, that the said Surety, for value received hereby stipulates and agrees that no

change, extension of time, alteration or addition to the terms of the contract or to the services and obligations to be performed thereunder or to the specifications accompanying the same shall in any way effect its obligation on this bond, and it does hereby waive notice of any such change, extension of time, alteration or addition to the terms of the contract or to the services or to the specifications.

PROVIDED, FURTHER, no right of action shall accrue on this bond to or for the use of any person or

corporation other than City.

IN WITNESS WHEREOF, this instrument is executed in four (4) counter-parts, each of which shall be deemed an original, this the day of , 20 .

Principal

ATTEST :

By By Principal Secretary

(SEAL) (Address)

By (Witness as to Principal)

(Address)

ATTEST :

Surety

By By

(Surety) Attorney-In-Fact Attorney-In-Fact

(SEAL) (Address)

32

By (Witness as to Surety)

(Address)

NOTE: Date of Bond must not be prior to date of Ambulance Service Agreement. If Operator is a Partnership, all partners shall execute bond. EXHIBIT “D” LIQUIDATED DAMAGES

I. Start-up

In the event Operator fails to achieve compliance with required response time standards by the end of the start-up period of the Agreement, which will expire 180 days following the implementation of this agreement, liquidated damages as provided in this Exhibit “D” will begin to accrue. For clarity and to avoid doubt, there shall be no liquidated damages assessed during the start-up period of the Agreement.

II. Response Time Standards

A. Operator Per Minute

Liquidated Damages

1. Liquidated damages in the amount of $20 per minute, will accrue for each incident in which Operator fails to meet established response time requirement, not including exemptions granted as provided in Section I.11.b. of Exhibit “A” of this Agreement. These liquidated damages will accrue and be paid monthly. The per minute liquidated damages will apply for Operator after the maximum response time is exceeded according to the table set forth below

Priority 1 Maximum response time:

Urban Zones 13:00 Minutes (13:01 is late) Special Zones 18:00 Minutes (18:01 is late)

Priority 2 Maximum response time:

Urban Zones 18:00 Minutes (18:01 is late) Special Zones 23:00 Minutes (23:01 is late)

2. For the purposes of calculating per minute liquidated damages, any fraction of a minute will be rounded up for the first minute Operator is late. After the first minute, any fraction of a minute will be rounded up to the next minute. For

33

example, a unit arriving on scene in seventeen (17) minutes and two (2) seconds for a priority 1 call in an urban zone would be five (5) minutes late and a liquidated damage of $100 would accrue.

3. The foregoing per minute liquidated damages shall be capped for each incident at $1,000.00. In the event that failure to respond results in monthly liquidated damages as provided below, such failure to respond liquidated damages shall be offset by any payment of $1,000.00 for the maximum per minute liquidated damages for a particular incident.

B. Operator Failure to Respond Liquidated Damages

1. Escalating liquidated damages (per month) in the amount of $1,000.00, $3,000.00, $5,000.00, and $10,000.00, for the first, second, third, consecutive, fourth and continuing months, respectively, will be assessed for not responding to a request for service due to the shortage of Operator 9-1-1 ambulance(s). In addition to any liquidated damages, it is understood that the City may dispatch any non-Operator ambulance in the event of Operator not responding.

2. Not responding is defined as no ambulance being assigned to the call in ten (10) minutes from the time the call is transferred to Operator by the Pueblo Dispatch Communication Center. Or no ambulance arriving on scene within 30 minutes for a priority 1 call or 40 minutes for a priority 2 call in an urban zone.

3. In the event that Operator is subject to liquidated damages for failure to respond in an amount of $5,000.00 or more, the City reserves the right to terminate the Contract.

C. Operator Release from the Scene Liquidated Damages

1. Except when otherwise acting according to the Command and Control requirements set forth Agreement and when medically necessary, liquidated damages in the amount of $1,000.00 will be assessed for leaving a scene without prior approval from PFD. Exceptions to this requirement may be granted by the Fire Chief in his sole discretion.

D. Operator Citywide Liquidated Damages

1. In the event that Operator’s response fails to meet citywide monthly response time requirements as set forth herein, additional liquidated damages will accrue as follows:

Citywide compliance per month Priority 1

89.9% to 89.1% $8,000.00 89% to 88.1% $10,000.00 88% to 87.1% $12,000.00 87% to 86.1% $14,000.00 86% to 85.1% $16,000.00 85% to 84.1% $18,000.00 84% and below $32,000.00

Citywide compliance per month Priority 2

89.9% to 89.1% $2,000.00 89% to 88.1% $3,000.00

34

88% to 87.1% $4,000.00 87% to 86.1% $5,000.00 86% to 85.1% $6,000.00 85% to 84.1% $7,000.00 84% and below $8,000.00

For purposes of computing the foregoing citywide compliance, on Priority 1 responses, both PFD and Operator arrival times, whichever is earlier, shall be considered to stop the clock. Beginning August 1, 2018, and there after the citywide compliance will be based upon a 92% requirement, and thereafter citywide liquidated damages shall be determined as follows:

Citywide compliance per month Priority 1

91.9% to 91.1% $8,000.00 91% to 90.1% $10,000.00 90% to 89.1% $12,000.00 89% to 88.1% $14,000.00 88% to 87.1% $16,000.00 87% to 86.1% $18,000.00 86% and below $32,000.00

Citywide compliance per month Priority 2

91.9% to 91.1% $2,000.00 91% to 90.1% $3,000.00 90% to 89.1% $4,000.00 89% to 88.1% $5,000.00 88% to 87.1% $6,000.00 87% to 86.1% $7,000.00 86% and below $8,000.00

E. Operator Citywide Incentives

Operator incentives for exceeding the citywide goal for monthly response times will be awarded as liquidated damage reductions. These reductions are available monthly and are based on the citywide response. These reductions are applied to the total per minute liquidated damages assessed. These reductions are awarded monthly and cannot be accumulated or applied to other months. The response time goal will be the previous

calendar year’s PFD 90th percentile priority 1 citywide response time performance. This time standard will be changed each January 30 th to reflect the PFD’s previous year’s performance. The allowable operator liquidated damage reductions shall be: Citywide response Incentive

99.0 - 100% 100% off the per minute liquidated damages 97.0 – 98.9% 75% off the per minute liquidated damages 95.0 – 96.9% 50% off the per minute liquidated damages 93.0 – 94.9% 25% off the per minute liquidated damages

35

III. Operator Equipment and Supplies

If during any inspection by PFD, Operator’s unit fails to have the minimum equipment and supplies required by the City, unless said equipment or supplies have been used on a recent call for service, liquidated damages in the amount of $500.00 will be incurred.

IV. Operator Mechanical Failures

In the event of any mechanical failure, the ambulance crew shall contact Pueblo Dispatch Communications Center via radio on FIRE One.

Liquidated damages of $1,000.00 will be incurred for each preventable mechanical failure occurring while transporting patient(s) from any call. The City has the sole discretion to determine whether a failure was preventable, but a preventable incident typically would be defined when proper maintenance or repair procedures have not been performed by Operator.

V. Operator Administrative Failures

Failure to submit identified report(s) within the required time frame will result in liquidated damages of $200 plus $50 per day thereafter until the report is received by the City.

VI. Weather

Pueblo presents a multitude of weather events, for which Operator is expected to be aware and prepare. Weather does not necessarily exclude response time standards. Under circumstances where the Fire Chief, or his designee, directs Operator to prepare for a predicted, adverse weather event, Operator shall deploy two (2) additional ambulances during weekday days and one (1) additional ambulance during the night time and on weekend days. Such additional deployment, as well as the safe operation of Operator vehicles, shall be considered by the Fire Chief in assessing response time exemption requests under Section I.11.b. of Exhibit “A” of this Agreement. In the event that that Operator fails to respond during predicted weather events, due to circumstances within Operator’s control, as determined in the sole discretion of the Fire Chief, such failure may constitute a failure to respond subject to liquidated damages set forth in Section II.B, above.

VII. Operator Ambulance Staffing

Failure to staff any ambulance responding to any call per the requirements of the Agreement will result in liquidated damages of $1,000.00 per incident.

VIII. Ambulance Deployment

All ambulances will reflect accurate status in CAD with such status to be determined by Operator. Failure to reflect proper status will result in liquidated damages of $500 per incident. In the event the technology is not ready due to the City's inability to comply with the foregoing CAD and/or AVL interface, the Operator will not be required to meet the previous section, reference

36

3.12 of the agreement. VIV. Other Liquidated Damages

Assessments of liquidated damages for willfully falsifying proper status shall be assessed at $500 if by Operator’s field staff and $1,000 if by Operator’s management staff, for each incident. For clarity and to avoid doubt a unit reporting on-scene before they arrive on scene is an example of falsifying proper status.

Failure to timely respond to inquiries or goals assigned by the medical director will result in liquidated damages of $500 per incident.

EXHIBIT “E” AMBULANCE EQUIPMENT and SPECIFICATIONS

PPE CABINET Eye Protection – 3 Surgical Masks – 4 Personal Protection Kit – 3 TB Mask, Large – 2 TB Mask, Medium - 2 TB Mask, Small – 2 OB Kit– 1 Peroxide- 1 Hand Cleaner- 1 MED CABINET Adenocard – 5 Albuterol – 6 Amiodarone – 3 50ml NS – 1 bag ASA – 1 bottle Atropine – 2 Atrovent - 3 Bicarb 8.4% – 2 Calcium Chloride – 1 D50 - 2 Diphenhydramine – 2 with micro & 18ga needle

Epi 1:10,000 – 5 Epi 1:1000, 1ml – 1 Glucagon – 1 Glutose – 4 Lasix – 2 Lidocaine – 1 Mag Sulfate – 2 Narcan – 2 Nitrostat tabs – 1 Racemic Epi - 1 IV Zofran - 2

Solumedrol 125mg – 2 PO Zofran -8 Ring Cutter – 1 Mucosal atomizer-2 SPINAL CABINET C-Collar, Adult – 6 C-Collar, Peds – 2 Head blocks – 1

2” tape – 2 Spider Straps- 1

37

CARDIAC MONITOR ECG Cables – 1 set 12 Lead Cables – 1 set Electrodes – 4 sets LP Batt –1 LP Paper – 1 Razor – 1 Combo Pads, adult – 1 Combo Pads, peds – 1 Waveform cap NC – 1 Waveform cap ET - 1 IV CABINET Shelf 1 Macro Drip – 8 Normal Saline 500ml – 8 Shelf 2 Normal Saline 1000ml - 2 Micro Drip – 1 Pediatric arm board – 1 BANDAGING C

ABINET Bandaids – 1 box Cold Pack – 2 Hot Pack – 2 Sterile Water- 2 Burn Sheet- 2 Trauma Dressing- 2 Kerlix – 6 Non-Sterile 4x4 – 1 package Occlusive Dressing – 2 Sam Splint - 2 Sling – 2 Sterile 4x4 – 1 box Surgipads – 6 (3 ea) Tourniquet - 1 SUCTION CABINET Suction Canisters with lids- 2 Suction Tubing – 2 Tonsil Tip – 2 French Suction Caths - 1 set AMR

38

O2 CABINET Nasal Cannula – 8 Adult NRB - 6 Adult Neb Kits – 4 Peds NRB- 2 Peds Cannula- 2 OP Airways – 1 set NP Airways – 1 set Lubricating jelly - 6 Emesis bags - 6 AIRWAY CABINET Waveform cap ET – 2 Waveform cap NC - 2 BVM, Adult – 2 BVM, Child – 1 BVM Mask , Neonatal – 1 Chest Kit x 1 Neb to ET Kit – 1 Nasal ETT (prep) kit Cric Kit - 1 Laryngascope handle C Batt – 2 ET Tubes Peds and Adult (3.0 -9.0) – 1 ea Peds Stylet – 2 Adult Stylet – 2 Adult ETT holder – 2 Peds ETT holder –1 Bougie – 1 CPAP assembly - 1 CARDIAC CABINET Electrodes – 10 sets LP Paper – 1 Combo Pads, adult – 2 Combo Pads, peds

- 1 B/P Cuff, Neonate/Peds – 1 B/P Cuff, Child – 1 B/P Cuff, Large Adult – 1

39

ACTION AREA

Spit sock - 2 Syringe organizer – 1 60cc- 0 30cc – 1 10cc - 4 5cc - 4 3cc - 4 1cc - 4 Angio organizer – 1 14ga – 6 16ga – 6 18ga – 10 20ga – 10 22ga – 5 24ga – 5 Prefilled saline – 4 Trauma shears – 1 Flat Organizer Tray - 1 Iodine preps – 4 Ammonia caps – 4 18ga needle – 2 22ga needle – 2 25ga needle – 2 Filter needle – 4 Small basket – 1 Extension sets - 6 Thermometer- 1 Suction supplies for canister

KED – 1 Traction splint - 1 CAPTAIN’S CHAIR DRAWER Linen sheets (flats) – 4 Blankets- 2 Pillow cases - 2 PORT O2 CABINET Port O2 bottles – 1 O2 wrench – 1 O2 regulator – 1

40

BENCH AREA B/P Cuff, Adult – 1 Disinfectant pads - 6 Electrodes – 2 sets Non-sterile 4x4s – 1 package Tape, 1” clear – 4 Tape, 1” silk - 2 Tape, 2” silk – 4 Tourniquets – 10 Tagaderm – 10 Alcohol preps - 20 SPINAL AREA Backboards - 1 Scoop - 1 CLEANING CABINET Disinfectant spray – 1 Window spray – 1 Towels - 2 BAG CABINET Red bags – 10 Clear trash can liners - 10 UNDER SQUAD BENCH Peds Car Seat – 1

PEDS BAG STOCK LEFT SIDE POCKET Nasal Canula – 1 NRB – 1 FRONT POCKET Manual Child Cuff – 1 RIGHT SIDE POCKET Stethoscope – 1 TOP FLAP INTERNAL POCKET Broselow Tape -1 Silver Swaddler or foil– 1 Stylet – 1 ETT 3.0-5.0 – 1 ea MAIN INTERNAL POCKET OB Kit -1 Quick Trach -1 BVM -1 BOTTOM ORANGE POCKET Magill’s -1 Laryngoscope Handle – 1 Blades - 1 ea Light bulb – 1 Thomas Tube Tie – 1 BOTTOM BLUE POCKET Neonate Mask – 1 OPA’s – 1 set Arm Board – 1

BAG STOCK INTERIOR COMPARTMENT MED BOXES LG & SM ASA – 1 bottle Amiodarone – 3 Atropine – 1 Bicarb 8.4% – 1 D50 - 1 Epi 1:10,000 – 4 Glutose – 1 Lasix – 1 Lidocaine - 1 Narcan – 1 Atomizer - 1 Nitrostat tabs – 1 Adenocard – 3 Albuterol – 2 Atrovent - 1 Diphenhydramine – 1 Epi 1:1000, 1ml – 1 Mag Sulfate – 1 Solumedrol 125mg – 1 Zofran tabs – 4 Zofran IV - 1 BVM, Adult – 1 OP Airways, adult – 1 set NP Airways, adult – 1 set Lubricating jelly – 2 INTUBATION KIT 10cc syringe – 2 Blade, Mac 3 and 4 – 1 ea Blade, Miller 3 and 4 – 1 ea C Batts - 2 Cric Kit – 1 Nasal Tube (prep) Kit – 1 ET waveform cap- 1 ET Tubes (5.5-9.0) – 1 ea Lubricating jelly - 2 Bougie - 1 Laryngascope handle – 1 Laryngascope Bulb, Lg – 2 Magills, Lg – 1 Stylet, adult – 2 Tube holder – 1 adult Biohazard (red) bag – 1

41

Bag Stock cont LONG EXTERNAL POCKET I.O. Kit Driver – 1 Lg. Adult needle - 1 Adult needle – 1 Peds needle - 1 IV Kit Normal Saline 500ml – 1 Normal Saline 50ml - 1 Macro Drip – 2 Blood Y Set – 0 Angio organizer – 1 14ga – 2 16ga – 2 18ga – 2 20ga – 2 22ga – 2 24ga – 2 Alcohol preps – 6 Prefilled saline – 1 Saline lock - 1 Sharps shuttle – 1 Sterile 4x4 – 6 Tape, 1” clear – 1 Tourniquets – 2 10cc - 2 5cc - 1 3cc - 1 1cc - 1 18ga needle – 2 22ga needle – 1 25ga needle – 1 Filter needle – 2

SMALL EXTERNAL POCKETS BANDAGING POCKET Tourniquet – 1 Kerlix – 2 Sterile 4x4s – 8 5x9 Dressing – 2 8x10 Dressing – 2 Occlusive Dressing – 1 Sling – 1 Tape, 1” silk – 1 Tape, 2” silk – 1 Emesis bags – 2 Sam splint – 1 LID POCKET Refusal form - 1 Combitube -0 Or King Airways – 0 Igel - 3 Chest Kit x 1 Neb to ET Kit – 1 O2 POCKET Nasal Cannula – 1 Adult NRB - 1 Neb Kit – 1 Spit mask - 1 CUFF POCKET B/P Cuff, Adult – 1 Adult stethoscope – 1 GLUCOMETER POCKET Glucometer – 1 Strips – 1 bottle Lancets – 4 Bandaids – 4 Alcohol preps – 4 Lancets – 6 (loose in bottom)

42

PFD EXPENDABLE EQUIPMENT AND SUPPLIES

Cardiac Electrodes (Diaphoretic, Not

McKesson) LP 15 Paper

Razor

LP 15 Quik-Combo Pads, adult

LP 15 Quik-Combo Pads, pediatric

LP 15 Smart CapnoLine® Plus Waveform cap

NC – Adult & Pediatric

LP 15 Waveform cap

ET Macro Drip

Normal Saline (500ml or 1000

ml) Micro Drip IV Set

Blood Draw set (Parkview & St. Mary

Corwin) Pressure Infuser

Cold Pack

Hot Pack

Sterile Water (1000

ml) Burn Sheet- 2

Kerlix – 4”

Occlusive

Dressing Sam

Splint

Sling (Triangular

Bandage) Sterile 4x4s

Surgipads

(5”x9”) CAT

Tourniquet

Suction Canisters with lids

Suction Tubing

Tonsil Tip (S-SCORT® HI-D ‘BIG STICK’)

French Suction Caths

43

Syringe

30cc

10cc

5cc

3cc

1cc

Angio

14 gauge (Braun)

16 gauge (Braun)

18 gauge (Braun)

20 gauge (Braun)

22 gauge (Braun)

24 gauge (Braun)

Prefilled saline (10 ml Flush)

Safety Needles (18 gauge, 22, 23 or 25

gauge) Filter needle

Extension

sets Surgical

Masks OB Kit

Adenocard (12

mg.) Albuterol

Amiodarone

50ml bag NS

Atropine (pre-filled

syringe) Atrovent

D50(pre-filled

syringe)

Diphenhydramine

40

Nasal

Cannulas

Adult NRB

Nebulizer Kits

Peds NRB

Peds

Cannula OP

Airways NP

Airways

Emesis bags

BVM, Adult

BVM, Child

BVM Mask,

Neonatal Chest Kit

x 1 (ARS) Neb to ET

Kit

Nasal ETT (prep) kit

Cric Kit

ET Tubes Pediatric and Adult (2.0 -

9.0) Pediatric Stylets

Adult Stylets Adult

ETT holder

Pediatric ETT

holder Bougie

CPAP- (CPAP-FLOW-SAFE® II EZ – Small &

Large)

Cold packs

Spit sock

Epi 1:10,000 (pre-filled

syringe) Epi 1:1000, 1ml

Oral Glucose

Lasix (pre-filled syringe)

Lidocaine (pre-filled

syringe) Mag Sulfate (5

gram vials) Narcan (pre-

filled syringe)

IV Zofran

Solumedrol

125mg PO

Zofran Mucosal

atomizer C-

Collar, Adult

C-Collar,

Peds Head

blocks

Spider Straps

Tape, 1”

clear Tape,

1” silk Tape,

2” silk

Tourniquets

Transparent IV Dressing (i.e.Tagaderm,

Kendall, etc.)

Backboards Blood Glucose Safety Lancets

Neo-Synephrine

I-GEL Airways - #1, #1.5-, #2, #2.5, #3 - #4 - #5

41

LP15 Pediatric Disposable Pulse Ox Probes

EZ-IO Needles (15mm, 25mm,

45mm) EZ-IO Stabilizers

COBAN 3”

2” Roller Bandage

Type D Oxygen Cylinders.

Disposable Laryngoscope Blades

(GREENLINE® Mac 1 – 4 & Miller 0 -4)

Suction Tonsil Tips (S-SCORT® HI-D

‘BIG STICK’)

Replacement Video

Laryngoscope Disposable exam

gloves in small, medium, large and

extra-large.

Other items to be added per section 7.2

42

ATTACHMENT F

COLORADO PUBLIC EMPLOYEES RETIREMENT ASSOCIATION SUPPLEMENTAL QUESTIONNAIRE TO BE ANSWERED BY

ANY BUSINESS PERFORMING SERVICES FOR THE CITY OF PUEBLO

Pursuant to section 24-51-1101(2), C.R.S., salary or other compensation from the employment,

engagement, retention or other use of a person receiving retirement benefits (Retiree) through the Colorado Public Employees Retirement Association (PERA) in an individual capacity or of any entity owned or operated by a PERA Retiree or an affiliated party by the City of Pueblo to perform any service as an employee, contract employee, consultant, independent contractor, or through other arrangements, is subject to employer contributions to PERA by the City of Pueblo. Therefore, as a condition of contracting for services with the City of Pueblo, this document must be completed, signed and returned to the City of Pueblo:

(a) Are you, or do you employ or engage in any capacity, including an independent contractor, a

PERA Retiree who will perform any services for the City of Pueblo? Yes , No . (Must sign below whether you answer “yes” or “no”.)

(b) If you answered “yes” to (a) above, please answer the following question: Are you 1) an individual, 2)

sole proprietor or partnership, or 3) a business or company owned or operated by a PERA Retiree or an affiliated

party? Yes

, No .

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 1 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

If you answered “yes” please state which of the above listed entities (1, 2, or 3) best describes your business: .

(c) If you answered “yes” to both (a) and (b), please provide the name, address and social security number

of each such PERA Retiree.

Name Name

Address Address

Social Security Number Social Security Number

(If more than two, please attach a supplemental list)

If you answered “yes” to both (a) and (b), you agree to reimburse the City of Pueblo for any

employer contribution required to be paid by the City of Pueblo to PERA for salary or other compensation paid to you as a PERA Retiree or paid to any employee or independent contractor of yours who is a PERA Retiree performing services for the City of Pueblo. You further authorize the City of Pueblo to deduct and withhold all such contributions from any moneys due or payable to you by the City of Pueblo under any current or future contract or other arrangement for services between you and the City of Pueblo.

Failure to accurately complete, sign and return this document to the City of Pueblo may result in your being denied the privilege of doing business with the City of Pueblo.

Signed , 20 .

By: Name:

Title:

For purposes of responding to question (b) above, an “affiliated party” includes (1) any person who is the named beneficiary or cobeneficiary on the PERA account of the PERA Retiree; (2) any person who is a relative of the PERA Retiree by blood or adoption to and including parents, siblings, half-siblings, children, and grandchildren; (3) any person who is a relative of the PERA Retiree by marriage to and including spouse, spouse’s parents, stepparents, stepchildren, stepsiblings, and spouse’s siblings; and (4) any person or entity with whom the PERA Retiree has an agreement to share or otherwise profit from the performance of services for the City of Pueblo by the PERA Retiree other than the PERA Retiree’s regular salary or compensation.

NATIONAL INSTITUTE OF FOOD TECHNOLOGY ENTREPRENEURSHIP MANAGEMENT Deemed to be University (De-novo Category) under Section 3 of the UGC Act, 1956 and an

autonomous institution under Ministry of Food Processing Industries, Govt. of India Plot No. 97, Sector-56, Phase – IV, HSIIDC,

Industrial Estate, Kundli , Sonepat-131028 (Haryana) Phone No. 130-2281000 Fax No. 0130-2219772

www.niftem.ac.in

Ref. No. NIFTEM/Tender/Dispensary /2016-17/ Date: 18.11.2016

NOTICE INVITING TENDER

Name of work: Tender for Outsourcing of NIFTEM Dispensary

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 2 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

NIFTEM invites Tender for the selection of an agency for running NIFTEM Dispensary

on Outsourced basis at NIFTEM, Kundli, Sonepat (Haryana). Besides, rates/empanelment for the

supply for medicines and surgical items is also invited. Interested professional

Agencies/Hospitals/ Nursing Homes may submit their offer in two bid system (Technical &

Financial Bid) in the prescribed format along with DD of Rs 1000/- as tender

document/processing fee(Non- refundable) in favour of NIFTEM, payable at Delhi. The details

of the works/services/items and ot her terms and conditions of the Tender can be

downloaded from NIFTEM’s website i.e. www.niftem.ac.in. Corrigendum/addendum, if any,

would only be appear at our website, therefore, interested agencies are advised to frequently visit

our website for the same. Important dates are as

under:

Name of Tender

Tender for Outsourcing of NIFTEM Dispensary

Tender fee & EMD

Tender Fee:

Rs. 1000/- (Nonrefundable)

EMD:

Rs.1,00,000/-

Tender uploading date and

time 21-11-2016

2.00 PM

Pre-bid Meeting date and

Time 30-11-2016

11.30 AM

Tender Closing

date and Time

15-12-2016

2.00 PM

Technical Bid

Opening date and

Time 15-12-2016

3.30 PM

Financial Bid Opening date

and time

Will be communicated separately by mail/phone only to those agencies, which have been found technical qualified.

Bids/ Offers complete in all respect should be addressed to The Registrar, National

Institute of Food Technology Entrepreneurship & Management, Plot No. 97, Sector-56, Phase-

IV, HSIIDC, Industrial Estate, Kundli, Sonepat, Haryana-131028 and dropped in the Tender Box

as kept at Reception of NIFTEM.

Registrar

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 3 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

National Institute of Food Technology Entrepreneurship and Management (NIFTEM) Deemed to be University (De-novo Category) under Section 3 of the UGC Act, 1956 and an Autonomous Institution under Ministry of Food Processing Industries, Govt. of India

Plot No 97, Sector-56, HSIIDC Industrial Estate, Kundli-131008, District-Sonepat (Haryana)

Ref. No. NIFTEM/Tender/Dispensary /2016-17/ Date: 18.11.2016

TENDER

Tender are invited from professional Agencies/Hospitals/Nursing Homes for the selection of

an agency for Running NIFTEM Dispensary on Outsourced basis at NIFTEM Campus, Kundli,

Sonepat, and Haryana. The important dates of EOI are as under:

Tender No. NIFTEM/Tender/Dispensary /2016-17/

Name of the work Selection of an agency for running NIFTEM Dispensary on outsourced basis

Brief Scope of Work The agency has to supply professional Doctors, paramedical and nursing staff to run NIFTEM Dispensary on outsourced basis.

Period of Contract Initially one year but extendable further up to 2 more years on satisfactory performance.

Earnest Money Deposit (EMD) Tender document/ processing charges Non- refundable Last date & time of submission of Bid

Rs. 1,00,000/- (Rupees One only) in the form of DD, in favour of NIFTEM payable at SBI, New Delhi. Rs. 1000.00 (Rupees One thousand only) in the form of DD in favour of ”NIFTEM” Payable at SBI New Delhi. 15-12-2016 up to 2.00 PM at NIFTEM Campus, Kundli, Sonepat.

Pre Bid Meeting & Venue 30-11-2016 at 11.30 AM at CRD Meeting Room at NIFTEM Campus, Kundli, Sonepat.

Date & Time of Opening of Technical Bid Date & time of Financial Bid Opening

15-12-2016 at 3.30PM at CRD Meeting Room at NIFTEM, Campus, Kundli, Sonepat. Will be intimated to the eligible & qualified Agencies through email/phone. No other mode will be adopted.

Validity of offer 180 days from the date of opening of Bids. Contact person for enquiry Mr S.K. Singh Chandel,

Officer I/c, Dispensary, NIFTEM, Plot No. 97, Sector-56, HSIIDC Industrial Estate, Kundli, Sonepat-131-028(Haryana) Phone: 0130-2281079 Email: skchandel@niftem.ac.in

1. About NIFTEM

National Institute of Food Technology Entrepreneurship and Management (NIFTEM) is a Deemed– to-be-University under De-Novo category and an autonomous Institution under the Ministry of Food Processing Industries, Government of India. It has been setup by the Ministry as a Rs. 500 crore (US $125 million) project in a sprawling campus of 100 acres plot located near Delhi NCR at Kundli, Sonepat, Haryana as an apex world-class institute of global standards in Food Technology

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 4 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

Entrepreneurship and Management. The Institute will cater to the needs of various stakeholder entrepreneurs, industry, exporters, policy makers, the government and the existing institution.

2. Mandate of NIFTEM:

NIFTEM would work as-'Sector Promotion Organization' & 'Business Promotion Organization' of the food processing sector. It would be a prime academic institution and offering B.Tech, M. Tech. and Ph D. Programmes in the areas of Food Technology and Management. The Institute has been granted Deemed to be University status under De-novo category under Section 3 of the UGC Act, 1956.

Major Objectives of NIFTEM are -

One Stop Solution Provider Skill & Entrepreneurship Development Facilitating business incubation services with its ultra modern pilot plant Conducting Frontier Area Research Developing world class managerial talent knowledge repository Upgradation of SME Clusters Promoting cooperation and networking

3. Scope of Work:

PART-I(Mandatory)

i) Beneficiaries: Presently Dispensary is providing its services to approximately 900 students,

100 resident employees and their families. Besides, Dispensary also serves to

regular/contractual/ outsourced employees/guests/participants/trainees of different training

programmes etc. Thus, total no. of beneficiaries is around 1500 persons. The number

may increase/decrease with passage of time.

ii) Manpower Supply:

The agency has to provide professionally qualified manpower & services of Doctors, Nursing Staff (Male/Female), Pharmacist (Male/Female), Driver-cum-Attendant (Male) etc. Besides, agency has to also ensure the availability of further staff or any other services, as per requirement. All the staff deployed at Dispensary is required to perform their duties normally at NIFTEM Campus but in case of any requirement or otherwise, they can be asked to attend their duties at any other location, as per requirement. They can also be asked to accompany with patient to nearby hospitals for/during hospitalisation. In that case, they will be paid TA/DA etc or actual expenses, as the case may be, as per Govt. rules & as admissible to their category/status of employees. Time to time, requirement of manpower will be reviewed and decision about increase/decrease will be taken on the basis of assessment & requirement. The qualification and experience of Dispensary Staff may be as under:

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 5 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

S. No.

Post Qualification & Experience No. of persons

01. Physician (Male-01 Female-01)

02. Staff Nurse

(Male-02/ Female-01)

03. Pharmacist (Male/ Female)

04. Driver-cum- Dispensary Attendant (Male)

The person must have minimum M.B.B.S. Degree from recognised Medical College/Institute and the degree must be approved from MCI.

Preference shall be given to Postgraduate candidates or Diploma in Medicine.

The person should be registered with Medical Council of India. The person must have at least 2 years experience in a reputed

hospital/Nursing Home or having Individual Clinic or individual Practice.

Preference shall be given to retired persons upto 62 yrs) Age Limit- 30-62 Years The person must have GNM/Diploma in Nursing(3 yrs) from

recognized Institute/College or B.Sc.(Nursing) along with at least one year working experience as Nurse or equivalent in Hospital/Nursing Home etc.

The person must be registered with concerned State Nursing Council.

Preference shall be given to retired/short service/armed staff. Age Limit- 25-50 Years The person must have minimum Diploma in Pharmacy or B. Pharma along with at least 3 years working experience as Pharmacist or equivalent in a hospital/nursing home/chemist shop etc. The person should be registered with State Pharmacy Council.

Age Limit- 25-50 Years The person must have passed 8th class. The person must have valid Driving License to run Commercial

Light Motor Vehicle/Ambulance/Light Vehicle Preference shall be given to those persons, who have atleast 3

years experience to drive light motor vehicle/ambulance. Age Limit: 25 -50 Yrs

02 (Full time)

03

(Full time)

01 (Full time)

02 (Full

Time)

III) The Senior most Medical Officer (Doctor) shall be the overall In-charge of the

Dispensary and responsible for managing the affairs of the Dispensary including Medical Services, Ambulance, Housekeeping, Record Keeping. Dispensary etc other affairs whatsoever relating to medical facilities/services at NIFTEM.

IV) Doctor and other staff are required to stay either in the campus subject to allotment

of suitable accommodation as per their entitlement and status on monthly prescribed license fee plus electricity charges or any other suitable accommodation subject to availability otherwise they have to make their own arrangement within radius between 5-8 Kilometres, so that in case of emergency, they could reach Dispensary within 15 minutes. In case of non- availability of suitable accommodation to the Nursing & paramedical staff, they can be provided hostel facility on usual charges.

V) Each employee/staff posted at Dispensary has to work at least 7 ½ hrs on all working days(Monday to Friday) & 05 hrs on Saturday. Normally Sunday is closed holiday. Duty hours for Driver–cum-attendant preferably would be 12 hrs in each shifts to ensure the availability of at least one Driver-cum-Attendant all times in the Dispensary. They will work in day and night shifts by rotation.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 6 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

VI) The Dispensary is required to run all the six days except Sunday and Gazetted holidays. The

Dispensary will be kept closed on Sunday and Gazetted holidays, which are declared by NIFTEM but during these closings, at least one staff and one doctor, will always be available in the dispensary/Campus to attend patients & emergencies. The said staff(except doctor) will be given compensatory off in lieu of working on Sunday and Gazetted holidays.

VII) The Dispensary will be run in two shifts:

Monday to Friday:

Morning Shift 9.00 AM to 1.00 PM and Evening: 5.00 PM to 8.00 PM or 4.30 PM to 7.30 PM Saturday: Morning: 9.00 AM to 1.00 PM

However, these timing can be changed/modified as per need by the administration/Officer In-charge and in campus doctor can be called any time for any emergency.

VIII) The agency has to ensure alternative arrangement of each staff during the leave or

when they are away from the campus beyond 24 hrs. One of the doctor will always available in the campus. In case, only one doctor is employed, then agency will make alternative arrangement during their leave beyond 12 hrs. However, if doctor have some personal work around Delhi or nearby area or wants to leave campus for short period, he may take permission/inform to the Officer I/c concerned and also ensure that atleast one nursing/paramedical staff must be available in the campus/dispensary. Besides, he may also be available over mobile for consultation or any other purposes. There shall be no day, when atleast one nursing staff is not available in the Dispensary/campus.

IX) The patients being referred for hospitalisation should have a valid clinical reasons and the

hospital referred as per patient’s choice only. Any unethical or biased referral will be treated as a breach of the contract.

X) While leaving HQ(NIFTEM Campus), Dispensary Staff is required to take prior permission from Medical Officer I/c. Leave of Dispensary staff will be recommended by Medical Officer I/c to Oficer I/c(Dispensary) for sanction after ensuring alternative arrangements. The leave of Medical Officer I/c will be granted by Registrar. However, in case of emergency, he can be permitted to leave the campus after alternative arrangement to attend any emergencies.

XI) The Dispensary has been established to cater the medical-aid to the campus students and employees including their family as there is no proper medical centre in vicinity of NIFTEM. It is only a welfare measure and not a claim. No one including students and employees can claim for its mandatory.

XII) The Dispensary will offer primary treatment and if required, the patient will be referred to

nearby Nursing Homes/Hospitals for further treatment by the Dispensary.

XIII) The primary treatment will be extended to all the students, employees including family irrespective of any difference among regular, contractual, outsourced employees. Besides, in

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 7 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

the case of any emergency, the primary treatment will also be extended to NIFTEM guests and trainees etc or as directed by the NIFTEM authorities.

XIV) Every patient, seen in the NIFTEM Dispensary as OPD patient will required to be entered in an OPD Register and thereafter medicines will be dispensed maximum 1-3 days for a particular disease at a time as per their illness, as the case may be. The doctor is required to examine patients and prescribe medicines. In absence of doctor, dispensary staff in the case of any emergency, after consultation with doctor will prescribe/dispense medicines to the patients. If required, they will be referred to nearby nursing homes/hospitals.

XV) A treatment register shall be maintained by the agency indicating type of treatment given and medicines/consumables consumed every day along with the identity and details of the patients. Signature of recipient of treatment shall be obtained for each case.

XVI) The agency will require to maintaining Institute Pharmacy/medicines stock to provide the same to the beneficiaries/users. At a time, maximum 3 days treatment would require to be given on the advice of Medical Officer. Accordingly monthly stock will be maintained by Pharmacist/Nurse concerned. The Pharmacist will work out medicines/surgical requirements for next 6 months well in advance and put up on file through Medical Officer for approval. After approval the Medicines will be purchased either through agency or local purchase committee of NIFTEM by due procedure as laid down in GFR. At no stage, expired medicines will be kept in the Dispensary. Medicines required for VAP, First Aid Boxes at Hostels, laboratories, admn. Office or any other outdoor events shall be provided by the Dispensary. While purchasing medicine, it should be ensured that medicines must have at least six months to one year validity period.

XVII) Every month, Pharmacist will prepare monthly stock position and put up it to Medical Officer. The Medical Officer will verify the stock and indicate excess/shortfall, if any otherwise sent its report to Officer I/c(Dispensary), every month for information. The stock verification report would be signed by Pharmacist concerned and countersigned by Medical Officer. On every quarter, Accountant alogwith Officer I/c(Dispensary) will carry out physical inspection of Dispensary including medicines/stock to ascertain shortfall/excess of any item and smooth functioning of Dispensary. This is to be made to ensure to maintain transparency and to avoid any malpractices.

XVIII) The monthly expenditure on medicines, surgical etc items would be between Rs25,000 to

50,000/-. This can increase/decrease subject to actual requirement. The No. of beneficiaries will also increase/decrease in future.

XIX) Supply of Branded and Generic Medicines/Surgical/Toiletry proprietary items as required for Dispensary time to time. The supply has to make against NIFTEM’s Supply Order only.

XX) The agency has also to maintain First-aid Boxes at all the Hostels, Admn. Block, Labs or wherever required including refilling of these boxes.

XXI) Though, Dispensary is having all required tools and equipment. However the agency‘s

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 8 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

doctors should have their own stethoscope and BP instrument.

XXII) In case of emergency, the driver alongwith ambulance can be parked or asked to proceed to nearby hospitals or as directed by NIFTEM administration.

XXIII) The staff deployed at Dispensary should be capable to stitching on small wounds/injuries; therefore agency must have sterilization facility of the equipment.

XXIV) Besides, the agency will maintain all the tools and equipment. The agency will also assist

NIFTEM to fill oxygen cylinders.

XXV) In the case of emergency or requirement as communicated by NIFTEM administration, the agency will extend support/facilitate in primary treatment/check- up/investigations or hospitalization etc. at nearby or any empanelled hospital/nursing homes, which are covered under cashless policy as purchased through Insurance Agencies.

XXVI) The Institute have already purchased Medical Insurance Policies for their staff members including their families and students, therefore the agency is required to make efforts to have a Tie up with nearby Hospitals/Nursing Homes(Sonepat/Narela/Rohini, Shalimar Delhi etc), where cashless treatment could be available in the case of emergency. The Institute patients will preferably referred to these hospitals in the case of requirement or emergency. These hospitals may be asked to extend OPD/IPD treatment, laboratory investigations, radio-diagnosis, physiotherapy, surgeries, minor and major procedures etc on preferably CGHS rates or discounted rates.

XXVII) The Institute has already purchased cashless policy for staff and their families and students, therefore, Institute will not take any responsibility of payment of any patient except in those cases, where Institute authorities has permitted for hospitalisation. In this regards, written order from the competent authority to be obtained.

XXVIII) The agency will ensure tie-up with reputed and certified pathologies like Lal Pathology etc. for Laboratory Test of students and employees. Under tie-up, there should be provision for collection of samples from NIFTEM Campus alongwith home delivery of report.

XXIX) The Agency will make arrangements to organise free Health Check-up camps in the Campus on weekly holidays(10.00 AM to 5.00PM), wherein doctors(Eye/Dental/ Physician etc) may be invited along with pathology services. During the camp, free check up and limited free investigations like Blood Sugar(F/PP), BP, Weight etc will also be arranged by the Agency. The invited doctors will be paid Rs. 2500/- as sitting charges for half day(4 hrs) and Rs.5000/-for full day(beyond 7 hrs).

XXX) To assist in Blood Donation Camp etc should be arranged periodically with the help of Red Cross/Rotary Club/District Hospital etc or through any other Blood Camp.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 9 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1 7

t h N o v e m b e r , 2 0 1 6

XXXI) In case of requirement, the agency will be providing Ambulance Services on payment basis. The chargeable mileage will start from NIFTEM Dispensary(Kundli) + 5 KM extra for any location. The driver shall possess appropriate valid driving license and all other requisite documents of the Ambulance including pollution control certificate, insurance cover note etc.

XXXII) In the case of any untoward incidence/accident or requirement, the agency will also

provide more manpower to the Institute on the approved rates.

XXXIII) The agency will also ensure that in case of requirement of any male/female attendant to take care of patients (especially students and Staff) in the hospital/nursing home for short duration or until their family members are not arrived to take care of patient. The existing staff deployed at Dispensary will take care of such patients or as directed by the administration.

XXXIV) Medical examination of Female Patients by Male Doctor or male staff cannot be carried out (unless it is an emergency) without presence of a female staff or patient’s attendant.

XXXV) Handling of Bio-Medical Waste: Safe disposal of all kind of Bio-Medical Waste for instance

used materials along with swabs; syringes etc. shall be the responsibility of the Agency to

the satisfaction of the Officer-In-Charge (Dispensary). Records thereof shall also be

maintained by the agency and the same shall be got checked by Officer-In-Charge tri-

monthly. Moreover, agency must have a legal agreement with any contractor /

company / firm which holds a valid license for safe disposal of Bio-Medical Waste as per

the provisions of Law OR the firm

/ hospital itself lawfully holds such license. No payment shall be made to the contractor

/ contractor on account of that. Besides, in Health Centre, the agency shall keep Bio-Medical

waste in three different dustbins of different colours as prescribed under Law. Any laxity in

handling of Bio-Medical Waste shall warrant termination of contract forthwith.

PART-II(OPTIONAL)

SUPPLY OF MEDICINES TO THE DISPENSARY

I. The agencies, which are capable and having valid drug license and willing to supply medicines to the NIFTEM Dispensary time to time on placing work orders, may participate in the bidding process. The supply is required to make within 7 days and in some cases within 3 days as per requirement.

II. The supply should be made of only of those medicines/surgical/toiletry products, which

are ordered.

III. Any kind of inferior supply, unordered items, short supply, duplicate, under quality will be rejected forthwith and will not be considered in any manner. The payment of such items

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 10 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

will also not be paid besides imposing penalties. The quality will be certified by Pharmacist and countersigned by Doctor.

IV. The payment will be made within 15 days after the submission of bills. All the items should be as per work order.

V. In case, the discount structure offered by the agencies is found below to our expectations (as being obtained while retail purchasing), negotiations, if required, will be made. Despite of negotiations, it is not necessary to award this work to any agency on the ground of fewer discounts. In this regards, decision of the Institute shall be final.

VI. Interested agencies may quote discount on MRP at Annexure-III-B(Optional) (Financial Bid format). This is optional section.

4. Facilities provided by the Institute

I. The Institute will provide sufficient space for running the Dispensary on free of cost along

with water and electricity facilities. The agency not needs to pay any charges for electricity

and water.

II. The present Dispensary equipment will be utilized by the Agency & is required to maintain it

properly at their expenses. On the expiry of contract, the agency have to hand over them in

working condition except those which are consumable nature or those having limited life.

III. The Dispensary is having Split AC, Ceiling Fans, Blowers, Geyser, lighting and furniture etc.

The Dispensary is also equipped with all required tools and equipment as required to run

the Dispensary smoothly. The bidders are advised they must visit to the Dispensary before

submitting their application/tender.

IV. The Institute Ambulance will also be given to the Agency and the same will be

properly maintained by the Agency and expenditure towards Driver, fuel, insurance,

pollution, servicing and maintenance will be borne by the Institute.

V. All the Dispensary staff are entitle for one day weekly off and it will be preferably on Sunday

or any other day as prescribed by the Officer I/c(Dispensary). Besides, they will also

be entitled for Casual leave and restricted holiday as applicable to the NIFTEM employees.

5. Eligibility Criteria

a. The Agency/Hospital/Nursing Home must have at least one year similar experience of running Dispensary/Clinic/Poly Clinic/Nursing Home/Hospitals etc. Besides, the agencies/ Hospital/Nursing homes, those having experience in supply of professional doctors and Paramedical staff are also eligible.

b. The agency must have at least one such project, where agency is supplying professionally

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 11 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

qualified manpower to run their unit (Clinic/Dispensary/Hospital/Nursing Home etc).

c. Average Annual financial turnover during last 3 years, ending 31st March of the previous financial years, should be at least Rs.25,00,000/-(Twenty Five Lakh only) per annum. Certificate issued by Chartered Accountant, duly supported by Balance Sheet and Profit & Loss Accounts should also be enclosed.

d. The agency must be propriety firm/partnership firm/Private Limited/NGO etc. to run the business. Copy of such documents must be enclosed.

e. The agency/hospital/nursing home must have registration/valid license with the appropriate authority to run Hospital/Nursing Home or such medical services. Copy of the same should be enclosed.

f. The agency may have valid drug license to sale, purchase, supply of medicines on retail/wholesale basis, duly issued by Drug Controller, if they are interested to supply medicines. Copy of the same should be enclosed.

g. The bidder must submit the copies of ITRs & Audited Annual Report (Balance Sheet and Profit

& Loss Accounts) for last three years along with the technical bid(2013-14, 2014-15, 2015-16).

h. The Agency/bidder is required to submit experience Certificate/Work orders or certificate on letterhead from their previous and current clients pertaining to their services and performance.

i. The Institute, at their discretion, may send a team of officers to any of the site(s) of bidders, without prior information to check their suitability, work, performance and professionalism.

j. The bidder should have PAN (Permanent Account Number)/TAN and Service Tax Registration

Number as applicable in the medical profession. Kindly submit a copy of PAN/TAN and Service Tax Registration number if any , as applicable in their case.

k. The agency must be registered under the Income Tax Act.

5. Tender Processing Fee: Rs 1,000/- (Non-refundable) is required to submit along with technical documents in the form of demand draft in favour of NIFTEM, payable at New Delhi, which will be non refundable.

6. EMD: The bidders/Agency are required to submit an EMD of Rs. 1,00,000/- (Rupees One Lakh only) (Refundable) toward the work, in the form of demand draft in favour of NIFTEM, payable at Delhi. The EMD shall be forfeited in case:-

If the Bidder withdraws or amends, impairs or derogates from the tender in any respect within the period of validity of this tender.

If the bidder having been notified of the acceptance of his tender by the Buyer during the period of its validity,

If the Bidder fails to furnish the Performance Security for the due performance of the contract within reasonable period including prescribed period.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 12 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

If the Bidder fails to sign the agreement within prescribed period. Fails or refuse to execute the contract. Fails to respond to queries by the NIFTEM.

7. Release of EMD/Performance Security- The EMD of unsuccessful bidders will be returned

immediately after the award of work. However, EMD of successful agency will only be

returned after submission of performance security in the form of DD/bank guarantee within

30 days from the issue of work order and in case of Bank Guarantee it will be returned only

after verification from the bank.

8. Bidding Procedure

Bidding Application must be accompanied by the following:-

i. Technical Bid on the Tender document appearing at Annexure- I duly filled in, signed and

stamped along with following documents.

ii. Earnest Money Deposit (EMD) & Tender document Fee (non-refundable) as specified in the

form of Bank Drafts (cheques are not accepted) drawn in favour of NIFTEM payable at Kundli/Delhi from SBI.

iii. Proof of permanent address.

iv. Proof of Registration of Firm

v. Proof of Registration to run similar business

vi. Proof of Drug License

vii. Proof of Propriety/Partnership/Private Ltd/Public Limited/NGO

viii. A complete list of clients with details of services. In this regards, please enclose detailed work orders/certificates describing the services being given/provided to those organisation.

ix. Details of Bank Account of Agency i.e Account No., IFSC Code, MICR No., Bank Name

and address. Copy of passbook or bank statement duly signed by bidder to be attached.

x. Copies of Audited Balance Sheet, profit and Loss Acc. and Income Tax Return of last 3

years. xi. Details of PAN/TAN/Service Tax Registration number/ ESI & EPF No, as applicable.

xii. An authorisation letter in favour of the person signing the Tender documents. If not signed by the Proprietor/Partner/Director.

xiii. An attested copy of the certificate of registration/incorporation pertaining to the legal status

of the bidder.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 13 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

xiv. Tender document with Annexure-II, Annexure-III(Financial Bid), Annexure-III

B(Financial Bid-Optional) duly signed and stamped on each page as acceptance of the

terms and conditions laid down by NIFTEM authority, otherwise it will be treated as incomplete submission and consequently tender will be rejected out rightly.

xv. The bidder should furnish an undertaking to the effect that the firm has not been black listed in India or abroad by any government department/agency in the attached Performa. (Annexure – IV).

xvi. Technical & Financial Bids should be kept in a separate envelopes and sealed properly and super scribed as “Technical/Financial Bid Selection of an agency for running NIFTEM Dispensary on Outsourced basis” and the sealed covers be put in a bigger sealed envelope and duly super scribed in block letters as shown below:

“TENDER FOR ” Selection of an agency for running NIFTEM Dispensary on Outsourced basis” and it should be addressed to the “Registrar, National Institute of Food Technology Entrepreneurship and Management, Plot No.-97, Sector-56, HSIIDC Industrial Estate, Kundli-131028, District-Sonepat (Haryana)”. Tender should be dropped in the Tender Box or submitted to the NIFTEM, Reception or through registered post. Only one Tender should be included in one cover. Incomplete Tender will not be entertained and summarily rejected.

xvii. Opening of sealed Tenders will take place as per above schedule in the “Meeting

Room, National Institute of Food Technology Entrepreneurship and Management, Plot No.- 97, Sector-56, HSIIDC Industrial Estate, Kundli-131008, District-Sonepat (Haryana)”in the presence of the representatives of the firms/Bidders, who may wish to be present at that time. No separate intimation will be sent to the firms/Bidders in this regard. In case of any change in the opening schedule of bids, the same will be notified at our website. The agencies may see our website.

xviii. The Institute will not be responsible for any delay or postal delay.

9. Validity of tender The Tender will be valid up to 180 days from the date of technical bid.

10. Clarification on bid document/work: Bidder requiring any clarification to this tender

shall notify to Institute in writing who will respond (in writing) to the clarifications sought

not later than 14 days prior to the date of opening of tender. The address and contact no.

For seeking clarifications regarding this tender are given below.

Shri S.K. Singh Chandel,

Assistant Registrar/In-

charge(Dispensary) NIFTEM, Kundli

Sonepat(Haryana) 131028

0130-2281079, Mobile No. 9215611973 email: skchandel@niftem.ac.in

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 14 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

11. Evaluation Procedure: i) The Technical Bids will be scrutinized based on eligibility criteria as indicated in

the tender document.

ii) Technically qualified agencies will be called for PPT Presentation (10 Minutes) on the

date and time, as communicated to them through mail/phone, before a duly constituted

Technical Evaluation Committee. Their PPT should be consisting of 3 parts, first

part should be introduction of the agency, strength, services being provided/carried so

far, experience, financial soundness, second part should have information,

coloured photographs or video clippings(Maximum 3 Minute)

about those sites/hospitals/nursing homed/dispensary, where agency is

providing their services and third part should have strategy to run NIFTEM

Dispensary at NIFTEM and value added ideas to raise the general health of campus

residents. Agencies are also required to submit a hard copy of their presentation

(preferably hard /spiral bounded.

The PPT Presentation/Performance will be assessed on the following parameters: How old

agency (2 marks for

each completed years but maximum 10 marks) (Enclose

proof)

Is agency/ Hospital

/ Nursing Home is

Regd. Partners

hip Firm/

Pvt Ltd/Ltd

firm. (Enclose

proof)

Is agency/ Hospital/ Nursing Home is

registered with

appropriate authority

with a valid license to

run the Hospital/ Nursing House/ Medical Services (Enclose

proof)

If agency owner/

Directors/ Partners & associate

team members are

qualified professional

doctor. (2 Marks for each such associated

persons but maximum 10

marks) (Enclose a

copy of valid salary

proof(Bank))

Is agency has

established any

Dispensary / Nursing

Home/ Clinic/

Hospital during last 5 years (5 marks for such each unit but

maximum 20 marks) (Enclose

proof)

If agency is running any

Clinic/ Polyclinic/

Dispensary/ Day Care/ Hospital/

Nursing Home by providing Professionals

(+5 Nos.) (5 Marks for

each such units but maximum 20 marks for

each such units).

Annual Turn Over during 2014-15 or

2015-16 ( > 25 Lakh -

2 marks, > 50 Lakh up to 99 Lakh- 4

marks, >1 Crore up to 2 Crore- 6

Marks, >2.1 Crore up to 3

Crore- 8 marks, 3.25

Crore or above -10

marks)

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 15 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

1 2 3 5 6 7 8 10 10 10 20 20 20 10

Note: The agency has to enclose documentary evidence, if claiming for above

parameters otherwise marks will not be given.

iii) The Institute may send an Officer or a team to those sites/Hospital/Nursing, which is being

run by the Agency/Hospital/Nursing Home to assess their capability, quality of work &

suitability to the requirement. This will also be taken in to account while selection.

iv) Financial Bids Opening: The financial bids (Annexure-III) (Annexure-III-B-Optional) shall

be opened only of those agencies, which full fills the prescribed eligibility criteria and scored

minimum 50 % marks in the above assessment. Annexure-III-B is Optional for those

agencies, who are interested to supply medicine during the contract period.

v) Normally, deviation shall not be allowed in the eligibility conditions. However, in case

of deviation of taxes etc., the same will be borne by the bidder and shall not be reimbursed.

10. The award of work: The selection of the Agency will be made on the basis of L1 (Lowest

quote) rates for Agency Charges. In case of tie between the agencies, the work will be

awarded to that agency whose financial turnover would be high.

11. PRE-BID MEETING: In case, after pre-bid meeting (wherever applicable) any

modification(s)/addition(s)/deletion(s) or any alternation in the

requirement(s)/ specification(s)/ condition(s) etc, the same will be placed only on NIFTEM’s

website- www. niftem.ac.in, therefore all the bidders are advised to visit our website

before filling their Tender. Corrigendum/addendum in respect of this Tender, if any, shall

only be uploaded at NIFTEM’s website and shall not be advertised in the newspapers.

All the prospective bidders are advised to keep themselves updated for such

corrigendum before submitting their tender. The bidders are advised to be in touch our

website regularly. In this regard, the Institute will not be responsible in any manner.

12. General Term & Conditions

1. The bidders may modify or withdraw their bid after submission provided that the written

notice of modification or withdrawal is received by the buyer prior to the

deadline prescribed for submission of bids. A withdrawal notice may be sent by fax

but is to bne followed be a signed conformation copy be post not later than the deadline for

submission of bids. No bid may be withdrawn in the interval between the deadline for

submission of bids and expiry of the period of specified bid validity. Withdrawal and

modification of bid during this period will result in forfeiture of bidder’s bid security.

2. The Agency have to enclose Tender fee and EMD as mentioned above, failing which Tender

will not be accepted. Later date Tender fee or EMD will not be considered in any form. In

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 16 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

case of Tender is not processed due to any reason or cancelled, EMD will be refunded within

30 days after such decision.

3. If the agency is registered with MSME/NSIC/DIC/ or any other appropriate Govt. authority,

where the Govt. has granted some exemptions to such units and if the agency is claiming for

any exemption, is required to submit relevant documents/Govt. orders alongwith tender. In

such cases, only EMD will be exempted but not tender processing fee & Performance

Security.

4. Unless exempted specifically, tenders not accompanied with the prescribed EMD/Cost

of Tender shall be rejected. EMD/Cost of Tender shall be in the prescribed mode of payment

as asked in the NIT, otherwise, the tender shall be liable to be rejected.

5. The bidders /agencies shall observe the highest standards of ethics during the submission of tender, procurement and execution of the contract. In case of evidence of cartel formation by the bidder(s) EMD is liable to be forfeited.

6. Person signing the bid or other documents connected with Tender must clearly write

his/her name and specify the capacity in which signing.

7. Before submitting the filled in Tender document to the Institute, the bidders may seek

clarifications, if any in Pre Bid Meeting or by visiting on any working day. They can

meet Officer I/c(Dispensary) also.

8. The Institute reserves the right to modify any condition of the Tender before opening of the

Technical Bids.

9. No agency will be allowed to alter or revoke the bid after opening of the bids and during the

validity of tender. The EMD of agency may be forfeited, if the agency withdraws or amends or

deviates from the Tender in any respect.

10. The authorized representative of the NIFTEM reserves the right to enter and inspect the

Dispensary at any point of time.

11. The Institute reserve the right to cancel/reject full or any part of the tender without

assigning any reason.

12. Every payment made to the Contractor shall be subject to deduction of tax at source

and other taxes as applicable form time to time.

13. Acceptance of the Tender will be intimated to the successful agency through work order duly

signed by the authorized signatory of the Institute.

14. In case of interpretation, modification and any alteration with respect to terms & conditions

the Institute, successful agency will jointly look into such aspect and the decision of

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 17 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

the competent authority will be final and binding to agency.

15. Period of Contract: The selection of agency will be initially for a period of one year but can be

extended further to the maximum up to 2 more years based on satisfactory performance and

mutual consent. Further extension will be decided by NIFTEM.

16. The Agency will deploy Medical Officers & other paramedical staff in White Apron and

Ambulance Drivers-cum-Attendant in White Uniform (Pant-Shirt). The Doctor, Nursing Staff

will must wear Apron while duty. The expenditure will be borne by the agency.

17. The Medical Officer of the Agency will prepare and send a monthly duty roster for Medical

& Paramedical staff to Officer I/c(Dispensary) for approval. After approval, its copies will be

issued to all concerned for implementation. The duty roster can be changed from time to

time depending upon the need of the NIFTEM management and proper substitute shall be

engaged in case of leave of Medical Officer & staff.

18. The agency shall produce attested documents of Medical Officer & other paramedical staff

before deployment to Officer-in-Charge for consideration of their eligibility. The agency will

also carry out police verification of all their employees deployed at NIFTEM Dispensary at

the cost.

19. The Ambulance shall be equipped with the following items :

i) Oxygen Cylinder with complete attachments. ii) B.P. Apparatus, iii) Stethoscope, iv) Gloves (Disposables) & Cotton, v) Suction Catheters, vi) Disposable syringes, vii) Intra Venus (I / V) Sets, viii) Adhesive Tapes, ix) Cannulas, x) 10 nos. wooden Splints of various sizes, xi) 12 nos. Bandages (size- 10 cm x 4 meter) etc.

Besides, the following tools / medicines also required to be in the Ambulance all the time:

i) Apparatus Trey

ii) Adequate quantity of Anti Tetanus (To be carried along whenever carrying

patient),

iii) Injection Atropine, Adrenaline, Coramine, Nevocam,

iv) Crocin Liquid (60ml),

v) Tablets Antihistamine, Antispasmodic,

vi) Syringes with needles – 2cc, 5cc, 10cc, 50cc,

vii) General Medicines like PCM, Antibiotic, Painkiller, Antacid preparation, Eye Drop,

etc.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 18 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

20. The agency will execute a Contract agreement on non-judicial stamp paper of Rs.100/-

within 30 days from the issue of work order. The cost of Stamp Paper will be borne by the

agency. The draft of agreement will be shared by the agency on the basis of tender

documents describing various clauses of agreement. The agreement will be signed by

authorised person of the agency and Registrar, NIFTEM. Until the execution of proper

contract agreement, the clauses mentioned in the tender document and Work

Order/LOI shall constitute contract agreement between both parties (Agency and

NIFTEM) for all kind of differences/dispute/arbitration/ legal purposes.

21. The quoted agency charges will not be changed during the entire contract, however, if any

revision of salaries of the Doctor, Paramedical Staff, and Nursing staff, will be considered.

22. If at any stage it has been found that electricity or water have been misused, the agency will

be fined appropriately and may result in tentative/cancellation of permission.

23. The agency will be paid/reimbursement towards the purchase/consumption of

Medicines, Surgical items etc. subject to production of bill/cash memo/proof of

purchase and stock entry. The consumption/stock entry must be signed by concerned

Medical Officer I/c and countersigned by Officer I/c(Dispensary).

24. Repairing and maintenance as well as cost of spare of any tools & equipments, will be borne

by the Institute.

25. All kind of records, registers etc will also be maintained by the Agency at their expenses but

that shall be property of NIFTEM for all purposes. NIFTEM will provide stationeries to the

Dispensary.

26. The Doctor/Medical Officer I/c or Dispensary staff will not issue any Medical

Certificate regarding bed rest/complete rest/location change etc to Students & Staff normally

beyond 3 days, on actual requirement basis. In case, any students/employees asked for the

same, the patient may be referred to the nearby hospital/nursing home/Govt. Hospital to

obtain the same.

27. The Doctor/Medical Officer I/c or Dispensary staff will not do medico-legal examination or

issue any Medical Legal Certificate to any patient until/unless, they are directed by the

Competent Authority.

28. The Doctor/Medical Officer I/c or Dispensary Staff shall comply all the medical ethics

strictly, as required in the profession. They will not leak any record, patient details, disease,

illness, treatment given etc to anyone otherwise it will be breach of contract. In this regards,

Govt. policies should be adopted strictly.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 19 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

29. The Agency has to make their own arrangement for stay of their workforce nearby area as

the Institute is not having any such facility.

30. The agency staff shall work under supervision, direction, and overall administration of the

Agency, who will be subsequently responsible/assumable to the Institute nominated person.

31. The Agency shall not engage or appoint any sub Contractor or transfer the contract to any

other person in any manner to carry out his obligations under the contract.

32. The Agency as well as Dispensary Staff will take initiatives to maintain eco-friendly

and disease-free environment in the campus. Besides, the agency will engage adequate

number of personnel as per the requirement and high standards of campus and will

also time to initiatives for fogging, spray etc to control mosquitoes, insects etc. The

Medical Officer I/c will issue time to time cautions/awareness to save from diseases.

33. NIFTEM reserves the right to call upon the agency to remove any person employed working

in the NIFTEM Campus, if found unsuitable for services because of conduct or any

other administrative reasons. NIFTEM reserves the rights to disallow the person not

having the identity card.

34. The agency has to carry out Police verification of each worker/employee at its risk & cost.

35. The Agency will ensure the disposal of Medical waste/Biomedical Waste at designated place

at their own cost and risk.

36. The agency shall be responsible for engaging adequate number of trained/semi-trained

manpower required.

37. The employees of the agency should possess good health and should be free from any

diseases, especially contagious and frequently recurring diseases.

38. The agency will, prior to the commencement of the operation of contract, make available to

NIFTEM the particulars of all the employees who will be deployed at the Institute’s premises.

Such particulars, inter alia should include age/date of birth, Photo, fingerprint,

permanent address, police verification report and profile of the health status of the

employees.

39. In the case of extension beyond one year of those workers, who does not cover under

Minimum wages, will be entitled for 10% increase in their wages annually subject to

satisfactory performance and on completion of twelve months continuous working. The

performance will be assessed by the Institute linked with their duties and performance.

40. The agency shall ensure proper discipline among his/her workers and further ensure that

they do not indulge in any unlawful activity.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 20 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

41. The agency shall be personally responsible for conduct and behaviour of his staff and

any loss or damage to Institute’s movable or immovable property due to the conduct

of the agency’s staff shall be made good by the agency. If it has been found that the

conduct or efficiency of any person employed by the agency is unsatisfactory, the agency

shall have to remove the concerned worker/person and engage a substitute within 48

hours under intimation by NIFTEM.

42. Employment of child labour is strictly prohibited under the law. Therefore, the agency will

not employ any child labour.

43. The staff shall be issued identity cards bearing photographs by NIFTEM. The agency

shall provide sufficient sets of uniforms to their workers and shall ensure that they

may wear them all times and maintain properly.

44. NIFTEM management have right to inspect the services. Any shortcomings pointed out by

such officials during their visits shall be properly attended to by the agency.

45. The agency has to extend one paid weekly off to Dispensary Staff. The wages/salaries shall

be worked out on the working of 26 days in a month. The daily rate will be worked out on

the basis of 26 days working = full wages. Each employee will be given one day paid

rest either on Sunday or any other day, as decided by NIFTEM. In case, any employee is called

for extra duty on rest day due to any exigencies, the said employee will be given rest

on any other day.

46. Each Dispensary Staff will be entitled for 8 days paid holidays including 3 national holidays.

These 8 holidays will be those days, when NIFTEM will also be closed on account of Gazetted

holiday. These gazetted holidays will be (1), Independence Day, (2) Republic Day, (3) Holi,

(4) Gandhi Jayanti, (5) Dushara (6), Deepawali, (7) Id-ul-fiter/Id and (8) Christmas.

47. The agency has to ensure 100% manpower availability on all the working days. In case of

short fall beyond 25 % or more staff continuously 3 or more days, appropriate deduction or

maximum @ Rs.250/- per person plus wages of absent employee(s) can be deducted. The

Officer I/c(Dispensary) will impose this penalty at their discretion.

48. The agency may deploy adequate work force on Saturdays/Sundays including

other holidays, according to the requirement of the Dispensary.

49. The staffs have to perform duties in shifts and therefore should be rotated on regular

intervals.

50. Timing of Dispensary:

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 21 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Monday to Friday- Morning: 9.00 AM to 1.00 AM Evening: 5.00 to 8.00 PM or 4.30

7.30 PM.

Saturday : Morning 9.00 AM to 1.00 PM(5 hrs) Weekly holiday will be provided by the

agency as per Shop and Establishment. Working hours may vary including shift duties

depending upon the requirement. The agency will follow time schedule as provided by the

Officer In-charge (Dispensary).

51. No inexperienced staff shall be allowed to put on job by the Agency, if found unfit to work, he

will not be allowed to work in the Campus.

52. Storing/Supply/Sale and consumption of drugs, alcoholic drinks, cigarettes or any other

items of intoxication are strictly prohibited in the Institute’s campus. Any breach of

such restrictions by them will attract deterrent action against the agency as per statutory

norms.

53. The workers employed by the agency shall be directly under the supervision, control

and employment of the agency and they shall have no connection what so ever with

NIFTEM. NIFTEM shall have no obligation to control or supervise such workers or to take

any action against them except as permissible under the law. Such workers shall also

not have any claim against NIFTEM for employment or regularization of their services by

virtue of being employed by the agency against any temporary or permanent posts in

NIFTEM.

54. The Institute authorities can inspect any time the Area and if any irregularities are

found, appropriate penalty can impose upon the agency.

13. Performance Security

i) The successful agency has to submit a Performance Security @ One Lakh within 30 days of

issue of letter of work award & latest by the date of submission of 1st monthly bill.

The performance security can be submitted either in the form of DD or Bank Guarantee(in

the form of DD upto Rs5,00,000/-). The format of Bank Guarantee is available at Annexure-V.

Until submission of Performance Security, the EMD amount will retain, but in case of delay

beyond three month, the EMD amount will be forfeited. However, in this regard, decision of

the Competent Authority shall be final & binding on both the parties.

ii) Release of performance Security- On expiry of contract, the Performance Security as the case

may be, will be returned without interest, after completion of all contract obligations

within 60 days.

14. Penalty Clause

Punitive measures as delineated hereunder shall be initiated for non conformities:

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 22 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

i) In case of continued/repeated non compliance of roaster, penalty of Rs.100/- shall be levied

on each exposure. Besides, the Officer I/c(Dispensary) reserves the rights to take any more

stringent action against the agency .

ii) There shall be pro-rata deduction for any wilful absence of Medical Officer & Paramedical

Staff.

iii) Oxygen Cylinder filled with Oxygen OR any other prescribed required in Ambulance/

Dispensary is not found available in good working condition, a penalty of Rs.100/- shall be

imposed on each occasion.

iv) Misbehaviour by any of the agency staff shall cause penalty as deemed appropriate by

Officer I/c(Dispensary). It can be financial/non financial /both.

v) The time schedule should be strictly followed by the agency. If the services are not made

within stipulated time/dates, penalty will be imposed as deemed fit in the circumstances.

vi) No employee of Agency will use drugs, alcohol or any other toxic substance, cigarette, Bidis,

Pan, Masala etc, if found, appropriate penalty will be imposed on the agency.

vii) The agency will ensure the statutory compliance of Minimum Wages Act, Haryana, Contract

act, Labour Act and any other act, which are applicable in the business strictly.

viii) No employee of Agency should be found without uniform etc failing which

appropriate penalty will be imposed upon the Agency.

ix) If any complaint, lapses, irregularity etc found, appropriate penalty will be imposed upon

the agency. The agency will ensure appropriate disposal of Medical Waste.

x) If agency or their employee found quarrelling, misbehaving with any officer,

employee, students, visitors or involved in any anti social activity, besides penalty,

appropriate action will be also taken against the agency.

xi) The agency will ensure that their employees do not shout/ abuse /play loudly

music/movie/news on mobile or tape or radio or FM, failing which attract

penalty provisions.

xii) In the case of repetition of any act, misconduct, heavy penalty and any other action

as deemed proper will be taken against the Agency or guilty.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 23 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

xiii) If the agency fails to carry out the maintenance work as per requirements or despite

of verbal cautions, notices, reminders, suitable penalty for the same, as deemed proper in

each occasion will be imposed.

xiv) If the agency’s staff absents beyond 25% or more continuously 3 or more working days, a

penalty of maximum Rs.250/- per staff will be imposed besides deduction of wages of the

concerned manpower for absent days. However, before imposing, the agency will be

warned. The agency can also be panelised, if the absenteeism is frequent.

Penalty Chart

S.No. Reasons of Penalty Penalty details01 Late coming on

duty 1ST time-Verbal caution. 2nd time –Verbal Caution. 3rd time – penalty of Rs. 50/- + extra working. 4th time – penalty of Rs. 250/- Frequently- discontinue from duty/campus

02. Without Uniform New employee will be allowed to come on duty without uniform, failing which a fine of Rs. 50/- will be imposed on each occasion.

03. Indiscipline case In case of quarrelling, abusing, using non-parliamentary language, shouting, misbehaving, disobeying the instruction, threatening, etc. 1st occasion- verbal warning or penalty of Rs. 500/- on the gravity of incident. 2nd occasion- Written Warning + Rs.1000/- 3rd occasion- Dismissal from the services/campus.

04. Smoking and intoxication

05. Carelessness in the work

a. Tobacco chewing, bidis, cigarette, pan masala chewing etc. – Rs. 100/- for each occasion.

b. Under influence of liquer, drugs, ganja, afeem etc. While duty – dismissal from duty/campus.

c. Unwilling to work/absent from duty place/ Playing cards or any other such activity -Rs. 50/- or more upto Rs. 500/-, as the case may be, will be fined for each occasion.

Note: the above chart is only indicative.

15. The Payment of wages and salaries:

1. The Agency will pay the wages & salaries to Dispensary Staff on or before 7th of the following month as per approved rates but not less than minimum wages at prevailing rates.

2. There is no linkage between payment of wages & salaries and payment of bills. Therefore,

agency will be make payment first to Dispensary Staff and then only submit their bills for payment alongwith required supportive documents. In case delay payment of their bills from NIFTEM, the agency has to pay wages timely.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 24 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

3. The payment of wages shall be made through online or account payee cheques only. Direct payment in the form of cash should be in very exceptional.

16. Compliance of Minimum Wages Act/Insurance Act/EPF Act Etc:

1. The agency shall be wholly responsible to provide all the benefits viz PF, ESI, Bonus,

Gratuity, Leaves etc, to eligible personnel engaged and deployed by the Contractor.

2. The Agency shall give an undertaking that the minimum wages has been paid to their staff,

besides timely deduction/submission of ESI, EPF etc. contributions to the

respective authority and will produce a copy of documentary proof alongwith claiming their

monthly bills.

3. The agency shall be responsible for timely payment of wages to his/her workers as

per Minimum Wages Act of Govt. of Haryana and fulfil all other statutory obligations,

such as revision of wages, Provident fund, ESI, /Bonus/ Fatal Accident Act, Personal injuries

etc., as applicable. In case of deficiency or dispute, the agency will be solely

responsible & appropriately punished.

4. Strict adherence of various applicable labour laws like Minimum Wages Act, Labour Act, ESI

Act, EPF Act, Payment of Wages Act, The Workman Compensation Act, Contract

Labour(Regulation and Abolition) Act 1970 or any other application Acts/Rules and all other

statutory requirements as amended from time to time to the entire satisfaction

of Central/State Govt. Authorities, shall be the responsibility of the Agency and he shall have

to good loss, if any, suffered by NIFTEM on account of default in this regard by the

agency. EPF/ESI contributions will be deposited by the agency in his EPF/ESI code No.

in the respective account of workers. The agency will submit the copy of EPF/ESI

Challan/Proof of deposit alongwith bill for payment.

5. In the event of violation of any contractual or statutory obligations by the agency,

he/she shall be responsible and liable to be penalised for the same. Further, in the

event of any action, claim, damages, suit initiated against the Institute by any

individual, agency or government authority due to the acts of the agency , he/she shall

be liable to make good

/compensate such claims for damages to any individual, agency or government

authority, the agency would be required to reimburse such amount to the Institute or

the Institute reserves the right to recover such amount from the payment due to the

agency while settling agencies bills or from the amount of Security Deposit of the agency

lying with the Institute.

17. Insurance of workers:

The agency will be solely responsible for any liability for his manpower in respect of any accident, injury arising out and in course of firm’s deployment. To meet his

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 25 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

aforesaid

obligation under the workmen Compensation Act, the agency may obtain W.C. Policy from the Insurance Company for the person employed by him for carrying out the work. The premium payable for the foresaid insurance policy shall be borne by the agency.

18. Safety Rules:

a. The agency shall have to comply with all the provisions of safety rules. The Officer I /c may

impose penalty, if any employee found working carelessly without proper protective equipment in unsafe condition. Against violation of any other clause, penalty per violation shall be levied. In case of repeated violation of serious nature resulting in various serious accident or direct loss to the NIFTEM/threatens to cause servere consequences, high penalty will be imposed including termination of contract.

b. The agency will ensure all safety measure precautions are taken while running any

electrical or mechanical equipments. The agency shall be responsible for any loss or damage due to carelessness.

c. The Agency shall be responsible for safety of their staff while on the job and the Institute shall not be responsible for payment of compensation for any accident occurring during the work. The contractor is required to equip their workman with all required safety equipment etc. The Institute will not be responsible for any injury partial or permanent, or any mis-happening or death at site due to accident or malfunctioning of the equipment or by negligence of the staff.

d. If any damage caused for public convenience/services, the same shall have to be repaired instant, failing which necessary recovery shall be made from the agency bill.

e. No compensation shall be payable to the Agency for any damage caused by natural calamity (Rains, storms, earthquakes and other calamity) during the execution of the work.

f. In case, if it is observed that the Dispensary is not being run properly with minimum standard during the period of contract, payment will be deducted for sub standard work and agency may be debarred to undertake the work.

19. Withholding of Payment:

This clause authorizes user(Institute) to withhold payment till end when service provider fails in its contractual obligation. The standard text of this clause is as under:

“In the event of the Service Provider’s failure to submit the Bonds, Guarantees and Documents, supply the deliverables etc as specified in the Contract, the Buyer may at his discretion, withhold any payment until the completion of the Contract”.

20. Payment:

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 26 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

i. The payment of bills for Dispensary will be made on Monthly basis after submission of bills along with previous month payment details, PF & ESIC contribution deposit proof, service tax, Attendance, Proof of wages distributions(Through bank account). If the bills are complete in all respect, the same will be paid by in 20 days.

ii. Counter conditions by the bidders/agencies shall not be acceptable.

21. LIQUIDATED DAMAGES (LD)

In the event of the Service Provider's failure to submit the Bonds/Guarantees/ Documents or/and supply/perform the items/services as per Delivery schedule specified in the contract, the User may, at his discretion, withhold any payment until the completion of the contract. The User may also deduct LD to the sum of 0.5% of the contract price of the delayed/undelivered stores/ services mentioned above for every week of delay or part of a week, subject to the maximum value of the Liquidated Damages being not higher than 10% of the value of delayed stores / services.

22. NO CONDITIONAL BIDS SHALL BE ACCEPTED.

23. Right of Acceptance of Offer

a) The User reserves the right to accept partly or reject any offer without assigning any reason thereof. The User does not pledge itself to accept the lowest or any other tender and reserves to itself the right of acceptance of the whole or any part of the tender or portion of the quantity offered and the Service Provider shall supply the same at the rate quoted.

(b) In respect of enquiries, which call for procurement of more than one item the User reserves

the right to consider and accept the offer for any of the items in the enquiry reserving the right to utilize the offer for balance items at a later stage within the validity of offer.

24. Cancellation/Termination of Contract

1. NIFTEM reserves the right to terminate the contract at any time without assigning any

reason or prior notice.

2. The contract can be terminated either side by serving three months notice. However,

the Institute can serve notice less than three month in the case of continuous

unsatisfactory performance, negligence, misbehaviour, misconduct, untoward incidence,

gross violation of terms & conditions of tender/agreement or instruction passed by the

Institute. In such cases, the notice period shall be 30 days.

3. The Institute shall have the right to terminate the Contract, arising out of finalisation of this

tender, in part or in full in any of the following cases :-

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 27 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

(a) The delivery of the material/services is delayed for causes not attributable to

Force Majeure for more than 15 days after the scheduled date of delivery.

(b) The Service Provider is declared bankrupt or becomes insolvent.

(c) The delivery of material/delayed is delayed due to cause of Force Majeure by more than Sixty Days provided Force Majeure clause is included in contract.

(d) As per decision of Arbitration/Tribunal.

(e) When both parties mutually agree to terminate the contract.

4. If the contractor fails to complete the work or any portion thereof as agreed upon or restrict

to comply with any direction given to him, shall terminate the contract and forfeit the security deposit. The contractor shall also be liable for any expenses, loss or damage which Institute may incur or sustain by reasons due to contractors fault. If it exceeds the amount of security deposit, the same shall be recovered from the dues payable to the contractor.

5. The Institute reserves the right to cancel/short close the contract at any time, in case

of unsatisfactory performance, without assigning any reasons.

6. In case of unsatisfactory performance/services, the contract will be liable to be terminated at any time giving 15 days Notice.

25. FORCE MAJEURE

a. Should any force majeure circumstances arise, each of the contracting party shall be excused for the non-fulfillment or for the delayed fulfillment of any of its contractual obligations, if the affected party within 14 days of its occurrence informs in a written form the other party.

b. Force majeure shall mean fires, floods, natural disasters or other acts such as war, turmoil,

strikes, sabotage, explosions, and quarantine restriction beyond the control of either party.

26. STATUORY DEDUCTIONS

Statutory deductions on account of Income Tax, Work, Tax etc. including surcharge shall be made at source from the bills of the agency at prevailing rates.

27. RISK & COST:

In case of the agency fails to full fill the contractual obligations, the work shall be got done from some other agency at the risk and cost of the agency. It shall be without prejudice to the right of NIFTEM to recover any further amount or any liquidated and/or other damages.

28. PENALTY FOR USE OF UNDUE INFLUENCE

The Service Provider undertakes that he has not given, offered or promised to give, directly or indirectly any gift, consideration, reward, commission, fees brokerage or inducement to

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 28 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

any person in service of the Buyer or otherwise in procuring the Contracts or forbearing to do or for having done or for borne to do any act in relation to the obtaining or execution of the Contract or any other Contract with the Government for showing or forbearing to show favour or disfavor to any person in relation to the Contract or any other Contract with the Government. Any breach of the aforesaid undertaking by the seller or any one employed by him or acting on his behalf (whether with or without the knowledge of the seller) or the commission of any offers by the seller or anyone employed by him or acting on his behalf, as defined in Chapter IX of the Indian Penal Code, 1860 or the Prevention of Corruption Act, 1988 or any other Act enacted for the prevention of corruption shall entitle the Buyer to cancel the contract and all or any other contracts with the seller and recover from the seller the amount of any loss arising from such cancellation. A decision of the buyer or his nominee to the effect that a breach of the undertaking had been committed shall be final and binding on the Seller.

Giving or offering of any gift, bribe or inducement or any attempt at any such act on behalf of the seller towards any officer/employee of the buyer or to any other person in a position to influence any officer/employee of the User for showing any favour in relation to this or any other contract, shall render the Service Provider to such liability/ penalty as the User may deem proper, including but not limited to termination of the contract, imposition of penal damages, forfeiture of the Bank Guarantee and refund of the amounts paid by the Buyer.

29. Patent Rights.

The Service Provider shall indemnify and hold the User harmless against all third party claims of infringement of patent, trade mark of industrial design rights arising from use of the stores supplied or any part thereof.

30. Right to Variation Clause

To take care of any change in the requirement during the period between issue of tender and conclusion of contract, Buyer reserves the right to increase or decrease the quantity of the required deliverables without any change in the terms & conditions and prices quoted by the Seller. While concluding the contract, the quantity can be accordingly increased or decreased at the same terms of conditions by 25%.

31. Arbitration Clause:

In case of any dispute between Agency and NIFTEM, arising out of or in relation to

the agreement, the dispute shall be referred to arbitration of a sole arbitration to be

appointed by the Hon’ble Vice Chancellor, NIFTEM. The award of the said arbitrator shall be

binding on both parties. The seat of the arbitration shall be at Sonepat & Haryana territory.

In additions to clauses above, other terms & conditions, which have not been mentioned in

the Tender, can be added and the same will be mentioned in the award of work. If

the agency is not agree with any terms, which has been included later date, may

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 29 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

communicate in

writing before accepting the offer. After acceptance, no protest will be considered.

(Registrar, NIFTEM)

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Signature of Tender 30 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Annexure- I

Tender form (Technical Bid)

(To be submitted by the Agency on their letter head. All Columns should be filled.

Documents prescribed at Sl. No. 2 (a) of other term & conditions should be enclosed)

Name of the Firm/Agency......................................................................................................................................................

Address..........................................................................................................................................................................................

Sl. No.

Particulars Status (to be filled by the Bidder)

1. Year of Incorporation of the agency (copy to be enclosed) along with the latest registered address of corporate office

2. Type of Services applied for : Length of relevant experience in years :

3. Registration No. of the firm/Agency registered for Medical Services (Copy to be enclosed)

4. Mobile No................................................Email ID: .....................................................

5. Name of Proprietor/Authorized Person: ..........................................................

6. No. of Govt./ Semi Govt. Institutions/PSUs/Autonomous Orgn/Universities/Educational & Research Institute served during last three years (Work order along with list with names, designation & Telephone numbers of the authority to be enclosed)

7. Income Tax Registration No. PAN No.

8. Service Tax No.(Enclose copy also) 9. Provident Fund Account No. and authority with whom registered:

10. ESI/EPF No (with latest return challan copy) Drug License No.(Enclose copy_

11. License No. under Contract Labour (R&A) Act(Copy enclose) 12. Brief explain how the firm will carry out the work assigned by

NIFTEM (use separate sheet) 13. Annual Turnover(In lakhs) of last three years of the company (Copy

to be enclosed)

14. Details of work carried out by the Bidders

Attach the proof of experience for last 03 years.

a) 2013-14 b) 2014-15 c) 2015-16

Demand drafts bearing No.…..……................. dated …....………. drawn on ............…………………for

Rs............................is enclosed with Technical bid as Tender Fee and EMD.

Signature…………………………. Date: Seal of firm……………………….

Signature of Tender 31 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Annexure- II

TENDER CONDITIONS ACCEPTANCE LETTER (To be given on Company Letter Head)

To, Date:

Sub: Acceptance of Terms & Conditions of Tender

Tender Reference No:

Name of Tender / Work: -

Dear Sir,

1. I/ We have downloaded / obtained the tender document(s) for the above mentioned “Tender/Work‟ from the web site(s) namely:

as per your advertisement, given in the above mentioned website(s).

2. I / We hereby certify that I / we have read entire terms and conditions of the tenderdocuments from Page No. to (including all documents like annexure(s),schedule(s), etc .,), which form part of the contract agreement and I / we shall abide hereby the terms / conditions / clauses contained therein.

3. The corrigendum(s) issued from time to time by your department/ organizations too have also been taken into consideration, while submitting this acceptance letter.

4. I / We hereby unconditionally accept the tender conditions of above mentioned tender document(s) / corrigendum(s) in its totality / entirety.

5. In case any provisions of this tender are found violated , your department/ organization shall be at liberty to reject this tender/bid including the forfeiture of the full said Earnest Money Deposit absolutely and we shall not have any claim/right against deptt in satisfaction of this condition.

Yours Faithfully,

(Signature of the Bidder, with Official Seal)

Annexure- III

Signature of Tender 32 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Approved Final Tender of Outsourcing of NIFTEM Dispensary

PART-I (Mandatory)

Format of Financial Bid

(To be submitted by the Agency on their letter head. Quote only agency charges)

S. No.

Requirement of Manpower with required qualification

No. of persons

Fixed Monthly

salary(upto) Rs.

Remarks Service charges to be quoted by

the bidder in %age.

01. Physician(Male/Female) MBBS

02. Physician(Male/Female) MD(Medicine)

75,000/-

02 1,00,000/-

03. Staff Nurse(Male/Female) 04 30,000/- -

04 Pharmacist(Male/Female) 01 25,000/-

05 Driver-cum-Attendant(Male) 02 20,000/-

06 Rate of Agency/Overhead charges on billing amount (in percentage )

07 Service Tax/GST As per Govt. rates 08 Cess (Education, Swachh Bharat, Labour Welfare As per Govt. rates

Note-

1) Service Charges and TDS(If any) will be deducted as per rules.

2) The selection of the Agency/Contractor will be made on the basis of L1 (Lowest quote) rates for Agency Charges. In case of tie between the agencies, the work will be awarded to that agency whose financial turnover is higher.

3) If any change(s) in Govt. rates, the same will be admissible to agency also.

4) The agency may visit NIFTEM Dispensary before submitting tender/bid.

5) The agency has to worked out their requirement on quarterly basis and thereafter its availability will be ensured through Officer In-charge(Dispensary).

6) In the circumstances and requirement, the agency can be asked to make arrangement for any specific requirement or material and in that case, the agency shall be bound to provide the same on market rates together with agency charges as mentioned in the tender. In such cases, no advance will be paid. In case it is found that agency has charged rates more than existing market rates, the appropriate amount will be deducted towards the same.

Name ……………………………. Signature of the contractor (Date & Stamp of the Company)

Signature of Tender 33 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Approved Final Tender of Outsourcing of NIFTEM Dispensary

PART-II(Optional)

Format of Financial Bid

Annexure-III(B)

(To be submitted by the Agency on their letter head. Quote only agency charges)

Those agencies, who are having valid drug license and capable to supply medicines, surgical

items, toiletries products to NIFTEM Dispensary, are required to quote discount structure on

following format.

SNo. Name of Product Minimum Order quantity at a time

Discount on MRP

Remarks

01 Branded Medicines in company packaged strips

10 Tab or one Strip

02 Generic Medicines (packed) 100 Tab/ Capsules 03 Surgical Items 01 No. of

Box/Packing 04 Toiletries products 01 No. of

Box/Packing

i. VAT/GST/Sales Tax(as applicable) will be paid extra.

ii. The Item wise ARC will be made with that agency, who will offer highest discount on MRP.

iii. The Supplies are required to be made to the NIFTEM Campus, Kundli, Sonepat at their cost.

No extra payment towards cartages etc will be paid. The payment will be made within

30 days.

iv. The monthly consumption of Medicines/Surgical items/Toiletries products is above

Rs.25000/- but under 50,000/- per month.

v. The actual requirement can be increase/decrease subject to actual requirement

and increasing/decreasing of students from the Hostels.

vi. Presently, Dispensary is serving 900 students 500 employees including

regular/contractual/outsourced. The strength will increase in near future.

vii. All the items should be as per work order.

Name ……………………………. Signature of the contractor (Date & Stamp of the Company)

Signature of Tender 34 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Approved Final Tender of Outsourcing of NIFTEM Dispensary

Annexure-IV

To,

Registrar,

UNDERTAKING

Sir,

National Institute Of Food Technology Entrepreneurship and Management Plot no 97, sector-56, HSIIDC Industrial Estate, Kundli-131008, District-sonepat (haryana)

7. I/we the undersigned, certify that I/we have gone through the terms and

conditions mentioned in the Tender documents and undertake to comply with them. 2. The Contractor/Agency is not facing any legal proceedings for violation of any

labour law form any agency/department/court of law so far. 3. The Contractor/Agency has not been disqualified for poor performance or for failure to

adhere to labour laws by any government organisation or public sector undertaking. 4. I/we the undersigned will pay all the dues along with legal expenses, if any, if detected

for any default by any Inspector under labour laws. The Institute will not be responsible for any default made by the contractor.

5. I/we, the undersigned undertake to compensate for any loss to NIFTEM on account of

any failure/negligence or lapses in discharging the duty causing the loss.

6. It is further certified that our firm has not been blacklisted by any agency in India

or abroad so far. Neither, the firm/The partners/Contractor have been prosecuted/convicted for any criminal offence and nor any matter/case is pending for investigation/trial before any Civil Authority or in Court of Lawn.

Dated:

SIGNATURE OF THE BIDDER WITH SEAL

NAME OF THE BIDDER WITH ADDRESS

Bank Guarantee Format For Performance-Cum- Warranty Annexure-V

Signature of Tender 35 | A p p r o v e d T e n d e r f o r o u t s o u r c i n g o f D i s p e n s a r y 1

7 t h N o v e m b e r , 2 0 1 6

Approved Final Tender of Outsourcing of NIFTEM Dispensary

From : (_ Bank)

To, The Vice Chancellor, NIFTEM.

Dear Sir,

1. Whereas, Registrar, NIFTEM (hereinafter referred to as User) have entered into a ContractNo. dated (hereinafter referred to as the said contract)with M/s (hereinafter referred to as the Service Provider) for the running the Dispensary as per contract to the said User and whereas the Service Provider/Agency/ Contractor has undertaken to produce a bank guarantee for (10%) of total contract value amounting to to secure its obligations towards Performance-cum-Warranty to the User.

2. We the bank hereby expressly, irrevocable and

Approved Final Tender of Outsourcing of NIFTEM Dispensary

36

unreservedly undertake and guarantee as principal obligors on behalf of the Service Provider that, in the event that the User declares to us that the amount claimed is due by way of loss or damage caused to or would be caused or suffered by the User by reason of breach/failure to perform by the said Service Provider of any of the terms and conditions in the contract related to Performance and Warranty clauses, we will pay you, on demand and without demur, all and any sum up to a maximum of

Rupees only. Your written demand shall be conclusive evidence to us that such repayment is due under the terms of the said contract. We undertake to effect payment upon receipt of such written demand.

3. We shall not be discharged or released from this undertaking and guarantee by any arrangements, variations made between you and the Service Provider, indulgence to the Service Provider by you, or by any alterations in the obligations of the Service Provider or by any forbearance whether as to payment, time performance or otherwise.

4. In no case shall the amount of this guarantee be increased.

5. This Performance-cum-Warranty guarantee shall remain valid for a period until three months beyond the warranty period as specified in the contract.

6. Unless a demand or claim under this guarantee is made on us in writing or on before the aforesaid expiry date as provided in the above referred contract or unless this guarantee is extended by us, all your rights under this guarantee shall be forfeited and we shall be discharged from the liabilities hereunder.

7. This guarantee shall be continuing guarantee and shall not be discharged by and change in the constitution of the Bank or in the constitution of M/s

We undertake not to revoke this guarantee during the currency except with previous consent of User in writing.

8. Dated the day of for

(Name of Bank)

Approved Final Tender of Outsourcing of NIFTEM Dispensary

37

OUTSOURCING OF LAUNDRY

SERVICES AT

INDIRA GANDHI INSTITUTE OF MEDICAL SERVICES, PATNA

Last Date of Submission: 14.08.2014 (up to

3:00 P.M.) Date of Opening: 14.08.2014 (at

4:00 p.m.)

NOTICE INVITING

Expression of Interest (EOI) for Selection of Service Agencies to implement and manage Laundry Services at Indira Gandhi Institute of Medical Sciences - Patna

The Expression of Interest (EOI) Performa is available free of cost at the IGIMS website (www.igims.org). Filled-in completed performa along with all supportive documents should be send in a sealed envelope to the Director, Indira Gandhi Institute of Medical Sciences, Sheikhpura, Patna by 3.00 P.M. on date 14.08.2014..

Vendors, who submit EOI, will be informed and will be called for Pre-Bid Conference. Vendor will also be required to make a presentation on the informed date and time. The firm may come up with suggestion with regard to terms & conditions and format for giving financial bids. Based on documents given & presentation made, firm will be shortlisted. The shortlisted firm will be given final tender document along with format for financial bid to participate in tender process. The firm will be asked for all documents (not submitted earlier) & EMD.

INTRODUCTION

Indira Gandhi Institute of Medical Sciences, Sheikhpura, Patna is the apex tertiary care superspeciality hospital. Hospital is having patient care services in the form of Out Patient Departments, Indoor Services, Operation Theatres, various Diagnostic & Laboratory Services. Within the hospital set up, IGIMS is having superspeciality centers e.g. regional Institute of Ophthalmology, Regional Cancer Centre, upcoming Trauma Centre. IGIMS is having capacity of admission of more than 500 patients in the entire hospital.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

38

IMPORTANCE

The importance of running a laundry service at a reasonable cost to the patient by the hospital needs no emphasis. The importance of a clean environment and linen for optimal patient care has been stressed upon since the very inception of hospitals. A sick person coming to the alien environment of the hospital gets tremendously influenced and soothed by the aesthetics or cleanliness of the surroundings and the linen. Clean linen is an aid to reduction of hospital acquired infections. The main objective of the laundry service will be to provide better patient care through properly planned and cleaned linen supplies.

REQUIREMENTS

IGIMS has the requirement to launder/dry-clean the hospital linen, which comprises of big/small linen items both white & coloured, blankets, plastic curtains/tapestry etc. The laundry is to be operated on all days in one or more shifts depending on workload. The washed linen will be delivered within 24 hours of receipt for processing.

WORKLOAD

The quantity of linen items to be washed at present is approximately 700 pieces per day. This quantity is likely to increase with the addition of new centers /patient care facilities.

RESPONSIBILITY

(i) Processes to be undertaken

a. Collection and transport of dirty linen: Vendor will be responsible for collection of dirty linen from the different user areas and transport the same to laundry complex.

b. Sorting, processing of used linen with standard laundering processes including repairing (if required), finishing & packing. Transportation & delivery of washed clothes in a covered trolley to the user area daily.

c. Vendor will identify torn linen at the time of collection, process & wash them. Only torn linen will be replaced by the institute.

d. The vendor will be responsible for safe disposal of left chemicals & other washing materials and other garbage produced in laundry.

e. Separate carts for transport & storage of dirty & washed linen will be used. The hampers or carts to transport soiled textiles should be appropriately cleaned after every use & should be kept away from those to be used in transporting clean textiles.

f. The contractor will process linen as per approved washing procedure and approved washing formulae.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

39

g. Supply, installation, commissioning and maintenance of Laundry Equipments (i.e. Washing Machine, Hydro Extractor, Drying Tumbler, Ironing/Calendaring Machine etc. as per requirement) of reputed manufacturer.

h. Standard universal precautions to be followed while collecting & handling infected/soiled linen.

i. Supply the linen (viz. bed sheets, pillow covers, towels, table linen, Draw

sheets and drape sheets various types, Pyjama, Tray wrapper, Aprons and

Gowns, blankets etc.) to above units as per quality & quantity, specifications/

parameters approved by I.G.I.M.S. – Patna.

j. Maintain the linen for the period of contract, which shall, indicatively include its laundering, upkeep, replacements etc. as the case may.

k. Bio-Medical Waste (Management & Handling) Rules, wherever applicable will be followed by the vendor.

(ii) Manpower

a) Adequacy & training: The vendor shall employ adequate number of well-trained staff. Firm will provide uniforms, aprons and other protective gear to ensure proper protection to all workers. All workers will be immunized by the firm before employment & during the course of employment as & when needed. All personnel involved in collection, transport, sorting, and washing of soiled textiles should be consistently & appropriately trained at frequent intervals specially for the use of, appropriate personal protective equipment (PPE), and be supervised to assure compliance with protective procedures.

b) Medical examination of staff: The vendor shall employ only those persons in the laundry who are found to be medically fit. Hospital reserves its rights to examine any of the employees for medical fitness without prior notice. Expenses, if any incurred by the IGIMS on medical examination of such employees, shall be borne and paid by the vendor.

c) Wages to employees and Insurance: The vendor shall comply with the laws applicable to employees working in the laundry regarding working hours, minimum wages, safety, cleanliness, leave, over time allowances, provident fund, retrenchment benefit, medical benefit like ESI etc. If on account of non-compliance with the provisions of any such laws, IGIMS is called upon to make any payment to or in respect of his employees, the vendor shall fully reimburse to Institute all such payment and Institute shall be free to make deductions on this account from the amount of Security Deposit, in which case, the vendor shall immediately pay to the Institute such amount as may be necessary to make up the required security Deposit, or from the dues which may be payable to Institute to the vendor. The vendor will sign an Indemnity Bond in favor of IGIMS, to this effect.

(iii) Equipments and maintenance

a. Vendor shall install Laundry Equipments (Washing Machine – 50 Kg., Hydro Extractor – 25 Kg., Drying Tumbler – 50 Kg, Ironing/Calendaring Machine, Any other equipments; Qty. – 02 Nos. each) All machines will be maintained by the vendor by coordinating with the supplier. For the purpose

of maintenance of installed laundry machines, the vendor should enter in agreement with the OEM. (original equipment manufacturer). In addition to machines, Trolleys for carrying the linen as per requirement will be provided by the vendor. The

Approved Final Tender of Outsourcing of NIFTEM Dispensary

40

maintenance of Trolley will be responsibility of the firm. Institute authorities will provide administrative support during this period. The vendor will also be responsible for maintaining the laundry equipment in working condition throughout the contract period. The vendor shall not damage the said premises and the equipments or allow the above mentioned to be damaged. In case of damage to any equipments / machinery, the vendor shall be responsible for repair / replacement.

b. Vendor shall install additional laundry equipments as per requirement namely Washing Machine, Hydro Extractor, Drying Tumbler, Pressing Machine etc. at their own cost, which may be needed to meet the workload on per day basis. At the time of termination of the contract, the vendor will have the liberty to either, remove the additionally installed equipments, or to, hand over to the next vendor.

c. Vendor shall also install suitable fir fighting equipments at the Laundry

areas where Laundry Equipments will be installed.

(iv) Washing Chemicals/Detergents

The vendor shall be responsible for procurement of all the detergents/washing chemicals of the specification as per approved washing formula.(only from laboratory tested reputed firms and ISI marked where ever possible). The institutes authorities can make surprise check to verify that the items used are as per approved formula and right quantity of these are being used.

(v) Cleanliness

It shall be the responsibility of the vendor to employ adequate number of cleaners and sweepers and provide them with adequate and necessary equipments/ materials for keeping the laundry scrupulously clean and in a sanitary condition to the satisfaction of the institute authorities. Anti rodent and pest control measures will also be strictly followed and it will be the responsibility of the vendor to ensure that premises are free of these.

(vi) Security and safety

The IGIMS Hospital shall not be held responsible for any loss or damage due to any reasons whatsoever to any type of inventory that may be kept in the said Laundry store by the vendor. The premises provided to the vendor should only be used for the purpose as mentioned in the contract (i.e. Laundry services for IGIMS only). Under no circumstances, the premises are to be used for any other purpose, than what has been mentioned in the contract. The general safety & ensuring fire safety of the premises is the responsibility of the contractor.

COMMITMENTS BY THE HOSPITAL

(i) Space and accommodation requirement

Place and accommodation for the Laundry will be provided by the IGIMS to the vendor for a specified period of contract. At the time of termination of the contract, the vendor will have the liberty to either, remove all his materials, or to, hand over to the next vendor. On the expiry or earlier termination of this Agreement, the said laundry shall be vacated peacefully by the vendor and handed over to the IGIMS in the condition they had

Approved Final Tender of Outsourcing of NIFTEM Dispensary

41

received. In case during the period of contract, the vendor decides to terminate the contract, a notice for a period of not less than four months must be given to the IGIMS Administration. Successful Vendor will be responsible for renovation / alteration of the existing space for installation of new equipments and proper management of Laundry Services at their own cost. However, he has to take prior permission from authorities of the I.G.I.M.S. – Patna.

(ii) Electricity and Water Supply:

These will be provided by the institute for operations of laundry machines, general lighting & ventilation in the premises on charge basis. The firm will however use these judiciously and will ensure that there is no wastage. If this is observed than punitive action will be initiated. The charge of electricity will be as per tariff “Patna Electrical Supply Undertaking” and water would be as per Municipal Corporation.

(iii) Condemnation & Replacement of torn linen

Vendor will be responsible for condemnation of torn/useless linen and replacement with new linen. Equal no. of fresh linen pieces will be issued daily by the vendor to make up for this torn linen.

PERIOD OF CONTRACT

The period of contract shall be for eight years from the date of award of work.

TERMS OF PAYMENT

The monthly bills will be raised by the vendor, based on actual work done during the said month after satisfactory verification by the designated officials and same shall be payable by IGIMS.

SUPERVISION & QUALITY CONTROL

a. IGIMS management shall have the right to terminate the contract of the services rendered by the vendor, which are not of the requisite standard.

b. Management shall demand and be supplied with a sample of any washing chemical or detergent for inspection and analysis & if required to be sent for testing by the approved laboratory.

c. IGIMS authorities will have unfettered right to inspect the premise, process of laundry, finished product at anytime and the vendor will cooperate with the authorities.

d. Designated officials of IGIMS will have unfettered right to enter the Laundry premise at any time in order to inspect and execute, any Structural additions and alterations or repairs to the said laundry premises, repairs to electric, water and sanitary installations, which may be found necessary from time to time. The time and date for this purpose will be fixed with the mutual convenience of both the parties, as far as possible. However if

Approved Final Tender of Outsourcing of NIFTEM Dispensary

42

this is not possible in any exigency, IGIMS authorities may allow entry of other designated officials for the above purpose.

Pre-bid Meeting:

a. Date of pre-bid meeting will be uploaded at institute website. All the bidder(s) are requested to visit the institute website (www.igims.org) regularly for and information.

b. Prospective bidder will also be required to make a presentation on the informed date and time. The prospective bidder may come up with suggestion with regard to terms & conditions and format for giving financial bids. Based on documents given & presentation made, firm will be shortlisted. The shortlisted firm will be given final tender document along with format for financial bid to participate in tender process. The firm will be asked for all documents (not submitted earlier).

c. It is an opportunity for the prospective bidder to obtain all the details about the EOI, conditions governing the EOIs and also to get the explanation of any ambiguous condition that may be present in the EOI document.

d. Failure to attend the Pre-bid meeting will not be a disqualification, but a loss of opportunity for the prospective bidders to understand about the Expression of Interest and scope of contract.

e. Filled up technical proposal and financial bid will be accepted only after the date of pre-bid meeting.

PREREQUISITE CRITERIA FOR QUALIFICATION

1. Location: Agency should be preferably based in PATNA. In case of outside agencies, they must have their branch office in PATNA.

2. Authenticity & Operational Capability:

a) The tenderer should have been in business in govt. hospital//PSU or private sector (including hotel, textiles industry etc.) for a period of at least for 2 years in laundry service for which the quotation / tender are submitted. The vendor on a non– judicial stamp paper should give a declaration to the effect. The firm should also submit list of organization where it is running its service in the last two years. The vendor is required to submit performance report from such organization where it has been providing services in laundry.

b) Surprise/Scheduled visit to the premises where it is running the laundry services, by the representatives of the institute shall be made to verify vendor capacity and standing.

c) The Vendor will give a certificate that the firm or any other firm with similar type of operation with same or some/one of the proprietors being same as of the tendering firm, has not been black listed in the past 2 yrs. by any Government/ private institution.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

43

d) The vendor has to give an affidavit on a Non –judicial paper that there is no vigilance / CBI case pending against the firm/ supplier/ or any other firm with similar type of operation with same or some/one of the proprietors being same as of the tendering firm.

3. Financial Capability:

a. Vendor should submit statement of financial standing from an authorized bank. The name of the bank / firm along with full address should be furnished.

b. If the tenderer give a false statement on any of the above information, the firm / supplier will not be considered and their quotation / there shall be deemed to be rejected and security deposit will stand forfeited.

4. Each tender should be accompanied by Earnest Money deposit of Rs. One lacs, in form of Bank Guarantee from any nationalized bank (Valid for the period of contract from the date of opening of tender) or by way of demand draft in favour of the Director, IGIMS, Patna.

TENDERS NOT ACCOMPANIED BY EMD & HAND WRITTEN QUOTATIONS WILL BE SUMMARILY REJECTED.

Conditional tenders will be summarily rejected.

PERFORMANCE GAURANTEE:

The finally selected Bidder(s) will be required to furnish an irrevocable Contract Performance Guarantee (P.G.) of Rs.

2.00 Lakhs (Rs. Two Lakhs) within 15 days of issue of letter of intent in addition to other deposits mentioned elsewhere in the contract for his proper performance of the contract agreement. The guarantee shall be in the form of Government Securities or fixed deposit receipts or Guarantee bonds of any Scheduled Bank or the State Bank of India.

In case a fixed deposit receipt of any bank is furnished by the contractor to the Government as a part of the performance guarantee and the bank is unable to make payment against the said fixed deposit receipt, the loss caused thereby shall fall on the contractor shall forthwith on demand furnish additional security to the IGIMS to make good the deficit. In case of failure by the contractor to furnish the performance guarantee within the specified period, IGIMS shall without prejudice to any other right or remedy available in law, be at liberty to forfeit the earnest money absolutely.

The performance guarantee shall be initially valid up to the stipulated date of completion plus 60 days beyond that. In case the time for completion of work gets enlarged, the contractor shall get the validity of performance guarantee extended to cover such enlarged time for completion of work. The performance guarantee shall be returned to the contractor without any interest after completion of work. In the event of the contract being determined or rescinded under provision of any of the clause/condition of the agreement, the performance guarantee shall stand forfeited in full and shall be absolutely at the disposal of the Director, IGIMS.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

44

GENERAL TERMS & CONDITIONS

1) The 1st party (IGIMS) reserves the right to cancel the contract agreement or to withhold the payment in the event of non-commencement or unsatisfactory performance of the work contract. In such eventuality 1st party further reserves to get the work done from open market or through other agencies. 2nd party (contractor) will also be black listed in the institute for a period of 3 years from participating in such type of tender and his earnest money/security deposit may also be forfeited.

2) Any person who is in Govt. Service anywhere or an employee of the institute should not be made a partner to the contract by the 2nd party directly or indirectly in any manner whatsoever.

3) The contractor shall indemnify the 1st party (IGIMS) against all other damages/charges and expenses for which the institute may be held liable or pay on account of the negligence of the 2nd party or his servants or any person under his control whether in respect of accident, injury to the person or damages to the property of any member of the public or any person or in executing the work or otherwise and against all claims and demands thereof.

4) If any information furnished by 2nd party (Contractor) is found to be incorrect at any time, the contract is liable to be terminated without any notice and the security deposit is liable to be forfeited by the Principal Employer.

5) The individual signing the quotation form or any document forming part of the contract on behalf of 2nd party, shall be responsible to produce a proper power of attorney duly executive in his favour stating that he has authority to bind other such person of the firm as the case may be in all matters pertaining to the contract including the arbitration clauses. If subsequently the person so signing fails to provide the said power of attorney within a reasonable time, the institute may, without prejudice to other civil and criminal remedies cancel the contract and hold the signatory liable to all cost and damages. In case of registered or unregistered partnership firm, all the partners should sign the quotations. In case of any person signing the agreement on behalf of limited company or firm, he/she will produce a letter of authority/resolution passed by the company empowering him/her to sign the agreement on behalf of the company or firm.

6) The workers whose services are provided by the 2nd party, shall at least all times and for all purposes be the employees of the 2nd party and on no account personnel so appointed and recruited by the 2nd party will have any claim for appointment, continuous recruitment or regularization etc. against this Institute (1st party).

7) The 2nd party shall comply with the labour laws applicable and this Institute shall not be responsible for any litigation/default from agency side.

8) In every case in which by virtue of the workman’s Compensation Act, the Government of India/institute if obliged to pay compensation to such person employed by the 2nd party in execution of the work, the Government of India/institute will be entitled to recover from the contractor the amount of compensation so paid.

9) The firm will verify the antecedents of all employees working, by police verification and will keep attendance and other relevant records at it’s cost and will produce these on demand of any authority. The list containing the names/addresses of the personnel appointed by the agency shall be made available to the Institute authorities with their bio-data within 15 days from the date of deputing.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

45

10) The contractor shall obtain a license under Contract Labour (R&A) Act, 1970 and also submit a copy of such license dully attested in the institute prior to furnishing the tender/contract. No payments would be released till the contract license is submitted to the institute. Moreover, he shall abide by all the necessary provisions of various other Labour Laws/Acts viz. ESI/Bonus, Workmen’s Compensation and any other laws and rules applicable in this regard.

11) The contractor, himself, shall be responsible for any type of statutory/mandatory claims or penalties in light of the default with reference to the above provisions.

12) In case any person engaged by the contractor is found to be inefficient, quarrelsome, infirm, invalid or found indulging in unlawful or union activities, the contractor will have to replace such person with a suitable substitute at the direction of the competent authority.

13) The institute shall not provide any sort of accommodation to the staff or person deployed by the contractor and no cooking/lodging will be allowed in the premises of the institute at any time.

14) The laundry services shall be meant for the whole institute (Main Hospital & Centres including IPD, OPD, different Diagnostic blocks, Emergency services, Maternity services, Minor & Major OT’s, Administrative block, Medical College, Nursing College, Hostels etc.), or as per the directions of institute authorities from time to time.

15) The provision of appropriate manpower, material supplies, required for performing the tasks processes of the laundry services, shall be borne by the contractor.

16) The complete job of collecting of dirty linens from earmarked place/places to supply of cleaned linens to earmarked place/places of the hospitals shall be carried out by the contractor. (i.e. sluicing, washing, hydro- extraction, drying, repairing of the linens, ironing/calendaring, storing and issue or distribution of cleaned linen.

17) The tenderer will be wholly responsible for providing laundry services in the institute. The linen must be washed and ironed properly upto the satisfaction of institute authorities. If any defect, damage or deficiency is noticed, payment in part or full may be held & penalty may be imposed.

18) The firm will segregate torn linen at the time of sorting before washing process is commenced & report to designated officer.

19) Institute will decide the timing of collection of linen, to be followed by the vendor.

20) Collection, distribution of clothes should be carried out within the period as specified by institute authorities.

21) Vendor shall install following laundry equipments namely Washing Machine, Hydro Extractor, Drying Tumbler, Ironing/Calendaring Machine etc. at their own cost, which may be needed to meet the workload on per day basis. At the time of termination of the contract, the vendor will have the liberty to either, remove the additionally installed equipments, or to, hand over to the next vendor.

a. Washing Machine (Cap.: 50Kg.) – 2 Nos. b. Hydro Extractor (Cap.: 25 Kg.) – 2 Nos.

Approved Final Tender of Outsourcing of NIFTEM Dispensary

46

c. Drying Tumbler (cap.: 50 Kg.) – 2 Nos. d. Ironing/Calendaring Machine - (as per requirement) e. Any other Equipment as per requirement.

22) As and when any situation arise out in violation of any terms and conditions of the contract executed between the parties to terminate or cancel or at the time of expiry of the contract, the contractor will be held responsible to preserve the laundry equipments intact and handover the same in functional status. Otherwise contractor shall be liable to pay the damages occurred due to any lapse on his part and the amount of the damages of equipment will be deducted from the amount of security deposited.

23) Every worker engaged in Laundry services shall wear the prescribed neat and clean uniform according to season affixing thereon the badge mentioning on the same, the name and designation of the worker provided by the contractor at his own cost.

24) The contractor shall not engage the laundry staff below the age of 18 years.

25) If any complaint of misbehavior and misconduct comes into the knowledge of the institute authorities then all such responsibility shall be of the contractor and any loss owing to negligence or mishandling by the laundry staff, the contractor shall himself be responsible to make good for the losses so suffered by the institute.

26) The contractor shall not, at any stage, cause or permit any sort of nuisance in the premises of institute or do anything which may cause unnecessary disturbance or inconvenience to other working there as well as to the general public in the institute premises and near to it.

27) No escalation of rates quoted will be allowed during the period of contract. The agency will honour the Fall Clause in case it also gets business in any other establishment.

28) The contractor shall not engage any sub-contractor or sublet/transfer the contract to any other agency/person in any manner.

29) The contractor shall, for providing proper and hygienically laundry services, ensure the following: -

i. That a daily report of its staff on duty and about their performance is furnished & maintained.

ii. That its staff does not smoke at the place of work.

iii. That any specific laundry work assigned to it by the Principal Employer or any officer authorized by him is carried out by him diligently and well in time.

iv. That before using any equipment/appliances or material and products of laundry, it is having the approval of the Principal Employer as no sub standard material being used.

v. The Principal Employer may also furnish that the salary wages shall be distributed in full as per Minimum Wages Act by the contractor to the laundry worker(s) in the presence of a representative of the institute and a certificate to this effect is provided.

30) The Institute will deduct Income Tax at source under section 194-c of the Income Tax Act,

Approved Final Tender of Outsourcing of NIFTEM Dispensary

47

1961 from the contractor @ 2% or appropriate amount as applicable of such sum as Income Tax comprised therein.

31) In case the agency fails to execute the job after signing the agreement/deed or leave the job before completion of the period of contract at their own accord, the Director, IGIMS, Patna shall have the right to forfeit the security money deposited by the agency for the execution of the contract.

32) The contract can be terminated by the first party (Director, IGIMS, Patna) by giving four months notice. The second party (the contractor) if so desire to terminate the contract will be required to give four month’s notice.

Penalty clauses

1) In case the contractor fails to commence/execute the work as stipulated in the agreement or there is a breach of any terms and conditions of the contract: Institute (IGIMS – Patna) reserves the right to forfeit the security deposits / performance guarantee etc.

2) For any breach of contract, Director, IGIMS, Patna or duly constituted committee by Director, IGIMS, Patna shall be entitled to impose a penalty to the extent of Rs. 5000/- only on the first occasion upon the agency in the event of breach, violation or contravention of any of the terms and conditions contained herein brought to the notice of the Committee.

3) If the lapse is repeated again the extent of penalty will be doubled on each such occasion. The decision of the said officer/committee in this regard shall be final and binding upon the agency. Some of the instances in which penalty would be imposed are enumerated below. (but these are not exhaustive and penalty may be imposed on any violation/breach or contravention of any of the terms and conditions as well as assigned duties and responsibilities).

a) If the personnel working in laundry are not found in proper uniform and displaying their photo identity card.

b) If the personnel found indulging in smoking/drinking/sleeping during duty hours.

c) Penalty will also be imposed if the behaviour of personnel(s) found is discourteous to any one in the hospital including staff or patients.

d) If any personal found performing duty by submitting a fake name and address.

e) If any personnel found on duty other than those mentioned in the approved list is supplied by the agencies to the Institute authorities.

f) In the case of any loss/theft of Institutes property tearing of linen, or with stains the committee will consider the circumstances leading to the loss of linen and if the responsibility is fixed on the agency, the Institute will make good the losses by deducting the cost of loss from the security deposit/or next month’s bill in one or more installments.

g) If the washing procedure given by the firm is not followed in to.

4) In case of any loss or theft, it shall be made good by the agency and in event of failure in their part to do so within a period of one month, the loss shall be made good equivalent to purchase cost by encashment of security deposit and if the amount of loss or damage

Approved Final Tender of Outsourcing of NIFTEM Dispensary

48

exceeds the amount of security deposit, then the amount will be recovered from the bill in one or more installments. In the event of any dispute arising out in connection with the interpretation of any clause in the terms and condition of the contract, agreement, or otherwise the matter shall be referred to the Arbitrator as appointed by the Director, IGIMS at PATNA shall have jurisdiction in connection with any dispute/litigation arising out of this contract.

Method of Submission of EOI

a. EOI shall contain the complete technical specifications and details on the competency of the Bidder and also the EOI package with terms and conditions of implementation of the proposed service. Apart from the documents and signed copy of the EOI, the necessary enclosures shall be submitted with EOI. In short, the EOI shall contain all the necessary documents to prove the technical competency and capability of the Bidder for implementing project and the ability of the Bidder for providing efficient service and support to the satisfaction of the Corporation.

b. Minor infirmities in the submission of documents will be allowed to be rectified so as to ensure qualification of maximum number of competitive Bidders to the next level.

c. The EOI offers, duly filled, shall be submitted in a sealed cover super scribed as “EOI for Outsourcing of Laundry Services”.

d. Cover shall also indicate the name and address of the Bidder, last date & time of receiving the EOIs; shall be sealed and marked properly and shall be addressed to;

The Director

Indira Gandhi Institute of Medical Sciences, Sheikhpura, Patna – 800 014 (Bihar)

e. If the bids are not submitted as per the requirement of the above clauses, the Institute shall assume no responsibility for the offer’s misplacement or premature opening and consequential rejection.

f. The EOI shall be sent by registered post or by speed post or by courier to the above address. EOI sent by telex or fax or email is void.

Sd/-

Prof. (dr.) N. R. Biswas Director,

I.G.I.M.S. – Patna.

Maintenance Agreement Commencement Date:

Approved Final Tender of Outsourcing of NIFTEM Dispensary

49

Initial Term: Name of Customer: Address: This agreement is made and entered effective as of the date shown above, by and between [AV Dealer] and the customer, whose name and address is set forth above.

1. Equipment Schedules: This Agreement covers the equipment listed on the Equipment

Schedule. If we or the manufacturer replace equipment that is under warranty with the same

model number, the replacement equipment will also be covered. Except for this type of

replacement, no new or additional equipment is covered by this agreement unless it is listed

on an equipment schedule.

2. Relationship with warranties: This Agreement isn’t a warranty. Equipment

purchased from [AV Dealer] is covered by the manufacturer’s warranty. Replacement and

repair of defective parts is also covered by the manufacturer’s warranty.

3. Service: For the fee set forth below, [AV Dealer] will inspect on a regular basis, and

maintain in good operating condition, the equipment itemized on such Equipment Schedule.

Inspection and maintenance of equipment will vary by the nature of the equipment, and is set

forth on the Equipment Schedule.

4. Fees: The fee for services to be performed under this Agreement are:

5. Terms of Payment: Unless an Equipment Schedule provides otherwise, all Customer

Maintenance Agreements are to be prepaid for each maintenance period.

6. Limited/Warranty:

a. We will re-perform any maintenance service that proves defective during the term of this

agreement. If we cannot provide any maintenance service due to our fault, we will refund

that portion of your fee.

b. Any materials provided during maintenance services are covered by that materials

specific warranty. This agreement does not warrant any materials.

c. THE WARRANTY SET FORTH IN 6 (a) CONSTITUTES THE SOLE LIABILITY OF [AV

DEALER] AND THE SOLE REMEDY OF THE CUSTOMER FOR DEFECTIVE WORKMANSHIP, WETHER ARISING UNDER CONTRACT, TORT, STRICT LIABILITY

OR OTHER FORM OF ACTION. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,

INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A

PARTICULAR PURPOSE, ARE EXCLUDED HEREFROM.

7. Term: The term of this Agreement shall be for the initial term set forth above starting on the

Commencement date. This Agreement shall automatically renew for additional terms of one

(1) year each unless either You or We gives notice of cancellation in writing to the other at

least thirty (30) days prior to the expiration of the then current term. In the event of any such

renewal period, the maintenance fees You will pay during such period shall be as set forth

above.

8. Exclusions: Except as otherwise set forth in the Equipment Schedule, the services to be

provided for a quarterly service fee do not include:

a. Service required as a result of abuse, misuse, electrical storms, power failures or

fluctuations, glass breakage or damage, failure to follow user maintenance and operating

instructions, or the failure or results of failure of interconnected equipment not specified

on an Equipment Schedule, including, but not limited to, wiring, conduit, or voice or data

transmission equipment or facilities;

Approved Final Tender of Outsourcing of NIFTEM Dispensary

50

b. Consumable items including, but not limited to, light bulbs, batteries, video cassettes

or…………………………………

c. Services required because of service, inspection, or tampering with equipment by anyone

other than [AV Dealer].

d. Requested service outside our normal hours of operation.

If [AV Dealer] determines that the service requested by the Customer is excluded pursuant to the above, and the Customer requests [AV Dealer] to perform such service, the service will be provided under section 10.

9. Parts: Unless an Equipment Schedule indicates that parts are included, You will pay [AV

Dealer] then current list price for any replacement parts necessary for the performance of

service on equipment.

10. Other Services: You may from time to time request that [AV Dealer] provide other

services not included in the service plan for equipment described on a specific Equipment

Schedule, or for which no Equipment Schedule has been completed. [AV Dealer] will use

reasonable efforts to provide such service at 90% of its then current and standard hourly

rates.

11. Termination:

a. The fees listed above are non-refundable, even if you decide to cancel maintenance

appointments.

b. If you fail to make any payment in a timely manner, We will give you written notice,

and if you still do not pay, for an additional 10 days after that notice, We can

terminate this agreement.

12. General:

a. This Agreement and Equipment Schedule(s) constitute the entire agreement

between the parties concerning any service provided by [AV Dealer] to the

Customer, and no representation, inducement, promises or agreements not

embodied herein shall be of any force or effect.

b. This Agreement shall be governed by and interpreted in accordance with the laws of

the province of Alberta, applicable to contract to be performed wholly within such

province by resident thereof.

c. CUSTOMER ACKNOWLEDGES HAVING READ AND UNDERSTOOD ALL PAGES

OF THIS AGREEMENT.

[AV Dealer] (Customer) ___________________ ______________________ EQUIPMENT SCHEDULE:

NOTES: