Q.1.Explain in detail about material management and its objectives.

(Chapter 1) (CO1)

Materials Management is the planning, directing, controlling and coordinating those activities which are
concerned with materials and inventory requirements, from the point of their inception to their introduction
into the manufacturing process.It begins with the determination of materials quality and quantity and ends
with its issuance to production to meet customer’s demand as per schedule and at the lowest cost.

The wealth of a country is measured by its gross national product—the output of goods and services
produced by the nation in a given time. Goods are physical objects, something we can touch, feel, or see.
Services are the performance of some useful function such as banking, medical care, restaurants, clothing
stores, or social services.

The objectives of materials management.

The objectives of material management can be classified into two categories viz; primary objectives and secondary
objectives.

I]Primary Objectives:

1. Low Prices: If materials department succeeds in reducing the price of items it buys, it contributes in not only
reducing the operating cost but also in enhancing the profits.

2. Lower Inventories: By keeping inventories low in relation to sales, it ensures that less capital is tied up in
inventories. This increases the efficiency with which the capital of the company is utilized resulting in higher return on
investment. Storage and carrying costs are also lower.

3. Reduction in Real Cost: Efficient and economical handling of materials and storage lowers the acquisition and
possession cost resulting in the reduction in the real cost.

4. Regular Supply: Continuity of supply of materials is essential for eliminating the disruption in the production
process. In the absence of regular supply of materials, production costs go up.

5. Procurement of Quality Materials: Materials department is responsible for ensuring quality of materials from
outside suppliers. Therefore, quality becomes the single most objective in procurement of materials.

I] Secondary Objectives:

The following are the important secondary objectives of materials management.

1. Reciprocity: The purchase of raw materials from the organisations/customer’s by the concern and in turn, sale of
finished products to the above customers is known as reciprocity. It serves the twin purpose of increasing purchasing
as well as sales.

2. New Developments: The staff of the materials department deals regularly with the suppliers responsible for new
developments in material handling. These developments can be successfully applied in material handling and
management.

3. Make or Buy Decisions: The material manager with regular reviews of cost and availability of materials can safely
conclude that whether the material is to be purchased or developed in the organisation itself.

4. Standardisation: Standardisation of materials is greatly helpful in controlling the material management process.
With regular stock-taking, the non-standardised items can be rejected and standard components may be brought into
product designs to reduce the cost of production. It is further helpful in promoting the standardisation with suppliers.

5. Assistance to Production department:By supplying the standardised materials or components to the production
department, quality products can be assured. It is helpful in imparting the economic knowledge in bringing about the
desired improvement in the product.
Q.2. Discuss centralized and decentralized materials management. (Chapter 1) (CO1)

Centralized Procurement :
Centralized procurement means that a single department controls and manages the purchasing for the whole organisation. Ideally a
manager oversees the purchasing department regarding what materials need to be purchased and in what quantity. The single
purchasing department is generally located in the headquarters.

Centralized Purchasing – Pros

Purchasing in bulk quantities reduces cost to the organization.

2. Good relations developed with the supplier can lead to better discounts and bargain in the future.

3. Since shipments are consolidated, the transport cost is also reduced.

4. Inventory investment can be minimized through centralization of purchase.

5. Inventory management gets drastically reduced.

6. Duplication of work can be avoided through centralized purchasing.

Centralized Purchasing – Cons

High initial cost can be a deterrent.

2. People in charge of purchasing may not be efficient and this can lead to poor quality of materials purchased and even incorrect
quantity being purchased.

3. If branches are spread out geographically, then centralized purchasing may not be suitable.

4. In case of an emergency, work can be delayed drastically since materials cannot be purchased locally.

5. Delay in replacement of defective materials.

Decentralized Procurement :

With this method, rather than leaving the purchasing control with a single department, it is granted to local branches or
departments. They have the authority to purchase items necessary as per their requirement With decentralized systems, each
office, division, or project manager has purchasing power to order supplies at their own discretion without seeking approval.

Pros:

Supplies are purchased by each department on demand to meet immediate and long-term needs. Local managers are in the best
position to understand the needs of their divisions.

Order processing is fast and easy, with no wait for approval. If a need arises, it can be sourced and filled immediately.
Replacements for defective or damaged shipments can be initiated immediately, without routing through the company
procurement process.

Cons:

Opportunities for bulk purchasing across departments, and for negotiating better terms based on bulk are lost.

Orders are typically made by administrative staff, and not purchasing experts who have the knowledge and skill to evaluate
suppliers, consolidate orders, and negotiate better deals.

A decentralized system often means disorganized data. Compliance issues may arise as managers order or reorder for the greatest
expediency as opposed to strict protocol adherence.
Q.3.Elaborate the concept of Material planning and its importance (Chapter 2) (CO1)

Material Planning :

Material planning is a scientific way of determining the requirements starting with raw
materials, consumables, spare parts and all other materials that are required to meet the given
production plan for a certain period. Material planning is derived from the over all
organizational planning and hence it is always a sub-plan of the broad organizational plan.

Importance Of material planning :

1. TO AVOID OVER-ORDERING OR UNDER-ORDERING :- Absence of materials planning

leads to over ordering or under-ordering of materials. Over-ordering leads to over-investment
and unproductive use of working capital. Under-ordering leads to material shortage which may
incur delay in executive orders or may also leads to loss of customers.

2. REDUCE ESCALATION OF COST OF OPERATIONS :- Lack of planning leads to

unwarranted emergencies or rush of orders which may leads to costly transportation. The overall
cost of operations increases due to increase in cost of transportation, higher rate of interest on
working capital, damages and pilferage etc.

3. PURCHASE BECOMES A PROFESSIONAL ACTIVITY :- Materials planning changes the

role of purchaser to purchase manager or purchase executive as he/she can take decisions
independently. This leads to higher accountability and utilization of funds in an optimum
manner.

4. EFFECTIVE CONTROL DEVICE :- Materials planning help the management to track down
the variations in actual activity as compared to the standards set by the plan. This helps to
control the entire activities related to materials .Since the activities are properly streamlined and
standardized, it may motivate the people who work on that
Q.4.Write Short note on Bill-of-Materials (Chapter 2) (CO1

Before we can make something, we must know what components are needed to make it. To bake a cake, we
need a recipe. To mix chemicals together, we need a formula. To assemble a wheelbarrow, we need a parts
list. Even though the names are different, recipes, formulas, and parts lists tell us what is needed to make the
end product. All of these are bills of material.

The Association for Operations Management (APICS) defines a bill of material as “a listing of all the
subassemblies, intermediates, parts, and raw materials that go into making the parent assembly showing the
quantities of each required to make an assembly.” Figure shows a simplified bill of material. There are three
important points:

1. The bill of material shows all the parts required to make one of the item.

2. Each part or item has only one part number. A specific number is unique to one part and is not assigned to
any other part. Thus, if a particular number appears on two different bills of material, the part so identified is
the same.

3. A part is defined by its form, fit, or function. If any of these change, then it is not the same part and it
must have a different part number. For example, a part when painted becomes a different part and must have
a different number. If the part could be painted in three different colors, then each must be identified with its
unique number.

Table 2.1

The bill of material shows the components that go into making the parent. It does not show the steps or
process used to make the parent or the components. That information is recorded in a routing file.

A well-defined BOM helps companies:

• Plan purchases of raw materials

• Estimate material costs

• Gain inventory control

• Track and plan material requirements

• Maintain accurate records

2.3.1 Single-level bill of materials

which is a relatively simple list for a product. In this type, each assembly or subassembly is shown only
once, with the corresponding quantity required of each to make the product. Though easy to develop, this
type of BOM is unsuitable for complex products because it does not specify the relationship between parent
and child parts or between assemblies and subassemblies.

2.3.2 Multilevel bill of materials

Which takes more work to create but offers greater details and specificity on the parent and child parts in the
product. In a multilevel BOM, the total material required is shown. Additionally, the product structure is
indented to show the relationship between the parent and child product, as well as assemblies and
subassemblies.
Q.5.Elaborate the concept of Purchasing Principles (Chapter 3)(CO2)

Some of the major principles of purchasing are:

1. Right Quality : The term right quality refers to a suitability of an item for the purpose it is
required. For producing the goods of best quality, the best grade of raw material may be the
right quality whereas for producing items of medium quality, the average lowest grade may be
the right quality.

2. Right Quantity : Materials purchased should be of right quantity. The right quantity is the
quantity that may be purchased at a time with the minimum total cost and which obviates
shortage of materials. Ensuring and maintaining a regular flow of materials for carrying the
production activity is the vital aim of any purchase organisation. Excess purchases should be
avoided, it results in overstocking and capital is unnecessarily blocked and inventory carrying
cost goes up.

3. Right Time : The time at which the purchases are to be made is of vital importance. In case of
items used regularly, right time means the time when the stock reaches the minimum level. The
reorder level of material is fixed for each item under the principle of right time.

4. Right Source : Selecting the right source for the purchase of materials is an important
consideration in the purchase procedure. The right source for the procurement of materials is
that supplier who can supply the material of right quality as ordered, in right quantity as ordered,
at a right time at which the materials were required to be supplied, at an agreed price with the
supplier, who is in a position to honour the commitment without much follow- up, who has
necessary financial resources and adequate man-power to handle the order and who is well
established with higher reputation and proven business integrity

5. Right Price : Determination of right price is a difficult task. It is the main object of any
organisation to procure the material items at the right price. It is that price which brings the best
ultimate value of the money invested in purchasing the materials.

6. Right Place : Besides obtaining the materials of the right quality and quantity from the right
source at the right price, it should be ensured that the materials are available at the right place.
Transportation and material handling costs are greatly affected by the selection of the right place
from where the materials are to be acquired. For minimising these costs, selection of right place
for the acquisition of material is of utmost importance.

7. Right Procedure: The right procedure to be adopted has to be formally developed for the pre-
purchase, ordering, and post purchase system.

8. Right Contract: Purchase order is a legal document that binds the selling company with the
buying company.
Q.6.Differentiate between Purchase order and purchase contract (Chapter 3) (CO2)

A purchase order (PO)

is an official document that buyers send to sellers to document the sale of products and services to be
delivered at a late date. This allows buyers to place orders with suppliers without immediately making
payment. The seller uses POs as a way to offer buyers credit without risk because the buyer is legally
obligated to pay for products and services when they’ve been delivered. Each PO has its own unique
number, known as the purchase order number, to assist both buyer and seller in tracking delivery and
payment. Blanket purchase orders are used to commit buyers to purchase products or services on an ongoing
basis until a certain threshold is reached.

What Information is on a Purchase Order?

A purchase order specifies:

• The product(s) or service(s) to be purchased

• Specifics of brand names, SKUs, model numbers, etc.

• Quantity purchased

• Price per unit

• Delivery date – when the order should be delivered

• Delivery location – where the order should be delivered to

• Billing address – where the seller should send the invoice to after delivery

• Discounts – any discounts applied to the order per contract terms with the vendor

• Payment terms – when the invoice will be paid, such as on receipt of delivery.

A procurement contract

is a written agreement between a buyer and a seller in which the buyer agrees to purchase goods or/and
services from the seller in exchange for payment transactions. A procurement contract states each party’s
obligations and usually includes detailed price lists, payment information, conditions of delivery and other
legal terms and conditions. There are many types of procurement contract, including contracts with firm-
fixed prices, time and materials contracts (T&M contracts), cost-reimbursable contracts, construction
procurement contracts, etc.

The purchasing department is responsible for selecting a type of procurement contract to be used to establish
relationships with vendors and suppliers. Depending on the items included in the procurement list, a type of
procurement contract is to be selected. The buying department will consider all the items to be procured for
current project by communicating with the project manager in order to define the item types, quantities,
services and desired delivery dates. The project team will assist the department by providing technical
specifications and requirements as to the items. Then the procurement management department will
negotiate with various vendors and solicit their bids to select the most appropriate vendor(s). Once the
vendor is selected, the department signs the agreement with that vendor and starts purchasing the items
according to the specifications and quantities, within the required time frame and at reasonable prices. After
the agreement is signed, the procurement management department reports to the project manager on
timeframes and delivery terms.
Q.7.Explain the process of purchasing the materials and the stages (Chapter 3) (CO2

Purchasing is the first phase of Materials Management. Purchasing means procurement of goods
and services from some external agencies. The object of purchase department is to arrange the
supply of materials, spare parts and services or semi-finished goods, required by the
organisation to produce the desired product, from some agency or source outside the
organisation.

process of purchasing the materials involves the following stages:

· Requisitioning: At this stage, the purchasing officer should receive an accurate description of
the goods or service • required. The requisition form by which a member of staff notifies
purchasing officer of a need for goods or services should be simple, but clear. The more accurate
and detailed the requisition form is, the more are the chances that the purchase will meet the
expectations.

· Financial approval: Here, the purchasing officer must be given the approval from a
responsible person. It should be done before the purchasing commitment is made, and the
purchasing system should ensure that this is done at the right time and by the right person.

· Market assessment: The purchasing officer receives an approved requisition and starts market
research in this stage. He should check that the item is not already in stock, that there is a
competitive market for the item, if there is a list of “approved suppliers” for the item, if a lower
price can be negotiated, and so on.

· Purchase decision: During purchase decision stage, after the purchasing officer completed the
market assessment and determined the method of purchase, he decides on the supplier or
suppliers. To avoid internal customer complaints or audit reproof, the decision must be well
documented to provide clear reasons as to why a particular supplier has been chosen.

· Ordering: At the ordering stage, the main instrument purchasing officer works with is an
order form. The order form is an official, numbered document which details the purchase
requirements and authorises the supplier to deliver the goods or services to the company. Also, it
can fulfil other important functions.

· Delivery: At the delivery stage, the purchasing officer controls the method, terms and time of
delivery established while ordering. In case there is a competitive transport market, wise
freighting decisions can lead to considerable cost savings.

· Receipting and accounting: At this stage, the purchasing officer should check whether the
quality and quantity of delivered goods or services are relevant to ones in the purchase order.
Usually, suppliers are not paid until the goods are checked however, this procedure should be
taken up without unnecessary delays to ensure that payment terms are met.

· Payment: At the payment stage, the purchasing officer makes sure that the payments are made
on the dates they are due, because maintaining good supplier relations is very important. Also,
he should control the terms of payment in case, they include previously negotiated discounts,
progress payments or postponement of payment during warranty period
Q.8.Discuss Supplier Quality Assurance Programme (Chapter4) (CO2)
This encompasses following Activities

1. Development of a strategic vision that details the scope and role of suppliers.

Every business needs to have a clear vision of planned development, growth, market focus, etc., over the coming
years. How suppliers will contribute to the organizational vision should be defined. The vision will outline areas
where the business will retain and develop core capabilities, equally, the vision will detail where the organization is
comfortable with outsourcing capabilities to suppliers.

2. Defining a planned approach to supplier quality assurance

. The process for supplier quality assurance needs to be defined and documented. Staff involved in supplier quality
need to be trained and fully competent. Supplier quality assurance procedures will cover supplier selection, supplier
auditing, supplier rating, supplier risk assessment and management, corrective & preventative action processes, the
creation and maintenance of an “approved supplier list”, approaches to communication, relationship building and
feedback provision.

3. Formalizing supplier risk assessment, risk reduction and risk monitoring.

Supplier activity will span a broad range of activities, some activities may be essential to organizational success,
others may have very low impact on short or long term success. The level of monitoring and control exercised will be
directly related to the criticality and potential risk associated with a supplier. Low risk suppliers will need minimal if
any monitoring and control. High risk suppliers will need extensive monitoring and control. With limited resources an
organization will want to focus their resources on those supplier activities which pose the greatest risk and offer the
greatest benefits to the organization

. 4. Implementing a supplier evaluation and rating process.

A transparent, consistent method of evaluating suppliers needs to be defined and implemented. All equivalent
suppliers should be subjected to equivalent methods of measurement and evaluation so that fact based analysis and
decisions on relative supplier performance can be established. The rating process and rating results should be
continually communicated to suppliers, so that there is an understanding of how suppliers are being monitored,
which will allow suppliers the opportunity to focus on the key metric areas and drive improvement within their own
processes.

5. Defining and pursuing supplier “ship to stock” & “ship to line” processes.

The objective of a supplier quality assurance program should be to achieve high quality, consistent, high reliability
suppliers, where there is a strong open relationship between customer and supplier organizations. Incoming
inspection, safety stock, etc., should have no place where this objective is being achieved. Where there is confidence
in a supplier, then products and services supplied, should go directly to where needed. This may be in the form of a
direct “ship to line” for raw materials, another example maybe a distributor who will manage finished goods
inventory in locations close to customers. High confidence in suppliers, will allow the opportunity for costs reduction
and efficiency improvement initiatives

. 6. Having in place an effective and efficient supplier corrective & preventative action process.

Unfortunately, in many instances problems can and do arise with suppliers. In such instances, an efficient corrective
and preventative action process must be in place. Where problems arise, they must be quickly addressed, the root
cause of the problems must be understood, and actions taken to ensure no repeat.
Q.9. Write short Notes on Elements of procurement cycle (Chapter4) (CO2)
Elements of procurement cycle :

Procurement refers to techniques, structured methods, and means used to streamline an organization's
procurement process and achieve desired results while saving cost, reducing time, and building win-win
supplier relationships. Procurement can be direct, indirect, reactive, or proactive in nature.
1. Determination of Requirements
The material requirements are identified by the user departments or material planning & control The
requirement passed manually to the purchasing department
2. Source Determination
Identifies the potential source of supply This is based on: a) Past Order b) existing long term purchasing
requirement
3. Vendor Selection
The selection of vendors by comparing the prices of various quotations Sending the rejection letters for the
non-selected Vendors.
4. Purchase Order processing
Creating Purchase orders by including the Vendor schedule agreements and contracts
5. PO Monitoring
Sending the reminders to Vendors in pre-defined intervals
6. Goods Receipt & Inventory Management
Confirming the receipts of the Goods Compare the Goods receipts quantities with the PO quantities.
Inform the limit over or under deliveries of order goods.
7. Invoice Verification
Invoices are checked for the accuracy of prices and contents Noting of quantity and price variances based
on purchase order & goods receipt data
8. Payment processing
Find accounting for vendor payments
Q.10. Elaborate the Role of Purchasing Committees/ Purchase Managers (Chapter 5) (CO2)
Role of Purchasing Committees/ Purchase Managers

Purchasing Manager

is an employee within a company, business or other organization who is responsible at some level for buying or
approving the acquisition of goods and services needed by the company. Responsible for buying the best quality
products, goods and services for their company at the most competitive prices, purchasing managers work in a wide
range of sectors for many different organizations.

Role Purchase Manager

• Design, plan and implement sourcing and purchasing strategies

• Work with suppliers, manufacturers and internal departments

• Maintain a database of approved suppliers

• Build and maintain relationships with suppliers and vendors

• Negotiate lower pricing

• Search and source potential suppliers and vendors

• Track, measure and analyze company expenditures

• Oversee the recruitment, hiring and training of new staff

Responsibilities of the Purchase Committee:

The roles and responsibilities of the PC should include;

• To analyse quotations provided by the logistics department, and provide recommendation for approval by the
person who signed the SR or someone delegated by them.

• To ensure all documentation is accurately completed.

• To ensure that the supplies/services quoted for comply with what was requested on the SR.

• Seek clarification from suppliers/service providers where necessary.

• To request technical input from relevant staff as required.

• Where the person with authority to approve the QEF has a query on the PC’s recommendation, this should be
directed back to the committee stating clearly the nature of the query.

• The PC should also be assigned a role within the supplier pre-qualification process

• In certain contexts, it may be appropriate for some or all members of the PC to be directly involved in the collection
of quotations

• Ensuring proportionality, transparency, accountability and fairness in the procurement process

• Ensuring all relevant documentation is prepared prior to PC meeting

• Involvement in the evaluation discussion

Q.11.Differentiate between Purchase V/S lease (Chapter 5) (CO2)
Purchase versus lease :

Buying an asset involves the transfer of the ownership of the asset to the owner upon
competition of the payment. Leasing does not lead to the transfer of the ownership of the
asset to the lessee. The lessor remains the owner of the asset. Along with the ownership,
the risks and rewards connected with the asset are also transferred to the owner in buying.
Risks and rewards are not transferred in leasing. The payment that is to be made in the
buying option is the cost of the asset. The same can be paid either by up-front payment or
by making payment in installments. In case of leasing, lease rentals are required to be paid
at periodic intervals such as monthly, quarterly or yearly. The lease rentals can either be
fixed or variable based on factors such as performance, sales, etc, or it can be a combination
of both. Buying is useful for medium or big sized entities that are capable of funding the
assets and blocking amounts in assets without effecting their operational profitability.
Leasing is advantageous for small-sized and start-up entities as they can enjoy the right to
use high costing assets without making the initial investment. In the financial statements of
a company, the asset which is bought can be shown in the assets side of the balance sheet
and the cost of the asset can be amortized over its useful life and amortization amount can
be claimed as an expense in profit and loss account. On the other hand, lease rentals paid
by an entity can be claimed as an expense in the financials. However, the asset cannot be
capitalized. A buying transaction involves two parties known as buyer and seller. While the
parties to a leasing transaction involve lessor and lessee. In case of buying, the
responsibility to carry out repair and maintenance and bearing the cost of the same lies
with the owner. However, in the case of leasing, the maintenance and repair costs are to be
borne by the party mentioned in the lease contract. Once the useful life of the asset is over
or it becomes obsolete, the same can be sold by the buyer and salvage value can be claimed
in exchange for it. However, in case of leasing, no such benefit is available to the lessee.
Q.12 Explain Letter of Credit and its types in detail (Chapter 6) (CO3)
Letter of credit Letter :

of credit is a type of payment term opted by importers and exporters. Letters of credit (LCs) are one of the most
secure instruments accessible to international traders. An LC is a commitment by a bank on behalf of the buyer that
payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as
confirmed through the presentation of all required documents. In other words, we can explain that a Letter of Credit
is an undertaking issued by a Bank, at the request of a importer, affirming the payment to the exporter on
presentation of complying documents as stated in the LC..

TYPES OF LETTER OF CREDIT

1. Irrevocable LC.

This LC cannot be cancelled or modified without consent of the beneficiary (Seller). This LC reflects absolute liability
of the Bank (issuer) to the other party.

2. Revocable LC.

This LC type can be cancelled or modified by the Bank (issuer) at the customer's instructions without prior agreement
of the beneficiary (Seller). The Bank will not have any liabilities to the beneficiary after revocation of the LC.

3. Stand-by LC.

This LC is closer to the bank guarantee and gives more flexible collaboration opportunity to Seller and Buyer. The
Bank will honour the LC when the Buyer fails to fulfill payment liabilities to Seller.

4. Confirmed LC

. In addition to the Bank guarantee of the LC issuer, this LC type is confirmed by the Seller's bank or any other bank.
Irrespective to the payment by the Bank issuing the LC (issuer), the Bank confirming the LC is liable for performance
of obligations

. 5. Unconfirmed LC

. Only the Bank issuing the LC will be liable for payment of this LC.

6. Transferable LC.

This LC enables the Seller to assign part of the letter of credit to other party(ies). This LC is especially beneficial in
those cases when the Seller is not a sole manufacturer of the goods and purchases some parts from other parties, as
it eliminates the necessity of opening several LC's for other parties.

7. Back-to-Back LC.

This LC type considers issuing the second LC on the basis of the first letter of credit. LC is opened in favor of
intermediary as per the Buyer's instructions and on the basis of this LC and instructions of the intermediary a new LC
is opened in favor of Seller of the goods.

8. Payment at Sight LC.

According to this LC, payment is made to the seller immediately (maximum within 7 days) after the required
documents have been submitted.

9. Deferred Payment LC.

According to this LC the payment to the seller is not made when the documents are submitted, but instead at a later
period defined in the letter of credit. In most cases the payment in favor of Seller under this LC is made upon receipt
of goods by the Buyer.
Q.14.Elaborate the term Classification of Material in detail (Chapter 7)
Classification of Materials

Classification‘ refers to the systematic division, grouping or categorization of materials or store items with reference
to some common characteristic. Classification of materials can be made on different bases namely nature,
manufacturing process, value, purpose etc.

For identification of materials being purchased and stored it is necessary that they should be properly classified. The
store incharge should make a close study of the materials during the process of storage for the purpose of their

(i) safe custody,

(ii) meticulous handling and storing, and

(iii) protection from damages, fire, pilferage, spoilage, etc. He is responsible for the classification of the materials.

7.2 Classification of Materials

The broad classification according to the materials

(i) nature,

(ii) use, and

(iii) service can be done in the following, classes

Basis Of Classification Of Materials

On the basis of nature, materials may be divided into:

(i) Direct Materials: Direct materials are those items of material which can be identified with a product or a group of
products in a manufacturing concern and can be easily measured and charged directly to the product. Such materials
form the part of the finished product e.g., timber in furniture, cloth in garments, bricks, sand and cement in building,
yarn in cloth etc.

(ii) Indirect Materials: These are the materials which cannot be traced to a specific product and cannot be charged
directly to the various products. These materials do not form part of the product. Examples of indirect materials are—
repair and maintenance stores, lubricating oils, cleaning materials, cotton rags etc.

7.2.2 On the Basis of Manufacturing Process

On the basis of the manufacturing process, stores are divided into:

(i) Pre-process Stock: These are the items of stores which are yet to be taken into the manufacturing process and are
obtained prior to the commencement of the manufacturing process or production. These include raw materials,
bought-out parts and assemblies, and stock in pipeline of materials in transit.

(ii) (ii) Intermediate Stock: Intermediate stock comprises the parts or assemblies which are manufactured within the
factory for use in the final product.

(iii) (iii) Finished Goods or Finished Products: As the name indicates, finished goods are the items which have been
duly manufactured in the factory and are ready for shipment or sale to the customers.

7.2.3 On the Basis of Value

On the basis of the value, the stores items may be divided into:
(i) Category ‘A’: Category ‘A’ consists of materials which constitute 5% to 10% of the total items in the stores and
represent 70% to 80% of the total stores value.

(ii) Category ‘B’: This category consists of materials which constitute 10% to 20% of the total items in the stores and
also represent 15% to 20% of the total stores value.

(iii) Category ‘C’: This category consists of cheap materials which constitute 70% to 85% of the total items in the
stores and represent 5% to 10% of the total stores value. Category ‘A’ items constitute costly items calling for greater
degree of control for preserving them. A reasonable degree of care may be taken to control category ‘B’ items while a
routine type of care may be applied to control ‘C’ category or residuary items.
Q.15. Explain Centralized and Decentralized stores with advantages and disadvantages (Chapter 8)(CO4)

Centralization and Decentralization of stores

Advantages Of Centralized Store:

1. A better supervision of store is possible because the store is located under a single supervision.

2. A better layout of store and its control are possible.

3. Less space is occupied.

4. Investment in stock is minimized.

5. It is economical for storing materials.

6. Safety of materials is possible according to the nature of materials.

Disadvantages Of Centralized Store :

The followings are the main disadvantages of centralized stores.

1. Delay in sending materials to the departments and branches.

2. Increase in material handling cost.

3. Greater risk of loss by fire.

4. Not suitable for a large company.

Advantages Of Decentralized Stores

1. Controlling a and storing function can be accomplished easily.

2. Delay in material handling will be eliminated.

3. Minimizes the chances of loss by fire.

4. No need of internal transportation costs.

5. Specific needs of individual departments can be easily fulfilled.

Disadvantages Of Decentralized Stores

1. Higher cost of supervision.

2. More space is required for individual departments.

3. Higher amount of investment is required.

4. More time for stock taking and taking.

5. Higher cost of staff and stationary.

Q.16.Elaborate the term Codification and its methods (Chapter 9) (CO4)

Systems of codification

The fundamental requirement for the codification of materials is to understand the basic features and characteristics of
all the relevant materials before classifying them into broad groups. Afterwards, materials managers need to sub-group
materials as per the codes in the logical progression of type, class, size, etc. Thus, each item is represented by a
number whose digits indicate the group, sub-group, type and size of the item. Typically, the first two digits indicate
the type and class of materials, such as building material, tools, furniture, stationery, oil and lubricants. The next three
digits indicate the size and characteristics of the item and the last digit is set aside for small variations.

Arbitrary System

As its name suggests, in this approach, an arbitrary number is assigned to an item when it reaches the warehouse.
This number is based on the serial number under which an item is received by the warehouse-keeper. In this system,
each item has a unique number allotted to it, but there is no logical pattern in the numbers allotted to similar items.
Therefore, it may happen that the codes of two related items may be apart by several thousand digit

Numerical System

In this system, only a simple numerical sequence is allotted for codification. It is a simple and easy-to-understand
system. In this main group is given a code known as simple number and sub group is given code as block number. If
any sub sub group is added then we provide slash between subgroup and sub sub group which is known as dash
number.

Mnemonic System

Mnemonic system uses a code designed with the aim of easy memorization. While this system is similar to a
numerical system for codification, it uses both numeric and alphabetic symbols in the code.

Decimal System

Decimal system of codification may said to be the universal in its working. It is simple and easy to codify
items under this system. Day by day, the number of items in almost every sphere of industry is increasing.
Hence, codifications should be such as may meet the increasing requirements and it should also be simple,
handy and easily adaptabl

Brisch System

The Brisch system consist of seven digits applied in three stages. The items are grouped into suitable
preliminary categories, such as assemblies, sub-assemblies, components and off the shelf items. After these
preliminary categories, items are grouped within the respective class in order to bring similar items together.
The Brisch system through it consists only of seven digits, is quite comprehensive as the basis is on logical
major groupings.

Kodak System

The Kodak system uses a 10-digit numerical code for the codification of the items. The logic behind major
grouping is based on the sources of supply. The number of categories is restricted to 100 and is based only
on the source of procurement. For example, if a screw is listed in a hardware catalogue and is available with
the hardware suppliers, then it can be categorised as a hardware item, but if it is listed as a part of
equipment, then it is categorised as a spare part.
Q.18. Write a note on Identification and control of obsolescence stock (Chapter 11)(CO5)

Control of scrap/ obsolescence :

The process of combing the stock records periodically through a computer and analyzing the movement of
items has been found to be very effective in many undertakings. For this purpose, the stores issues must be
combed and items must be classified as FSN of fast moving, slow moving and non-moving.

1. The item which has been issued at least once from the stores during the last year, can be classified as fast
moving.

2. Items issued from the stores at least once during the last five years may be classified as slow moving.

3. The remaining items have not been issued even once during the preceding years and may be categorized
as non-moving.

In this case, care should be taken to avoid the 'really insurance' items – as certified by maintenance
department. The year limitation and the time period can be varied according to the requirements of
individual organizations .

Scrap can be defined as a residue from manufacturing process , which cannot be economically used with in
the organization. The amount of scrap as a percent of the total production is certainly a measure of the
working efficiency of the personnel connected with the production. Scrap also arises due to a number of
reasons like, turnings, borings, spoilages, broken tools, etc.

Waste steel, irreparable materials are usually categorized as scrap. Thus scrap refers to unusable material,
whose value is only in terms of its material content. Only 8O per cent of metal that gets into the plant will
come out as finished product and the remaining 20 per cent is normally converted into process scrap.

Scrap is usually collected, properly segregated, and categorized into –

A. Ferrous Scrap

B. Metal Scrap

C. Waste

To control Scrap :

1. EPA ( Effective Point Advice) :- Periodical analysis of waste and scrap, with the reasons thereof, help to
reduce the incidence of waste. Some organizations have reduced obsolescence by introducing formal
documentation, known as effective point advice', while incorporating technical/design changes.

2. Cost Reduction Committees :- Some organizations have constituted cost reduction committees, with a
view to identify how an item becomes obsolete/scrap and how to prevent the same in future.

3. Art of salvaging :- Sometimes, the art of salvaging or recovering useful parts from the condemned
machinery and reclamation or bringing back to the original serviceable form like retreated tyre, is resorted
to, whenever economical.
Q.19.Write short notes on Process of Verification (Chapter 12) (CO5)

12.6 PROCESS OF VERIFICATION

In this Items are verified, By counting in the case of bearings, By weight in the case of sheets,
By measuring in the case of lubricants and so on. However, when large stocks of items such as
sand, scrap and ore fuel need to be verified, it is based only on estimates as the question of exact
measurement is ruled out. In the actual process of stock verification, the stores personnel should
be quicker identification of items. For instance, some items may be located in many places. By
virtue of their experience, only stores personnel will be able to locate them. So the material audit
people will have to work in close coordination with them.

Discrepancies must be discussed with Stores so that any omissions may be rectified and then
only should they be reported to top management. Major discrepancies may require a re-
verification. Such discrepancies may be due to pilferage on a large scale, wrong posting of
records and loose documents control. They require careful analysis and immediate corrective
measures. After discrepancies have been noted, stock adjustments must be made using standard
stock adjustment document duty signed by the appropriate authority.

After the approval, the stock records can be corrected. Surprise checks and verifications are
made by materials audit department to detect any fraudulent acts. Material audit plays the role

of a watchdog of stores, pointing out weak areas and remedying them. It assists in accurate
records – keeping and smoothes finalization of annual accounts.
Q.20. Write Short Notes on Business Ethics and its Importance (Chapter 13) (CO5)

13.2 BUSINESS ETHICS :

Ethics represent the eternal and prevalent moral standards, personal values, corporate code
of conduct and are generally part of the cultural tradition of a country. According to John
Huxley, major steps in the human phase of evolution are achieved by breakthroughs to new
dominant patterns of mental organization of knowledge, ideas, ideological beliefs, instead
of physiological or biological organization. Hence, this influences the socio-economic
environment, while the socio-economic ethos itself is determined by the interaction of
cultural ethics and psycho-social factors. Ethical values are inseparable from the pursuits of
ordered human society and dharma is the value that binds people together to form an
integrated organization - the society. The essence of our socio-economic ethics should be a
pervasive social awareness contributing towards efficiency and humanizing our outlooks
and actions. The conduct of an individual citizen or a corporate citizen involves the destiny
of one or more individuals or corporate bodies in the society and affects others
business ethics are important

1. To stop malpractices :- Some businessmen do business malpractices by indulging in unfair

trade practices like black-marketing, artificial high pricing, adulteration, cheating in weights and
measures, selling of duplicate and harmful products, etc. These business malpractices are
harmful to the consumers. Business ethics help to stop these business malpractices. Business
ethics are needed to improve the customers' confidence about the quality, quantity, price, etc. of
the products. The customers have more trust and confidence in the businessmen who follow
ethical rules. They feel that such businessmen will not cheat them.

2. Improve customer confidence:- Business ethics are needed to improve the customers'
confidence about the quality, quantity, price, etc. of the products. The customers have more trust
and confidence in the businessmen who follow ethical rules. They feel that such businessmen
will not cheat them.

3. Survival business :- Business ethics are mandatory for the survival of business. The
businessmen who do not follow it will have short-term success, but they will fail in the long run.
This is because they can cheat a consumer only once. After that, the consumer will not buy
goods from that businessman. He will also tell others not to buy from that businessman. So this
will defame his image and provoke a negative publicity. This will result in failure of the
business. Therefore, if the businessmen do not follow ethical rules, he will fail in the market. So,
it is always better to follow appropriate code of conduct to survive in the market

4. Safeguard Consumers Rights :- The consumer has many rights such as right to health and
safety, right to be informed, right to choose, right to be heard, right to redress, etc. But many
businessmen do not respect and protect these rights. Business ethics are must to safeguard these
rights of the consumers.
5. Protecting Employees and shareholders:- Business ethics are required to protect the interest
of employees, shareholders, competitors, dealers, suppliers, etc. It protects them from
exploitation through unfair trade practices.

6. Develops Good Relations :- Business ethics are important to develop good and friendly
relations between business and society. This will result in a regular supply of good quality goods
and services at low prices to the society. It will also result in profits for the businesses thereby
resulting in growth of economy.

7. Create good image :- Business ethics create a good image for the business and businessmen.
If the businessmen follow all ethical rules, then they will be fully accepted and not criticized by
the society. The society will always support those businessmen who follow this necessary code
of conduct.

8. Smooth functioning :- If the business follows all the business ethics, then the employees,
shareholders, consumers, dealers and suppliers will all be happy. So they will give full
cooperation to the business. This will result in smooth functioning of the business. So, the
business will grow, expand and diversify easily and quickly. It will have more sales and more
profits.

9. Consumer Movement :- Business ethics are gaining importance because of the growth of the
consumer movement. Today, the consumers are aware of their rights. Now they are more
organized and hence cannot be cheated easily. They take actions against those businessmen who
indulge in bad business practices. They boycott poor quality, harmful, high-priced and duplicate
goods. Therefore, the only way to survive in business is to be honest and fair.

10. Consumer Satisfaction:- Today, the consumer is the king of the market. Any business
simply cannot survive without the consumers. Therefore, the main aim or objective of business
is consumer satisfaction. If the consumer is not satisfied, then there will be no sales and thus no
profits too. Consumer will be satisfied only if the business follows all the business ethics, and
hence are highly needed.