Value

Engineering
and Quality
Assurance

BLOCK-4
MATERIALS MANAGEMENT
UNIT 12 Purchase System & Procedure and Inventory
Management
UNIT 31 Standardization, Codification and Variety
Reduction
UNIT 14 Waste Management

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Capacity Planning,
Work and Job
BLOCK 4 MATERIALS MANAGEMENT
Design & Value
Engineering Effective Material Management involves maximizing materials productivity.
This requires well coordinated and integrated approach towards various
problems involving decision-making with respect to materials. Unit 12
discusses various purchase systems and procedures. Problems related to
reducing inventories in the context of reducing uncertainties in demand and
supply and reducing excessive material varieties are also discussed in the
same Unit 12. The next Unit 13 discusses various standardization,
codification and variety reduction methodologies for improving materials
productivity and finally Unit 14 deals with, “how to minimize waste if it
cannot be totally eliminated”.

350
UNIT 12 PURCHASE SYSTEM AND Purchase
System and
PROCEDURE AND INVENTORY Procedure and
Inventory
MANAGEMENT Management

Objectives

After completion of this unit, you should be able to:

• appreciate the need of professionalism in purchase, define the scope and

objectives of the purchasing department of an organization and prepare
the appropriate formats of input forms to the purchase departments for an
efficient processing
• identify the demand characteristics of materials and their specifications,
management policies, legalities, etc. to identify the suitable purchase
procedures, decide on selection of suppliers, timing, price, quality and
quantity and decide on the forms, records and reports relevant to purchasing
• evaluate purchase department, evolve the procedures for vendor
evaluation, design the organizational structure for the purchase activity in
an organization and introduce computerization of purchasing activities.
• understand the meaning of inventory and identify inventory related cost
parameters, learn about various types of inventory policies, appreciate the
role of selective inventory management, know the exchange curve
concept for aggregate inventory planning and get a feel of some
mathematical models of inventory analysis
• perform sensitivity analysis on a type of model, compute safety stocks
• understand the problems of slow moving items, appreciate the role of
computers in inventory control and have a brief idea about recent
developments in inventory management.

Structure

12.1 Introduction: Role of Purchasing Function

12.2 Inputs
12.3 Restraints and Factors
12.4 Purchasing Decisions
12.5 Purchasing Organisation
12.6 Procedures, Forms, Records and Reports
12.7 Evaluation of Departmental Procedures
12.8 Vendor Evaluation and Rating
12.9 Computerized Purchasing Systems
12.10 Purchasing in Government Organisations
12.11 Introduction to inventory Systems
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Materials 12.12 Functions of Inventory
Management
12.13 Classification of Inventory Systems
12.14 Selective Inventory Management
12.15 Exchange Curve and Aggregate Inventory Planning
12.16 Deterministic inventory Models
12.17 Probabilistic inventory Models
12.18 Inventory Control of Slow Moving items
12.19 Recent Developments in Inventory Management
12.20 Summary
120.21 Key Words
12.22 Self-assessment Exercises
12.23 Further Readings

12.1 INTRODUCTION: ROLE OF PURCHASING

FUNCTION
From our daily life we know that every one of us depends on commodities
and services supplied by other individuals or organisations. Similarly, every
organisation, big or small, to varying extents, depends on materials and
services from other organisations. These materials and services are
obtained through exchange of money. This process of exchange is known
as purchasing. In the present context, we shall concentrate on the purchase
of materials. Materials constitute an important ingredient of inputs to the
activities of several types of organisations. Industries require raw materials,
components and equipments for their production, service organisations
require supplies, spare parts are required for maintenance operations, and so
on.

Furthermore, in most of the organizations, the value of materials as compared

to other inputs to the system is high. In an industry, on an average about 40 to
60 percent of the total money is spent on materials and related services.
Similar estimates about the large sums of money involved can be made for
public works departments, electricity boards, developmental agencies and
corporations etc.
With the increasing complexities in materials' characteristics and their usage
vis-a-vis increasing competition, the purchasing function has emerged as a
specialized organizational activity. In many organisations, it is regarded as a
supportive functions. However, in order to attain the maximum contribution
to the efficiency and effectiveness of an organisation, the purchasing should
be treated as one of the functional areas.
Objectives
Purchasing principle are usually epitomized as buying materials of right
quality, in the right quantity, at the right time, at the right price, from a right
source and also at the right place. The main objectives are:
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1) To make the user departments of the organisation from time to time Purchase
System and
aware of the range of the quality of materials available in the market and Procedure and
to maintain the right quality of purchased materials based on standards, Inventory
Management
technical specifications and suitability as determined by the user
departments.
2) To procure at the lowest possible cost consistent with quality and service
requirements.
3) To ensure the minimum possible investment in service operations related
to purchased materials, such as transportation, inspection, storing and
record keeping etc.
4) To maintain continuity of the supply to ensure that scheduled activities are
not interrupted.
5) To integrate the requirements of all departments of the organisation in
order to take the advantage of economy of scale wherever possible and to
also avoid duplications of purchases resulting in wastes and
obsolescence.
6) To create goodwill for the organisation through healthy buyer-supplier
relationship.

Purchasing Functions

In order to meet the above objectives of the purchasing functions, the requisite
inputs and possible restraints and factors must be identified. The purchasing
function is responsible for a host of decisions. Figure I depicts the purchasing
function.

In addition the outputs shown in Figure I, responsibilities of the purchasing

department include other related activities:

1) Vendor Rating and Development, (2) Make or Buy, (3) Value Analysis,
(4) Surplus Disposal, (5) Control and Audit, Maintenance and
Development of Procedures, Forms, Records and Reports.

Figure I: Purchasing Decision Function

353
Materials We shall discuss the relevant points with reference to Figure I in subsequent
Management
sections.

12.2 INPUTS
The Preparation of inputs constitute pre-purchasing activities and decide to a
great extent the success of the purchasing system. The inputs to purchasing
come in the form of requisition or indent from various departments and units
of the organisation. The success of purchasing department depends upon the
quality of these inputs and also upon the ability of the purchasing department
personnel to analyze the inputs to the fullest extent, The most important
inputs are: purchase requisitions and their accompanying product
specifications.

Purchase Requisitions or Purchase Indents

A purchase requisition is the primary and authorization document describing

the needed items. Most organizations have a standard requisition form for the
use of all its departments. The format, however, may change from
organization to organization.

The three most common types of the requisition forms are:

a) standard purchase requisition,

b) travelling purchase requisition, and
c) bills of materials (BOM).
a) Standard Purchase Requisition Form: This form is standard for a
given organisation. Different organizations may use different formats. A
standard purchase requisition form is used for non-recurring
requirements of items and normally contains the following information:
1) Requisition number (for identification, may use blocked codes
including a short code for the department, name of the requisitioner,
year, serial no. etc.).
2) Date of the requisition.
3) Name of the department/section.
4) Account to be charged (an appropriate head may be ticked out of
standard account heads).
5) Description and quantity of items.
6) Purpose of the items.
7) Date when items are needed.
8) Approximate unit price and the total cost.
9) Suggested suppliers' names and addresses.

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 10) Signatures of the requisitioner, head of the department, approving Purchase
System and
authority (as appropriate). Procedure and
Inventory
A sample format of standard requisition form is shown in Figure II. Space Management
may also be provided for the purchasing department to record:

1 Purchase order no.

2 Shipping instructions
3 Delivery date and quantity delivered.

b) Travelling Purchase Requisition: This type of form is used by stores

for recurring requirements for materials and standard parts. The
requisition form is in the format of a card for a single item containing the
information about the item (name and brief description, brief or coded
names of the user department, annual usage rate, re-order point, order
quantity) potential suppliers, records of receipts and issues, and so forth.
The card can be used for many requisitions. When the stock level drops to
or below the re-order point, the card is sent to the purchasing department
for placing the order with the supplier. Sometimes a separate requisition
form which is a brief version of standard form, is also used when it is not
convenient to send the card. To identify that the item is requisitioned, a
colored signal clip is attached with the card until the order is received.
The entire transaction can be handled with minimum delay and without
much of clerical paperwork.

A sample format of the travelling purchase requisition card is shown in

Figure III.

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Materials Travelling Requisition Form
Management
Material description: Order Quantity:
Part number: Re-order Level:
Annual usage: Suppliers: User Departments:
A ----
B ----
C-----
Requisitioned Received RFMARKS
Date Quantity Quantity Date Quantity
on hand requested

Figure III: Specimen Of Travelling Requisition Form

c) Bill of Materials: This is a list of all items for a finished product and is
prepared at the time of engineering drawing of the product. The bill of
materials and the production schedule are sent to the purchasing
department which computes the total requirements of each part for each
period of the production. This eliminates the necessity of typing
numerous requisitions for usually a large number of items.
Specifications

Specifications of an item intended to be purchased provide detailed

description of the characteristics and features of the item. These must be
provided by the requisitioning department by taking, if necessary, assistance
from the purchasing department which has acquired specialization in the
related matter. The major objectives of the specifications are: (1) to let the
purchasing department understand exactly the features required in the item,
(2) to let the supplier know exactly what the buyer wants, and

(3) to permit the easier, quicker and accurate verification of items upon
receipt.

Following are the common types of specifications used to describe and grade
the items:

a) Market Grade: Market grades are used in case of items bought and sold
in a market place. Grading is done by comparison with a standard
generally and widely accepted. Trade associations, commodity
exchanges and government agencies establish and regulate such grades.
Market grades are limited to natural products such as wheat, cotton, rice
and lumber, etc. The suitability and success of this system, however,
depend on the accuracy of grading and ability to ascertain the difference
by inspection.
b) Commercial Standards: These standards are used for the items above
commodity level because of their widespread use. When a material or
item is standardized with complete quality description and established by
customs, and accepted by the government, its agencies and industry in
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 general, the material or item is said to be commercially standardized. Purchase
System and
Standard specifications have been prepared for many items by the Procedure and
Bureau of Indian Standards. Commercial standards have proved to be of Inventory
Management
great assistance in interchangeability for the user, and simplification of
design, purchase procedure, inventory control and cost reduction. These
play vital role in mass production.
c) Trade or Brand Names: Trade or brand names are used by some
manufacturers to establish the identity of various models produced and to
protect them from other substitute. Branded products are simplest to buy,
procedurally. Specifying an item by brand name limits the scope of
competition and indicates a reliance upon the integrity and reputation of
the supplier to provide consistent quality. This system of specification
can be very economical for low-cost lot purchases.
d) Material Specifications: These specifications define the physical or
chemical properties desired in an item. Items such as metals (aluminum,
steel, copper, etc.), drugs, oils and paints are examples of products with
material specifications.
e) Performance Specifications: Rather than describing an item physically
or chemically, performance specifications describe the requirements
about the performance characteristics. The seller is free to choose the
materials, methods of processing and other details. These specifications
are commonly used in case of equipments, machines and tools etc. This
method, however, requires proper selection of supplier. The items
supplied are tested to see that stated performance features are met.
Purchase of computer system is a good example of this technique.
f) Samples: In case of special items of non-repetitive nature or where
quality requirement is not rigid or when the quantity of items is so low
that it does not justify the formulation of specifications, specifications
are established by specimens or samples. The supplier is supposed to
match the sample. Difficulty arises if the samples are subject to change,
physically or chemically. In case of mechanical parts for replacement
where the identification marks are not easily read, this method of
specifications by sample may be the only possible way of purchasing the
item.
g) Blueprints: A blueprint or engineering drawing is recommended for
accompanying a purchase requisition when close tolerance or a high
degree of mechanical perfection is required. Blue prints are used for
mechanical parts, and for construction and other projects.
h) Combined Specifications: Many products cannot be adequately
described by a single type of specification. In such cases, a combination
of two or more specifications may be used. Quite a few products for
industrial uses are so complex that a combination becomes a practical
necessity.
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Materials
Management
12.3 RESTRAINTS AND FACTORS
Restraints limit the alternatives available to purchasing department for its
decisions. Similarly, the type of purchasing procedure adopted will depend
on the factors related to the demand for the item. In this section, we shall
discuss some of these restraints and the demand factors.

Purchasing decisions are restrained by legal considerations, management

policies, resource availability and market conditions and so forth.

Legal Consideration

The purchasing department commits a good deal of finance when a purchase

order is placed. It is, therefore, necessary to have sufficient understanding
about the legal aspects of purchase. The Indian Sale of Goods Act, 1930 and
the Indian Contract Act of 1872 cover some of important legal aspects. The
important relevant laws are (1) Law of Agency, (2) Law of Contract, (3) Law
pertaining to Sale of Goods, including Patent Laws, Warrantees, Trademarks,
etc., and (4) Arbitration. Professional legal advice related to these laws is a
must for major contracts involving large sums of money or extending over a
long period of time like imports. Indian Chamber of Commerce and
International Chamber of Commerce have codified general business
terminology to minimize the friction between buyer and seller. In addition to
the legal precautions, emphasis should be on mutual trust and confidence.

Management Policies (Centralized vs. Decentralized Purchases)

Management may choose between centralized and decentralized organization

or a mixture of these two for purchases. Centralized purchasing has economic
advantage due to specialization and input standardization and thus, is an
attractive strategy for multi-plant and multi-location activities using related
items. In addition it offers:
1. Development of specialized purchasing skills.
2. Consolidation of order quantities which can result in quantity and cash
discount
3. Better control over inventory investment.
4. Less overlapping and duplication of effort.
5. Uniform quality and less variety of materials.

Centralized purchasing however, tends to be slow, rigid, and rule-bound, and

may turn out to be very costly for low-value purchases. Also, if item required
by various departments are unrelated and less frequently demanded, the
advantages of centralization may be lessened. In such cases, management
may decide to decentralize the purchase.

Resource Limitations

Finance is the major resource which can seriously influence the purchasing
activities. The corporate finance is shared by all the departments of the
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organisation and purchase department must operate within the allocated Purchase
System and
budget. This may lead sometimes to purchasing decisions somewhat less Procedure and
optimal than what it would have been had the purchase department been able Inventory
Management
to get the finance as and when desired. Thus sometimes the advantages of
quantity discounts might have to be foregone in favour of overall financial
planning of the organisation. Other resources such as manpower, storage
space, and handling equipments also place limitations on purchasing
decisions.

Market Conditions

The market conditions relate to short-term market situations which are

influenced by supply and demand as well as overall national economy. Thus
during shortage, the reliability of supply may be considerably more important
than the price. The purchasing strategies should, therefore, change to cope up
with these situations, and ability to anticipate these conditions measures, to a
good extent, professionalism acquired by purchase personnel.

Demand Factors

Based on the demand pattern, the items can be grouped into four basic
categories:

1) Items Used Continuously: Items that are continuously used with a fairly
predictable demand can be handled under blanket purchase orders (also
known as open-end purchase orders). A contract is negotiated with
supplier(s) for a fixed period of time (six months or one year) with
quantities, delivery dates, discounts etc. The price may be fixed, or kept
open in which case the market price at the time of delivery will be
applicable. Blanket orders conserve the time and effort of the purchasing
department,

2) Large Single Orders: The situation of large single orders usually occurs
in case of special machinery or other special goods, such as computers,
vehicles and buildings etc. Considerable planning and evaluation are
involved. The suppliers submit their bids with all relevant details and
purchases are negotiated by comparison and evaluation of the bids.

3) Small-value Purchases: The low-cost infrequently used items are

purchased usually by the concerned departments using petty cash or by
identifying some small local supplier. For the value involved, it is not
worth going through the complete cycle of purchase process.

4) Normal Purchases: Items other than mentioned above fall in this

category and are handled by the normal procedure, i.e., following the
complete cycle of the purchase process discussed above.

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Materials
Management
12.4 PURCHASING DECISIONS
With the purchase requisitions and specifications as inputs from the
departments and sections of the organizations, the restraints from the external
environment and the factors about the demand pattern, the purchasing
department has to make several decisions. Some are purely operational while
some relate to policy formulation having far-reaching impact on the long-
term success of the organisation. In this section we shall discuss the
operational decisions. Policy related decisions will be covered in subsequent
sections.
From purchase requisitions, the purchasing department generates purchase
orders which is a legal document. Purchase order forms vary in their format
and their routing through the organisation. A purchase order should contain at
least the following:
1) Purchase order number (for identification).
2) Date of issue.
3) Name and address of supplier receiving the order.
4) Quantity and description of item(s).
5) Required delivery date.
6) Shipping instructions.
7) Price and payment terms.
8) Other conditions governing the order.

A sample of the purchase order is shown in Figure IV

PURCHASE ORDER
No. …………………………………. Date: …………
………………………………….
………………………………….
………………………………….
Date.......
REF: Quotation No......................................... Dated ……………....
S. Description Quantity Unit Rate Amount
No. required Rs. P. Rs. P.
1 ……………. ……………. ……… ……….. ………
2 ……………. ……………. ……… ……….. ………
: Total Value

Payment Terms:
Delivery Terms:
Terms related to Sales Tax.
Other Information:
Copy to: All concerned departments Purchase Officer

Figure IV: Specimen of Purchase Order

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We shall now discuss some of the decision function leading to preparation of Purchase
System and
the purchase order. Procedure and
Inventory
Supplier Selection Management

Information on external sources of supply can be obtained from numerous

references:

(a) industrial advertisements of the supplier appearing in newspapers and

periodicals, (b) supplier catalogues, (c)supplier salesmen, (d) trade journals, (e)
trade directories prepared by government agencies and trade associations, (f) list
of suppliers approved by the government agencies, (g) enquiries through
advertisements or individual communications, and (h) records of the
organizations past purchases.

After compiling the information about suppliers for the needed item, relative
proficiency of each potential supplier must be assessed on the basis of
comparative quotations of price, quality, quantity, delivery, and other
services. Other relevant variables are the supplier's management capability,
technical ability, production capacity, quality of service, and financial
stability. The purchase order is then issued to the most promising supplier.
The information about other suppliers can be stored for future references.

Timing of Purchases

An organization is primarily interested in an adequate supply of material at

the best price consistent with quality requirements. Timing is not a critical
concern when the purchases are made in price stable market but it becomes
critical in unstable price market situation. Following approaches may be
adopted while trying to time the purchases in response to market conditions:

a) Speculative Buying: It involves purchasing in excess of foreseeable

requirements in order to make profit (or imputed profit) from rising
prices. Opportunities arise for such a purchase when price falls
temporarily and the organisation has sufficient working capital to finance
such speculative purchases.
b) Forward Buying: It involves purchasing in economical quantities
exceeding current requirements, but not beyond actual, foreseeable
requirements. This approach is often used when prices are stable over
time. It is adopted to obtain a favourable price, to get quantity discounts,
to secure items when they are available, and to protect against
prospective shortages. It, however, assumes the risk of increased
inventory holding cost which ties up working capital.
Hand-to-mouth Buying: This practice is resorted to satisfy only immediate
current requirements and may be uneconomical. This may be suitable in case
of high- value items. It is not recommended for normal operations.

361
Materials There are inherent risks in all these approaches in the environment of
Management
fluctuating market and price instability. Two techniques may be used to
reduce the financial risk.

a) Time-budgeting Purchases: Using time-budgeting purchases, an

organisation can frequently purchase an item over a long periodic cyclic
fluctuation at an average price very close to average market price. This is
accomplished by purchasing small quantities over short operating
periods of equal length.
b) Hedging: The organization purchases the required quantity on the spot or
open market and at the same time sells the same quantity in the future
market contracting to deliver at a future date in order to mitigate the risk
associated with fluctuating prices. This approach, however, can be used in
case of those items for which organized commodity markets or exchanges
exist.

Price Determination

Price per unit of an item comprises the unit purchase price, transportation
cost, handling cost, inspection, insurance and the administrative variable cost.
The right price simply means the lowest possible total price for the
organisation.

The typical approaches for price determination are published price lists,
competitive bidding, and negotiation. Price lists published by the suppliers
give initial indication of the price. In competitive bidding, the requests for
bids are sent to several suppliers. Usually (not always) the lowest bidder gets
the order. Normal practice requires at least three competitive quotations
wherever possible. Generally competitive bidding is most applicable to
standardized products that are widely used and are produced to stock.

Bids are normally secured when the size of an order exceeds some minimum
amount.

Negotiation is the approach resorted to when time is too short, the number of
bidders is too small, value of purchase is high, willingness to compete is
lacking, or the specifications are too vague. In such circumstances, the buyer
contacts the potential supplier and negotiates for the fair price and prompt
delivery. An advance planning and analysis are expected to bring satisfactory
results out of negotiation.

While determining the price, shipping terms should also be clarified. The
shipping terms established (1) who will pay the freight charges, (2) when
does the buyer take the legal title to the goods, and (3) who will prosecute
loss and damage claims against carriers. There are numerous terms of
shipment, but the most common ones are:

a) F.O.B. (Free on Board) Buyer's Plant: The buyer takes the title to the
goods when the goods are delivered at his plant and supplier pays all
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 transportation charges and processes all claims against the carrier for Purchase
System and
damages or loss of goods. Procedure and
Inventory
b) F.O.B. Seller's Plant: The buyer takes the title when goods are loaded Management
onto the carrier and he pays all transportation charges as well as
negotiates all freight damage claims with the carrier.
c) F.O.B.Seller's Plant—Freight Allowed: Legal responsibilities same as
in F.O.B. seller's plant, but the supplier pays the freight charges.
d) C.I.F. (Cost of Insurance and Freight) Contracts: The price includes
cost of materials, insurance and freight.
e) F.A.S. (Free Alongside Ship): Used in shipping by sea where supplier is
responsible for getting goods to the ship, and the buyer takes title as well
as all responsibilities thereafter.

Further, purchase contracts can be of fixed price (quite common), cost plus
contract (no definite limit to costs) or blanket order (for six months or one
year ) type.

Discounts: An important aspect of price determination involves discounts

that can be secured. Following types of discounts are common:

1) Trade Discount: To protect certain distribution channel when it is

economical to buy from the distributor rather than from the manufacturer.

2) Quantity Discount: For purchasing worth beyond certain amount of

money.
3) Seasonal Discount: For purchasing in off-season.
4) Cash Discount: For prompt and full payment.

Quality and Quantity

The process of determining right quality in purchasing implies striking a

balance between technical specifications and economic considerations. The
right quality has no absolute meaning but is specified in relation to a purpose.
As mentioned above most of the technical specifications are decided by the
requisitioning department. The purchasing department should be instrumental
in taking the quality decisions by making available various market grades,
trade names, commercial standards etc. and corresponding prices and sources
of supply to the requisitioning departments to enable them to specify quality
of items. Once the quality standards are specified, the purchasing department
makes arrangement in collaboration with the requisitioning department for
the inspection of the items after delivery. Sometimes, inspection is performed
by an organizational representative in the vendor's plant. On-site inspection
can save time and money while minimizing operational delays from the
inferior quality. For normal items supplied in lots, inspection for acceptance
is carried out by sampling.

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Materials Procedures should be established for handling inferior quality. Should the
Management
shipment be returned to the supplier and contract cancelled? Should the buyer
rework the item to an acceptable quality and bill the supplier? Should only
rejected items be returned for replacement and acceptable items retained?
Such issues must be resolved in advance to maintain a long-term relationship.

After determining the quality, the next important step is to determine how
much quantity to buy and when. For items continuously used, the purchasing
department can collect the projected demands from various departments and
then can incorporate these details into the blanket purchase order. For large
single orders, there is not much to decide about the quantity. Small-value
purchases are made as and when need arises. For normal purchases usually
two quantities govern the ordering decision: reorder-point and order quantity.
When the stock goes to or below reorder-point an order for the required
quantity is placed.

Reorder-point = Safety stock + average demand during the lead-time

A= fixed cost of ordering (Rs./order)

D= average annual demand (unit/year)

H = holding cost(Rs./unit/year)

Safety stock depends on the variation of demand and can be taken as 3 times
the standard deviation.(Safety Stock = 3Std Dev)

In case of production components, the determination of right quantity can be

linked with the concept of Materials Requirement Planning(MRP).

14.5 PURCHASINGORGANISATION
Purchasing department is usually under the General Manager at par with
other functional departments such as engineering, finance, accounts,
manufacturing and marketing etc. Sometimes it is kept along with other
related departments like stores, inventory and materials control, under
materials manager who in turn is under General Manager. Choice of an
organizational structure depends on the volume of work and value of the
purchase. A good structure encourages the assignment of specific
responsibilities, specific authorities and smooth chains of command of
delegation. It should lead to the development of policies that permit routine
decisions to be made by subordinates.

Within purchase department, the structure may be worked out using

following approaches:
364
a) Organization by Function: It is based on the principle that job should be Purchase
System and
organized so as to promote maximum possible specialization of skills. Procedure and
Total purchasing job is broken up on the basis of specialization, such as Inventory
Management
(1) processing of purchase requisitions, (2) floating enquiries, (3)
selection of suppliers, (4) preparation of purchase orders,(5) receipt
inspection and storing, (6) liaison with accounts section, (7) records
maintenance etc. Each job, or a group of jobs, is assigned to individual or
group of individuals who specialize in that work. This approach has
obvious advantages but suffers from the disadvantage of people getting
bored doing the same kind of jobs for a long time, and sometimes it leads
to bureaucratization.
b) Organization by Product: The items purchased are classified into
groups and each group is assigned to a team of personnel who specialize
in purchase of that particular type of the materials. For example, a team
may be specialist in buying raw materials, while other in components
and sub-assemblies, and so forth.
c) Organization by Location : This is applicable for the organizations
which are large and have several plants. Each plant may have a
purchasing department under the overall supervision of the central
purchasing department.
d) Organisation by Stage of Manufacturing: In case of manufacturing,
sometimes it is advisable to organise the purchase activities according to
the stage of manufacturing, e.g. raw materials, parts and sub-assemblies
etc.

14.6 PROCEDURES, FORMS, RECORDS AND

REPORTS
Procedure

By procedure we mean the entire set of steps in which a purchase transaction

is carried through from its inception to its conclusion. These steps together
form the purchase policy of an organization. Since there are wide variations
among industries, companies, organizations, products and personnel, it would
not be feasible to establish a single set of procedures which would apply to
all cases. The following basic steps, however, must be taken in one way or
another:

1) Receipt and analysis of requisition to assess the need and description of

requirement.
2) Selection of possible sources of supply.
3) Determining the time, price, quality and quantity.
4) Placing the order.
5) Following up and expediting of the order.
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Materials 6) Checking. the invoice and receiving the order.
Management
7) Processing discrepancies and rejections after inspection.
8) Communicating with accounts' section for payment.
9) Closing completed records.
10) Maintenance of records and files.

A schematic purchase procedure involving some of these steps is shown in

Figure V.

Figure V: A Schematic Diagram Of Purchase Procedure

Purchase Forms

Forms are very important tools for purchasing department to standardize the
communication with internal departments of the organization and external
agencies such as supplier and local government bodies, etc. The number of
forms required depends on the size of the organisation, the purchasing system
employed in the organisation, and the accounting and internal control
methods in effect. Normally there should not be too many forms as they
create confusion and red tapeism. Certain links of communication can be sent
in copies of some forms (as shown in Figure V) instead of individual forms.
The forms should incorporate the principles of good design to facilitate data
entry and data retrieval, to minimize the possibility of errors, and finally, to
be just economically sufficient in size and number of entries required.

Purchase forms for the following functions are usually employed (some of
which have already been exhibited).

1) Purchase requisition

2) Request for quotation

3) Purchase order

4) Follow-up
366
5) Receiving and Inspection. Purchase
System and
Procedure and
In addition, some other forms are also used by some large organizations. Inventory
Among such forms are: acknowledgement for quotation received, change of Management
order notice, purchase contract and sample test report etc.

Purchase Records

Since purchasing is a repetitive process, accurate records are a necessity for

efficient operation. These records provide a history of what has been done in
the past (supplier, price, discounts and quality of delivery etc.) and provide a
wealth of information upon which to base future decisions. Maintaining a
good-record system will increase operating costs but expectedly it should
bring some handsome savings in the long run.

Most purchasing departments maintain the following basic records:

1) Purchase Order Log: It contains a numerical brief record of all

purchase orders issued. It contains purchase order number, supplier's
name, brief description of purchase, total value of the order etc. The log
makes it possible to summarise several administrative data.

2) Open Order File: Contains the status of all outstanding orders. It

contains purchase requisition, purchase order and follow-up data.

3) Close Order File: Contains a historical data of all completed purchases.

4) Vendor Record : Contains the names and addresses of suppliers, materials

that a supplier can supply, delivery and quality records.

5) Commodity Record: Such record is maintained on each major material or

service that is purchased repetitively. It shows the list of suppliers, annual
usage rate, price, orders placed, orders received and disbursements to the
departments.

6) Contract File : Contains the purchase records of items under a term

contract. It is specially important when the contract is an open one, against
which orders may be placed.

Purchase Reports

Since the purchasing department handles a sizeable proportion of corporate

finance, it is desirable to have some summary reports periodically (quarterly,
half-yearly or annually) available to the management. Some of the important
reports are:

1) Total value of purchase.

2) Allocation of purchase value against major items.
3) Allocation of purchase value against each requisitioning department.
4) Budget for purchase for the next year.
367
Materials 5) Proposals for revisions of budget in current year.
Management
In addition, the purchasing department brings out the report for its own use.
They are:

1) Vendor Performance Report

2) Pattern of Consumption of materials.

3) Pattern of market prices.

12.7 EVALUTION OF DEPARTMENTAL

PROCEDURES AND VENDORS
Evaluation of the purchasing department is essential for the economic health
of the organization. At the same time, a good proportion of the efforts in
purchasing activities are not immediately visible and so the evaluation
becomes rather difficult. In any case, a consistent effort towards this aspect
must be kept on with the following objectives of evaluation:

1) Performance improvement of the department.

2) Aid to Organization.
3) Easy coordination amongst departments.

Establishing evaluation criteria is also very difficult. Following criteria can

be combined for an overall picture of purchasing performance:

1) Cost-Purchase Comparison (annual cost of purchasing department

divided by the total value of purchases).

2) Cost per Order (total purchasing department cost ddivided by the number
of orders).

3) Return on Investment (net savings per rupee. spent on purchasing).

4) Quality Criteria (measured by number of rejects).

5) Quantity Criteria (measured by down time).

6) Price Criteria (comparison with other organization or standard price

indexes).

The evaluation standards can be based on past performance, budgeted

performance, or performance of departments in other organization to judge
what is being done as compared to what should have been done.

12.8 VENDOR EVALUATION ANDRATING

It is not always easy to identify good suppliers. Records maintained or
procured from some other sources about the vendors help in their evaluation
and rating. Usually a combination of price, quality, quantity, delivery time
368
and service etc. giving relevant weightages to these factors is used to rate the Purchase
System and
vendors. 1n addition, a checklist can be used to facilitate rating from Procedure and
department standpoints. Some of the points are mentioned below: Inventory
Management
Reliability

1) 1s the supplier reputable, stable and financially strong?,

2) Are the supplier's integrity and ability above doubt?
3) Is the supplier going along with product improvement?
4) Is the supplier's competitive strength as to price and quality, etc. proved
by past experience?
Technical Capabilities
1) Can the supplier provide assistance as to application engineering?
2) Can the supplier provide assistance as to analytical engineering?
3) Can the supplier provide design assistance?
4) Can the supplier handle special needs and contribute to improve product
efficiency/basic processes?

Convenience

1) Can the supplier help reducing acquisition costs through personal visits,
telephone calls, incoming inspections, rejection of defects and spoilage,
etc?
2) Can he offer other related products?
3) 1s he qualified to help in solving difficult problems?
4) Does the supplier package his product conveniently?
Availability
1) Does the supplier assure delivery in time?
2) Are his stocks locally available, and or at short notice?
3) Is the supplier's location advantageous?
4) Can he plan his supply to minimise inventory?
5) Can he be depended on for a steady flow of materials?
After-sales Service
1 Does the supplier have a service organization?
2 Is an emergency service available?
3 Are parts available, when needed?
Sales Assistance
1 Can the supplier help building mutual markets?
2 Will he recommend our products?
3 Does the use of supplier's product enhance appearance of our products? 369
Materials Vendor Evaluation
Management
Recognizing that there is a need for having good vendor, it is essential that
supplies are obtained from vendors after an evaluation of his capabilities. The
buyer, who has to do the evaluation, is faced with two different situations;

1 Evaluating the performance before the vendor has delivered anything.

2 Evaluating the performance of vendor after the deliveries have been

made.

The latter one is normally called Vendor Monitoring and the former Vendor
Evaluation.

In case of Vendor Evaluation the buyer lacks the direct evidence on the
results achieved by the vendor and must get his information in other ways.
This includes (1) general reputation of vendor, (2) data from other buyers,(3)
vendor surveys.

Vendor Rating

Product quality submitted by vendors has always been evaluated and used as
a factor in making purchasing decisions. Recently, the evaluation has been
formalized by the use of vendor rating formulas which provide a quantitative
measure of vendor quality. These ratings are primarily meant to provide an
over all quality rating of a vendor for use in reviewing, comparing, and
selecting vendors. Vendor rating is not a tool for making decisions on
submitted lots.

To create a single numerical quality score is difficult because there are

several inputs, each involving its own unit of measure:

1 The lot quality, expressed as lots rejected versus lots inspected.

2 The parts qualities, expressed as per cent defective.
3 The characteristic qualities, expressed in numerous natural units, e.g.,
rupees per square cm., per cent active ingredient, MTBF (mean time
between failures) etc.
4 The economic consequences of bad quality, expressed in rupees.

The National Association of Purchasing Agents, New York, has published

three alternative vendor rating plans:

1 Categorical Plan: This is a non-quantitative system in which buyers

hold a monthly meeting to discuss vendors and rate each as plus, minus,
or neutral.

2 Weighted-point Plan: Each vendor is scored on various factors like

quality, price and service etc. These factors are weighted and a
composite rating is then calculated for each vendor. The details of this
performance evaluation scheme are as follows:
370
i) Quality Rating: Quality Rating for a consignment Purchase
System and
Procedure and
Inventory
Management
where,
Quantity supplied, Quantity accepted Quantity accepted
with concession, Quantity accepted with rectification
Quantity rejected and and X1 and are
weightage factors each less than
ii) Price Rating: Price rating for a consignment:

where, PL = Lowest price quoted, = Price agreed by supplier

iii) Delivery Rating: Delivery rating for a consignment:

Rating in excess of 100 shall be equated to

iv) Quantity Rating: Quantity Rating for a consignment:

Qty supplied within stipulated delivery time

RQty = ——————————————————— × 100
Quantity promised
Q
100
QP

v) Service Rating: Service Rating, , is to be assigned by Purchase

Department as per the following table for each consignment.

SI. No. Service Factor Max. Score

1 Cooperativeness and readiness to help in

emergencies

2 Readiness to replace rejected material

3 Providing support documents in time

4 Promptness in reply

5 Acceptance of terms without complaints

371
Materials vi) Composite Vendor Performance I Rating:
Management
VPR = f1RO + f2RP + f3RD + f4RQty + f5RS

where, f1 + f2 + f3 + f4 + f5 = 1

Fixing of Weightage Factors: In order to implement this scheme, it is

necessary to fix the weightage factors X1, X2, a1, a2, a3, a4,a5, f1, f2, f3, f4
and f5 as suited to the organization.

3 Cost-ratio Plan: This plan compares vendors on the total rupee cost for
a specific purchase. Total cost includes price quotation, quality costs,
delivery costs, and service costs. The final rating is in rupees of net value
cost. The net value cost is the product of the adjusted unit price and the
number of units. The adjusted unit price incorporates three cost ratios.

i) The quality cost ratio reflects the relative cost of quality.

ii) The delivery cost ratio reflects the relative cost of placing and
receiving an order. It also includes a promises-kept penalty based on
a ranking of past performance of vendors.
iii) The service cost-ratio reflects the technical, managerial, and field
service competence of the vendor.

All three of these plans recognize quality in the rating of vendors but the
rating is not restricted to product quality.

Vendor Relations

The ultimate objective in vendor quality assurance is the production of

materials which so adequately conform to the buyers, requirements that there
is no need for extensive acceptance or corrective procedures by the buyer.
The activities needed to achieve this objective include:

1 Communication of essential and helpful information, design,

specifications, standards and practices etc.
2 Communication of engineering changes, changes in specifications etc.
3 Developing methods for detecting deviations from standards promptly.
4 Helping the vendor in resolving quality problems. In case of vendors like
sub-contractors and ancillaries, rendering necessary technical assistance
as well.
5 Providing for use of vendor quality data in lieu of in coming inspection.
6 Using multiple vendors for major procurements of items.
7 Developing methods for identifying the qualified vendors, and for
eliminating those who are unable to meet the quality rrequirements.
8 Reviewing the performance of the vendor through vendor rating or other
plans and following up on the chronically poor vendors.

372
The guiding principle in vendor relations is the spirit of what is best for the Purchase
System and
partnership. The supplier must be made to realise that it is not sufficient to Procedure and
accept the returns willingly or to negotiate the disposition of materials not Inventory
Management
delivered to the specifications. The supplier should view such instances
objectively and work constructively with the buyer to correct the conditions
that brought about the delivery of unsatisfactory material or service.

12.7 COMPUTERISED PURCHASING SYSTEM

The attractive characteristics of computers such as high speed, huge storage,
quick retrieval accuracy, versatility and diligence on the one hand and
increasing complexities in purchasing on the other make an excellent match
for computerization of purchasing system. The declining cost of computer
system is an additive factor.

Although there are no complex arithmetic computations involved in

purchasing, the requirements of quick processing of requisition, follow up
and payment etc. find a computer of immense help. In this section, we shall
discuss broad outline of computerization of the system (not the computer
technology).

Let us visualize that the computer has the following files:

1 Inventory file for each item.

2 List of the suppliers (alongwith their performance history).
3 Budget allocation for each department.
4 Master purchase file condensing the previous purchases (item-wise,
department- wise, supplier-wise, price and quality etc.)

In addition, the computer has facilities to print and (may do so on a

preprinted stationery) the quotation request, purchase order, follow up and
inspection report etc.

When a requisition is received, the relevant data are entered through the
appropriate programme. Now a days, the screen and template designs are
proving much more convenient and fool proof. The computer checks the
inventory status of the items and if in-stock, items are issued and inventory
record is updated. If not in the stock, a programme finds the classification of
the item, that is, whether it is a continuously used item or a special item.
From the suppliers list, it finds the suppliers who can supply the items and
prints quotation requests. If it is a special item, then human intervention will
of course be needed to float the enquiries. The programme also checks the
budget of the department and account head to which the sum is to be debited.
The data from quotations are entered and the computer displays the
comparative statement. It will select the supplier and print the purchase order.
Upon receipt, it will update the inventory of the item. In addition, computers
373
Materials are very useful for monitoring the status of the purchase order to assist in
Management
follow-up actions.

So we see that computer performs all the actions displayed in Figure V and
generates the reports as desired above. In addition it is very useful in
processing exceptional reports, such as budget is over, orders not supplied in
time and payments not made in time etc.

It may be mentioned that most of the computers, specially small and mini-
computers, offer a host of utilities which are very useful for computerization
of tasks like purchase.

Computerization of purchase (such as receiving, issuing, instruction, stores,

inventory and handling etc.) can easily bring. the desire coordination among
other functions of materials management as well as among other departments
of the organization such as production, design, engineering, finance and
accounting, marketing etc. through suitable design of data base and
information systems.

12.10 PURCHASING IN GOVERNMENT

ORGANISATIONS
With the aim of providing the best possible service to the society out of the
limited resources and following its policy of mixed economy, the
Government of India has itself entered into manufacturing and other types of
commercial and trading activities. To gain the advantages of centralized
purchase all Governmental purchase operations are controlled by a central
agency, the Directorate General of Supplies and Disposal (DGS & D), New
Delhi headed by its Director General (Supplies and Disposal) under the
Ministry of Supply, Government of India. The DGS & D is responsible for
all purchase of materials of all kinds and functions as a purchasing and
inspection agency on behalf of:

1 All Ministries, attache's and subordinate offices of Government of India.

2 All State Governments and their departments.
3 All local bodies, such as, Municipal Corporations, District Boards, etc.
4 All Quasi-public Institutions, Statutory Corporations and Public Sector
industrial undertakings may also avail of the services of the DGS &D.

It also makes purchases from foreign countries through its subsidiaries like
the Indian Supply Mission in London and Washington. It also purchases from
East European and South-Eastern countries on trade agreements.

Organisation Set-up of DGS &D

The role of the DGS & D is very wide and, for smooth and efficient
functioning, it is divided into following wings:

374 a) Supply
b) Inspection Purchase
System and
c) Progress Procedure and
Inventory
d) Disposal. Management

The organisation has regional offices located at Kolkata, Mumbai, Kanpur

and Chennai. Besides, there is a regional-office at Mumbai exclusively for
textiles. The regional offices are empowered to purchase a large number of
items provided the individual demand for them does not exceed a pre-fixed
amount. All items financed through foreign loans are purchased by the HQ
irrespective of their nature and value.

In addition to the activities carried through its wings, the DGS & D performs
the following functions and has directorates and offices all over the country.

1 Public Relations and Publications.

2 Standardization and Quality Control.
3 Development of Indigenous Sources of Supplies.
4 Purchases from Cottage and Small Scale Industries.
5 Registration of Suppliers.
6 Termination, Suspension and Black-listing of Suppliers.
7 Rate and Running Contracts.
8 Payment Procedure.
9 Indent Processing.

12.11 INTRODUCTION TO INVENTORY

SYSTEMS
Concept of Inventory .

‘Inventory’ may be defined as ‘usable but idle resource’. If resource is

some physical and tangible object such as materials, then it is generally
termed as stock. Thus stock or inventory are synonymous terms though
inventory has wider implications.

Broadly speaking, the problem of inventory management is one of

maintaining, for a given financial investment, an adequate supply of
something to meet an expected demand pattern. This could be raw materials,
work-in-progress, finished products or the spares and other indirect materials.

Inventory can be one of the indicators of the management effectiveness on

the materials management front. Inventory turnover ratio (annual
demand/average inventory) is an index of business performance. A soundly
managed organization will have higher inventory turnover ratio and vice-
versa.

375
Materials Inventory management deals with the determination of optimal policies and
Management
procedures for procurement of commodities. Since it is quite difficult to
imagine a real work situation in which the required material will be made
available at the point of use instantaneously, hence maintaining, inventories
becomes atmost necessary. Thus inventories could be visualized as
‘necessary evil'.

Inventory Related Cost

An inventory system may be defined as one in which the following costs are
significant:

a) cost of carrying inventories (holding cost)

(b) cost of incurring shortages (stock out cost)
(c) cost of replenishing inventories (ordering cost)
a) Cost of carrying inventory :This is expressed in Rs./item held in
stock/unit time. This is the opportunity cost of blocking material in the
non-productive form as inventories. Some of the cost elements that
comprise carrying cost are—cost of blocking, capital (interest rate); cost
of insurances; storage cost; cost due to obsolescence, pilferage and
deterioration etc. It is generally expressed as a fraction of value of the
goods stocked per year. For example, if the fraction of carrying charge is
20% per year and a material worth Rs.1,000 is kept in inventory for one
year, the unit carrying cost will be Rs. 200/item/year. It is obvious that
for items that are perishable in nature, the attributed carrying cost will be
higher
b) Cost of incurring shortages: It is the opportunity cost of not having an
item in stock when one is demanded. It may be amounting to lost sales or
back logging. In the backlogging (or back ordering) case the order is not
lost but is backlogged, to be cleared as soon as the item is available on
stock. In lost sales case the order is lost. In both cases there are tangible
and intangible costs of not meeting the demand on time. It may include
lost demand; penalty cost; emergency replenishment and loss of good-
will etc. This is generally expressed as Rs./item short/unit time.
c) Cost of replenishing inventory: This is the amount of money and
efforts expended in procurement or acquisition of stock. It is generally
called ordering cost. This cost is usually assumed to be independent of
the quantity ordered, because the fixed cost component is generally more
significant than the variable component. Thus it is expressed as
Rs./order.

These three types of costs are most commonly incorporated in inventory

analysis, though there may be other costs parameters relevant in such an
analysis such as inflation and price discounts etc.

376
Importance of Inventory Management Purchase
System and
Procedure and
Scientific inventory management is an extremely important problem area in Inventory
the materials management function. Materials account for more than half the Management
total cost of any business and organizations maintain huge amount of stocks
much of which could be reduced by following scientific principles. Inventory
management is highly amenable to control. In the Indian industries there is a
substantial potential for cost reduction due to inventory control. Inventory
being a symptom of poor performance we could reduce inventories by proper
design of procurement policies by reduction in the uncertainty of lead times
by variety reduction and in many other ways.

12.12 FUNCTIONS OF INVENTORY

As mentioned earlier, inventory is a necessary evil. Necessary, because it
aims at absorbing the uncertainties of demand and supply by ’decoupling' the
demand and supply sub-systems. Thus an organisation may be carrying
inventory for the following reasons:

a) Demand and lead time uncertainties necessitate building of safety stock

(buffer stocks) so as to enable various sub-systems to operate somewhat
in a decoupled manner. It is obvious that the larger the uncertainty of
demand and supply; the larger will have to be the amount of buffer stock
to be carried for a prescribed service level.
b) Time lag in deliveries also necessitates building of inventories. If the
replenishment lead times are positive then stocks are needed for system
operation.
c) Cycle stocks may be maintained to get the economics of scale so that
total system cost due to ordering, carrying inventory and back logging
are minimized. Technological requirements of batch processing also
build up cycle stocks.
d) Stocks may build up as pipeline inventory or work-in-process inventory
due to finiteness of production and transportation rates. This includes
materials actually being worked on or moving between work centers or
being in transit to distribution centers and customers
e) When the demand is seasonal, it may become economical to build
inventory during periods of low demand to ease the strain of peak period
demand.
f) inventory may also be built up for other reasons such as: quantity
discounts being offered by suppliers, discount sales, anticipated increase
in material price and possibility of future non-availability etc.

Different functional managers of an organisation may view the inventory

from different viewpoints leading to conflicting objectives. This calls for an
integrated systems approach to planning of inventories so that these
conflicting objectives can be scrutinised to enable the system to operate at 377
Materials minimum total inventory related costs—both explicit such as purchase price,
Management
as well as implicit such as carrying, shortage, transportation and inspection
costs. Concepts and techniques useful in analysis of these problems to arrive
at sound policy decisions are the focal point of presentation in this unit.

12.13 CLASSIFICATION OF INVENTORY

SYSTEMS
Lot Size Reorder Point Policy

Under this operating policy the inventory status is continuously reviewed and
as soon as the inventory level falls to a prescribed value called ‘Reorder
Point’, a fresh replenishment order of fixed quantity called Economic Order
Quantity (EOQ) is initiated. Thus the order size is constant and is
economically determined. This is one of the very classical type of inventory
policies and a lot of mathematical analysis has appeared on this type of
policy. Figure VI shows the typical stock balance under this type of inventory
policy. The solid line in this figure represents the actual inventory held in
practical situation with a finite lead time, the lead time being defined as the
time delay between the placing of a replenishment order and its
subsequent receipt. The broken line indicates the inventory that would be
held in the ideal situation if no lead time existed. Lot size and reorder point
are the two decision variables involved in the design of the policy.

Fig VI. Typical Inventory Balances for EOQ-Reorder Point Policy

Fixed Order Interval Scheduling Policy

Under this policy the time between the consecutive replenishment orders is
constant. There is a maximum stock level (s) prescribed and the inventory
status is reviewed periodically with a fixed interval (T) .At each review an
order of size Q is placed which takes the stock on hand plus an order equal to
the maximum stock level. Thus order quantity could vary from period to
period. This policy ensures that when the level of stock on hand is high at
review, a smaller size replenishment order is placed. Figure VII shows the
typical stock balances under this fixed reorder cycle policy. S, the maximum
stock level and T the review period are the decision variable under this policy
378
 Purchase
System and
Procedure and
Inventory
Management

Fig VII. Fixed Reorder cycle Policy

Optional Replenishment Policy (s - S Policy )

This is very popularly known as the (s, S) policy. Figure VIII shows the
typical stock balance under this policy. The status of stock is periodically
reviewed and maximum stock level (S) and minimum stock level (s) are
prescribed.

Fig VIII- Typical Inventory Balances in (s –S) Policy.

If at the time of review, the stock on hand is less than of equal to s, and order
of size Q is placed so that stock on hand plus an order equals the maximum
stock level S. If stock on hand at review is higher than s, no order is placed
and the situation is reviewed at the time of next review period. S, s and T
(review period) are the decision variables in the design of such inventory
policy.

Other Types of Inventory Systems

There may be other policies which may be special cases of the policies
mentioned above or may be a combination of these policies. As a special case
of (s, S) policy we may have (S-1, S) policy or one-for-one order policy when
the maximum stock level may be upto S and whenever there is demand for
one unit, a replenishment of one unit is ordered. Such a policy may be quite
useful for slow moving expensive items.

379
Materials We may use a combination of lot-size reorder point policy and fixed interval
Management
order scheduling policy. Yet another variation of inventory policy could be
multiple reorder point policy where more than one reorder point may be
established.

Other types of inventory systems may be static inventory systems when a

single purchase decision is to be made which should be adequate during the
entire project duration. Such decisions are not repetitive in nature. Other
initial provisioning decisions may be with respect to repairable assemblies
such as engines and gearboxes etc. in a bus which may have to be overhauled
and for which we have to find adequate number of spare engines to be
provided initially.

The right choice of an inventory policy depends upon the nature of the
problem; usage value of an item and other situational parameters. We must
first select an operating policy before determining optimal values of its
parameters.

12.14 SELECTIVE INVENTORY MANAGEMENT

Role of Selective Inventory Control

One of the major operating difficulty in the scientific inventory control is an

extremely large variety of items stocked by various organizations. These may
vary from 10,000 to 100,000 different types of stocked items and it is neither
feasible nor desirable to apply rigorous scientific principles of inventory
control in all these items. Such an indiscriminate approach may make cost of
inventory control more than its benefits and therefore may prove to be
counter-productive. Therefore, inventory control has to be exercised
selectively. Depending upon the value, criticality and usage frequency of an
item we may have to decide on an appropriate type of inventory policy. The
selective inventory management thus plays a crucial role so that we can put
our limited control efforts more judiciously to the more significant group of
items. In selective management we group items in few discrete categories
depending upon value; criticality and usage frequency. Such analyses are
popularly known as ABC, VED and FSN Analysis respectively. This type of
grouping may well form the starting point in introducing scientific inventory
management in an organization.

ABC Analysis

This is based on a very universal Pareto's Law that in any large number we
have ‘significant few’ and ‘insignificant many’. For example, only 20% of
the items may be accounting for the 80% of the total material cost annually.
These are the significant few which require utmost attention.

380
 Purchase
System and
Procedure and
Inventory
Management

Fig. ix: ABC Analysis Fig. ixa: Classification of Items

22

A- 10% items claiming approximately 75% of annual usage(Rs)

B-15% items claiming approximately 15% of annual usage(Rs)

C -75% items claiming approximately 10% of annual usage(Rs)

Figure IX shows a typical ABC analysis showing percentage of number of

inventory items and percentage of average inventory investment (annual
usage value).Annual usage value is the demand multiplied by unit price thus
giving monetary worth of annual consumption. It can be seen from this figure
that 10% items are claiming 75% of the annual usage value and thus
constitute the ‘significant few’. These are called A- class items. Another 15%
items account for another15% annual usage value and are called B-class
items. A vast majority of 75% items account for only 10% expenditure on
material consumption and constitute ‘insignificant many’ and are called C-
class items. To prepare an ABC type curve we may follow the following
simple procedure:

i) Arrange items in the descending order of the annual usage value. Annual
usage value = Annual demand x Unit price.
ii) Identify cut off points on the curve when there is a perceptible sudden
change of slope or alternatively find cut off points at top10% next 20%
or so but do not interpret these too literally— rather as a general
indicator.

A very simple empirical way to classify items may be adopted as follows:

Average annual usage value

A-Class items

C-Class items

In between we have B-class items.

381
Materials Once the items are grouped into A,B and C category, we can adopt different
Management
degree' of seriousness in our inventory control efforts. A class items require
almost continuous and rigorous control, these are subjected to highest level of
control, supervision and management. Whereas B-class items may have
relaxed control, these are subjected to medium level of control, supervision
and management. C-class items may be procured using simple rules of
thumb, as usual and these are not subjected to elaborate control and
management since the cost of effort is not worth it.

Other Variants of ABC Analysis.

VED Analysis

This analysis attempts to classify items into three categories depending upon
the consequences of material stockout when demanded. As stated earlier, the
cost of shortage may vary depending upon the seriousness of such a situation.
Accordingly the items are classified into V (Vital), E (Essential) and D
(Desirable) categories. Vital items are the most critical having extremely high
opportunity cost of shortage and must be available in stock when demanded.
Essential items are quite critical with substantial cost associated with
shortage and should be available in stock by and large. Desirable group of
items do not have very serious consequences if not available when demanded
but can be stocked items for the sake of efficiency and less fatigue.

Obviously the % risk of shortage with the ’vital' group of items has to be
quite small- thus calling for a high level of service. With ’Essential' category
we can take a relatively higher risk of shortage and for’ Desirable' category
even higher. Since even a C-class item may be vital or an A-class item may
be ’Desirable' we should carryout a two-way classification of items grouping
them in 9 distinct groups as A-V, A-E, A- D, B-V, B-E, B-D, C-V, C-E
and C-D. Then we are able to argue on the aimed at service-level for each of
these nine categories and plan for inventories accordingly.

FSN Analysis

Not all items are required with the same frequency. Some materials are quite
regularly required, yet some others are required very occasionally and some
materials may have become obsolete and might not have been demanded for
years together.

FSN analysis groups them into three categories as Fast-moving, Slow-

moving and Non-moving (dead stock) respectively. Inventory policies and
models for the three categories have to be different. Most inventory models in
literature are valid for the fast-moving items exhibiting a regular movement
(consumption) pattern. Many spare parts come under the slow moving
category which have to be managed on a different basis. For non-moving
dead stock, we have to determine optimal stock disposal rules rather than
inventory provisioning rules. Categorization of materials into these three
types on value, criticality and usage enables us to adopt the right type of
382
inventory policy to suit a particular situation. In this unit,we shall mainly be Purchase
System and
developing some decision models more appropriate for A- class and fast- Procedure and
moving items. Later on a brief discussion on the inventory management of Inventory
Management
slow-moving items will be given.

SDE Analysis: Based on the problems of procurement, it classifies the items

into scarce, difficult and easy classes

HML Analysis: Based on the price instead of usage value, it classifies the
items into high, medium and low classes.

XYZ Analysis: Based on the value of stocks in hand(i.e. capital employed to

procure inventory) it classifies the items as X category whose inventory
values are high, Z category whose values are low and Y category in between.

SOS Analysis: This analysis is based on seasonality of items as

seasonal(available only for a limited period depending on the season) and off
seasonal.

12.15 EXCHANGE CURVE ANDAGGREGATE

INVENTORY PLANNING
Concept of Exchange curve

Exchange curve (or optimal policy curve) is an effective technique to look at

the inventories at an aggregate level in the organisation. 1t is a plot between
the total number of orders (TO) per year and the total investment in
inventories (TI) per year. The rationale is that for an optimal inventory policy
the trade-off between total inventory and total procurement effort as indicated
by the total number of replenishment orders per year must be made such that
if total number of order are prescribed, we minimize total investment in
inventories. Alternatively, if the total investment in inventories (TI) is
prescribed then a rational inventory policy must aim at minimizing (TO).
Optimal inventory policy must exchange (TI) for (TO) in such a manner that

(TI) constant

Value of constant is given by

2
1 N
K Di Vi
2 i 1

where Annual requirement of ith item, Unit price for ith item,

Thus a plot between (T1) and (TO) is a rectangular hyperbola and is called as

’Exchange curve' or ’optimal policy' curve, Figure X shows a typical

exchange curve for a situation where the ordering cost is not explicitly 383
Materials known. 1t shows that any point on the exchange curve is an optimal trade-off
Management
between investment in inventories and total number of orders.

Fig X. Exchange Curve

Uses of Exchange Curve

Exchange curve is an effective instrument for aggregate inventory analysis to

quickly determine the rationality (or otherwise) of our existing stock
provisioning policies.

We first plot the exchange curve by computing the value of K for a chosen
group of items. Then we determine the total number of orders (TO) and total
investment in inventories (TI) under current practice.

If the current practice is at point C (in Figure X) above the exchange curve
then it shows that our present procurement policies are not rational. If we
want to rationalize these then there are two possible paths-AC or BC; so that
we reduce inventory to B for the same ordering effort or reduce number of
orders to A for the same inventory. Thus an exchange curve is a useful device
at macro-level.

12.16 DETERMINISTIC INVENTORYMODELS

Classical EOQ Model

In this section we discuss some elementary inventory models with

deterministic demand and lead time situations. The purpose is to provide an
illustration of the mathematical analysis of inventory systems. The most
classical of the inventory models was first proposed by Harris in 1915 and
further developed by Wilson in 1928. It is very popularly known as EOQ
(Economic Order Quantity) model or ‘Wilson's Lot Size formula’.

When dealing with stocked items, the two important decisions to be made
are- how much to order and when to order. EOQ attempts to provide answer
to former while the Reorder point (RoP) provides the answer to the latter.

The following assumptions are made in the standard Wilson lot size formula
to obtain EOQ:
384
a) Demand is continuous at a constant rate Purchase
System and
b) The process continues infinitely. Procedure and
Inventory
c) No constraints are imposed on quantities ordered, storage capacity, Management

budget etc.
d) Replenishment is instantaneous (the entire order quantity is received all
at one time as soon as the order is released).
e) All costs are time-invariant.
f) No shortages are allowed
g) Quantity discounts are not available.

The inventory status under EOQ-RoP policy is continuously reviewed. Figure

XI (a) shows the behaviour of such a simple system whereas Figure XI (b)
shows the total system cost behaviour highlighting the conflicting trend of
ordering and inventory carrying costs. EOQ aims at minimizing total system
cost.

Fig. XI (a) Inventory behaviour under classical EOQ model

Fig. XI (b) Total Cost Curve Under EOQ model

Let us use the following notation in developing the classical EOQ model:

D = Demand rate; unit per year.

A = Ordering cost; Rs./order.
C = Unit cost, Rs. per unit of item.
r = Inventory carrying charge per year.
H = Annual cost of carrying inventory/unit item = r.c. 385
Materials TC=Total annual cost of operating the system Rs./year (objective function).
Management
Q=Order quantity, Number of units per lot (decision variable).

Since demand is at uniform rate average inventory is Q/2 throughout the year
and the total number of orders are (D/Q) per year. Thus total annual cost of
operating the systems consisting of carrying cost and ordering cost can be
written as:

D H.Q
TC A Differentiating TC w.r.t. Q, we have
Q 2

d TC AD H
dQ Q2 2

Equating it to zero, we get:

d 2 TC 2AD
Q0 EOQ 2AD / H also positive quantity
dQ2 Q3

Hence Q is minimum at Q Q0 2AD 0 optional

H EOQ {Q = Q = EOQ)
Putting the value of Q in the equation of TC, we get TC (min) =
2AHD =TC0
Due to convex nature of total cost curve, it is obvious that Qo(EOQ) gives the
global minimum total cost. It can also be seen that EOQ is obtained at the point
of intersection of ordering cost and carrying cost in Figure XI(b).

Some interesting insight may be obtained using this classical system:

i) If ordering cost is of high tendency, the optimal policy is to have high

EOQ thus raising average inventory level.
ii) If r or C are high leading to high value of H, the tendency will be to go
for smaller lot sizes.

r may vary from 0.15-0.30 and will depend on the nature of item, ‘A’ the
ordering cost should be marginal ordering cost while H should be based on
total purchased cost of the items.

Finite Replenishment Rates(See also Section 6.3)

We will now relax the assumption (d) of the classical EOQ model and permit
finite replenishment rate (staggered deliveries). When the rate of procurement
is P in units / year and the demand rate is D, in units/year, the build up of
inventory is at a rate (P-D) due to simultaneous consumption. It is obvious
that P>D for inventory to build up. Figure XII shows the inventory behaviour
with finite supply rate. The stock builds up to a maximum level I during
supply period ts, after which stock depletion takes place at rate D. It can be
Q Q D
seen that I= ts (P-D), ts = and thus TC A D Q H 1
P 2 P

386
 Purchase
System and
Procedure and
Inventory
Management

Time

Fig XII- Inventory Behaviour Under Finit Replenishment rate.

2AD
For minimum TC we get, Qo = and TC0 2ADH 1 D P
H(1 D P

Some interesting observations can be made about the behaviour of such

systems. These are:

i) Qo under finite replenishment rates are higher than Qo under classical

EOQ model for the same values of other parameters.
ii) Total system cost under optimal Qo is lower than corresponding total
system cost under EOQ model. Thus staggering the supplies always
reduces inventory level and total operating system cost provided other
cost parameters remain the same.
iii) As P→∞,Qo and TC0 obtained are same as in standard Wilson's formula
of instantaneous replenishment.
iv) At P=D,Q0→ ∞,TC→0. Thus if we can have a fully devoted reliable
supplier, then placing a single supply order of large size but matching
supply rate with the demand rate is the optimal decision. Under such a
system, no stocks are built, no replenishments are made, no shortages are
incurred. This would seem to be an ideal system towards zero-inventory
provided we know our requirements for sure and we have a dependable
source to supply us at the rate to match the requirement. This brings out
the role of dependable source of supply as an important asset to materials
management function.

Planned Backlogging

Let us now consider the effect of relaxing assumption (f) of classical Wilson's
model by permitting back logging (shortages or back ordering) at a unit
shortage cost of S in Rs./unit short/year. 1n such a case negative inventory
shows the backlogging position. The order quantity Q is partly used to clear
the backlogging level B and (Q-B) is the maximum stock level. Figure XIII
shows the inventory behavior under planned backlogging.

387
Materials
Management

Figure XIII: Inventory behavior with planned backlogging.

Inventory is maintained for duration ti and demands remain backlogged for

duration tb. Total cycle time of each replenishment cycle is

It can be seen that, average inventory = and average back order level

Total annual system cost

Optimal values of Q and B can be obtained for minimum value of TC as

follows:

2AD
*

388
 2AD S Purchase
Maximum stock level = Q* B* M* System and
H H S Procedure and
Inventory
Some useful observations could be made about the behaviour of inventory Management

system with planned backlogging as follows:

a) Total system cost is lower with planned backlogging than the

corresponding total system cost under classical Wilson's lot size formula.
Thus for a deterministic system with finite backlogging cost, it is
economical to plan for backlogging. It can be seen that at S→ ∞,, the
model reverts to classical EOQ model.
b) EOQ under backlogging is higher and maximum stock level is lower
than the corresponding values under classical Wilson's lot size model.
c) If S = 0 then B* = Q*=∞. This means that with no charge for back orders
one would keep piling up unfilled demand until the backlog gets
infinitely large. Then one single order would be released to satisfy all
accumulated demand. However, considering intangible cost of
backordering such as loss of goodwill etc. it is debatable whether there
are situations when the unit cost of shortages (S) is really zero.

Model with Quantity Discounts

Frequently, the vendors offer quantity discounts on bulk purchases to

encourage users to place orders in large quantities. Quantity discounts may be
all unit discounts or incremental quantity discounts. In all unit discounts
entire order quantity is purchased at lower unit price If order size is higher
than or equal to the stipulated conditions. In incremental case only quantity
exceeding the threshold point is charged at lower unit cost. The immediate
reaction may be to avail the discount and place bulk orders but if we see the
total system cost, our decision may be otherwise. There may be a single or
multiple quantity discounts. Figure XIV shows total system costs under four
discounts.

Fig XIV- Total Cost Curves Under Quantity Discounts.

The broken lines show the total cost curves without price break whereas solid
lines show the actual total cost if price break takes place. The larger the
number of price breaks, the more difficult it becomes to analyse the situation
as more alternatives are to be evaluated. The important point to be made in 389
Materials such situations is that individual situation is to be analyzed to judge which of
Management
the options is suitable to avail discount and place bulk order to make it
realizable— reject the offer and place small order at higher unit price or place
order at the minimum possible quantity at which discount becomes valid.
Any alternative is optimal if that minimizes the total system cost. For
example, it can be easily seen from Figure XIV that for this case the
minimum total system cost occurs at Q* = b3 is the minimum quantity at
which discount level4 is applicable.

Sensitivity Analysis

It may not be operationally very convenient to stick to EOQ if it is an odd

figure. Then one may like to know the repercussions on total system cost if
one deviated either way from Q0. This is done through sensitivity analysis. If
Qa is actual order quantity, Qa =b. Q0 where b is sensitivity parameter. If
b=0.8 then actual Qa is 1.025 Qo and if b =1.2 then Qa is 1.016 Q0. Obviously
the TC will increase over TC0 in either case. If we substitute Qa as bQ0 in
total cost expressions in the classical EOQ model, we can easily get the
following relationship.

Where TCa is actual cost with order size being Qa. 1t can be seen that at
b=1,p=1. 1f b is allowed to vary within 0.9 to1.10 then p will be within1.005
indicating that ±10% deviation in EOQ leads to less than half a percent
increase in TC. Thus TC is not very sensitive to EOQ and for operational
convenience we should be able to vary EOQ within ± 10% of Q0 without
adversely affecting total system cost.(Proof is shown below)
D 1
TCa A bQ.H
bQ 2

TC0 2DAH
2DA
and Q0
H
TCQ 1 b2
Solving we get
TC0 2b

Case I let b = 0.9

TCa 1.81
p 1.005
TC0 1.8

Case II let b = 1.1

TCa 2.21
p 1.005
TC0 2.20

i,c ±10% variation in EOQ amounts to 0.5% rise in total cost.

390
12.17 INVENTORY CONTROL OF SLOW Purchase
System and
MOVING ITEMS Procedure and
Inventory
Management
Nature of Slow Moving Items- As stated earlier, slow moving materials are
those which are not regularly demanded and their movement off the shelf is
very occasional, say once in six months or so.

Examples of slow moving materials can be—spare parts and some special
purpose materials for projects required only for a certain kind of project
activity. Inventory models valid for fast moving models are not applicable for
slow moving items due to lack of regular demand pattern. Generally slow
moving items are quite expensive and therefore one has to first decide
whether to keep them all in stock and if to keep them in stock then in what
quantity. Further difficulty of slow moving parts is the initial over-buying
decision which could take years to remedy the situation due to rarely
occurring demands.

Some Inventory Policies for Slow Moving Spares

We shall illustrate our approach to manage the inventory of slow moving

items with spares inventory problem as a substantial percentage of spares
come under the slow moving categories. Some of the strategies that could be
possibly adopted for efficient inventory management of slow moving spares
are as follows:

a) If spares are required only at pre-specified time such as at the time of

major scheduled maintenance for replacement, then it is better not to
stock them but to place procurement order sufficiently well in advance,
keeping lead ttimes in mind, so that these arrive just in time when these
are needed
b) If the part gives adequate warning of impending break down, then also the
best policy is to place an order the moment we get the warning. Adequate
warning refers to the case when the lead time required is less than the
warning time. This shows that major improvements in slow moving
inventory are possible by cutting down the lead times.
c) For inadequate warning spares we must keep the stock. Generally maximum
stock level will be 1 or 2 or one-for-one ordering policy is very useful. This
means placing an order for one spare when one is consumed.

12.18 RECENT DEVELOPMENTS IN

INVENTORY MANAGEMENT
Multi-echelon Inventory Systems

The inventory models described in the preceding sections pertained to

situations where the stock is located at a single place. In practice the stock
may be distributed over several locations. For example in a multi-project
391
Materials organisation, there may be a central store and a number of field stores or
Management
project stores. Such types of inventory systems are called ’Multi-echelons
inventory Systems'. Since the inventory in all the locations belong to the
same system, it is better to look at the inventory management for the system
as a whole rather than treating each storage location independently.
Recently a lot of attention has been given by the researchers to the analysis of
such multi-echelon inventory systems. Important decisions concerning the
design and operation of such systems are the number of echelons, number of
storage points at each echelon (level), location of central store, optimal
inventory policy to be followed by each storage location and stock
redistribution policies etc. For very expensive slow moving item such as
complex assemblies it may be desirable to locate the inventory at the central
store rather than at the project (field) store provided the item is standardized
and is usable at each locations. Detailed mathematical analysis of multi-
echelon inventory systems tends to be rather complex and is beyond the
scope of this unit.
Materials Requirement Planning(Refer Section 6.5)

12.19 SUMMARY
Purchasing, in ordinary sense, is the procurement of materials, components,
machines, equipments and supplies etc. on payment, In the present
environment of frequently varying price conditions and increasing material
variety and competition, the purchasing function needs professionalism to
reduce the total investment in purchase while making the required materials
of right quality available on time. The purpose of this unit is to present and
discuss various aspects of purchasing to achieve this professionalism. Major
topics discussed include: scope and objectives of purchasing, inputs,
environmental and management factors influencing the purchasing decisions,
purchasing decisions, procedures, forms, records and reports, procedure
evaluation, vendor evaluation, and organisation for purchasing. The
presentation and discussions are aimed at an efficient information flow
amenable for computerization.

An efficiently designed purchase system, with appropriate procedure, forms,

and information flow, can generate the reports with required contents
intended for specified destinations at various levels of management in the
organisation.

This unit has also attempted to highlight the role of inventory management in
the successful operation of any production or service system. Functions of
inventory and various inventory related costs parameters have been
identified. Various operating inventory policies have been described.
ABC/VED/FSN analysis concepts have been outlined to enable selective
control on inventories and the role of exchange curve to quickly detect the
irrationality of existing procurement practice has been highlighted. Some
392
deterministic models to determine EOQ are presented and sensitivity of Purchase
System and
classical EOQ model is analyzed. Impact of demand/lead time variability on Procedure and
reorder point and buffer stock has been explained. Problems of slow moving Inventory
Management
items inventory control has been identified and some guidelines have been
given. Recent developments in inventory management have also been
touched.

12.20 KEY WORDS

Average Down Buying: Policy of purchasing items at a moment when the
market dips sharply in the course of gradual price change.

Bill of Materials (BOM): A list of all items incorporated into a finished

product produced by the organization. It is prepared on the basis of
engineering drawing.

Bill of Lading: A document signed by the shipping agency acknowledging

the receipt of certain specified goods for carriage and embodying an
undertaking that goods will be delivered to the consignee.

Blanket (or Open- end) Purchase Order: A purchase order in the form of a
contract for continuously used items for a fixed period (usually a year) with
delivery dates and quantities. The prices may be negotiated for the whole
period or kept open in which case the prevailing market price applies.

Commercial Invoice: Statement showing the details of items and their

prices. It is a preliminary document sent by supplier to buyer and is used by
the buyer to check the goods received.

DGS and D (Directorate General of Supplies and Disposal): The central

purchasing organization of Government of India for public buying.

Forward Buying: Policy of purchasing items in economical quantities

exceeding current requirements, but not beyond actual foreseeable
requirements.

Hand-to-mouth Buying: Policy of purchasing items only to meet immediate

short term requirements.

Hedging: Practice of entering simultaneously into two transactions of a like

amount— a cash transaction and a futures transaction. The cash transaction
involves the current exchange of the buyer's cash for the physical goods and
the futures transaction involves the buyer's sale of a future contract on the
item with promised delivery at a specified date in future.

Letter of Credit: An arrangement by which the obligation to pay an exporter

is undertaken by a bank.

393
Materials Negotiation: Purchaser approaches the suppliers for price determination.1t is
Management
used when the number of bidders is small, value of purchase is too high and
time is too short for competitive bidding or willingness to bid is lacking.

Product Specifications: Detailed description of the characteristics and

features of an item. Some common types are: blue-prints, market grades,
commercial standards material specifications and performance specifications
etc.

Reciprocal Buying (or Reciprocity): Practice of giving preference in buying to

those suppliers who are customers of the buying organisation.

Speculative Buying: Policy of purchasing items in excess of foreseeable

requirements in order to make a profit from rising prices.

Standard Purchase Requisition: A requisition form used by internal

departments of an organisation to raise the indents for non-recurring
materials. The completed form is submitted to the purchase department.

Travelling Purchase Requisition: A requisition card maintained

continuously for each item and used to procurer currently needed materials
and parts. It originates from stores or inventory control section.

ABC Analysis: Arranging items according to annual usage value in three

categories A, B and C to identify significant few and insignificant many.

Backlogging: Process of accumulating unsatisfied demand till fresh

replenishment of stock is made available.

Buffer Stock: Extra safety stock needed to absorb variation in demand and
supply to provide cushion.

Carrying Cost: Cost associated with holding one unit in inventory for one
time period (year).

Exchange Curve: A curve indicating optimal trade off between total

inventory and total number of orders (also called optimal policy curve.)

EOQ: Economic Order Quantity; the quantity for procurement which will
result in minimum total system cost associated with carrying, ordering and
back logging.

FSN Analysis : Classification of items according to frequency of usage in

Fast, Slow and Non-moving groups.

Inventory Turnover Ratio: Annual demand divided by average inventory.

Lead Time: Time that elapses between placement of an order and actual
receipt of materials.

MRP: Materials Requirement Planning; a system of order scheduling for

dependent demand situation.
394
Multi-echelon Inventory System: A system of inventory control where the Purchase
System and
stock is located at different levels (echelons) at different locations. Procedure and
Inventory
Optional Replenishment Policy: An operating policy based on maximum and Management
minimum stock levels with periodic review, popularly known as (s,S) policy.

Ordering Cost: Cost associated with placing a purchase order expressed as

Rs./order.

Quantity Discount : A sales promotion strategy by vendor in which bulk

purchases can be made at lower unit prices.

ROP: Reorder point; the stock level when the action for replenishment of
stock be initiated by placing an order.

Service level: Percentage of times an item is available in stock when

demanded.

VED Analysis: Process of grouping items into Vital, Essential and Desirable
categories depending upon the criticality of the items.

12.21 SELF- ASSESSMENT EXERCISES

I Review Questions
1 What are the common objectives of the purchasing function?
2 What are the activities in the purchasing function which require high
consideration for legal aspects?
3 What are the approaches for price determination.
4 What are the various purchase forms and records usually employed by a
purchasing department?
5 How are vendors evaluated?
II Design Exercises (Purchase System and Procedure)

1 Design a suitable form to be used for preparing the comparative

statements to enable the purchasing manager to take the decision about
the best supplier.

2 Design an inspection report form to enable the purchasing department to

release various installments of the payment and to enter the appropriate
data in the supplier's file.

III Problems (Purchase System and Procedure)

1 An item is demanded at the rate of 20,800 units per year and the lead
time is 2 weeks. The unit price is Rs.50 and the holding cost is Rs.10 per
unit per year (i.e. 20 percent of the unit price).1t costs Rs.20 for each lot
of procurement. The standard deviation of the demand over the lead time
is 10. Calculate the order quantity, reorder point and safety stock and
prepare the purchase plan and the budget for the whole year. [Ans: 1year 395
Materials = 52 weeks assumed. Q=289, safety stock=30(3 times std deviation),
Management
Reorder point=830, number of orders=72(approx.)]

2 Consider a problem of comparing suppliers by weight point plan. A total

of 100 points are allocated among those factors considered important by
an organisation. The supplier with the largest number of weight points is
the most desirable. The following weights are used to compare the
suppliers: quality (40points), price (35points), and service (25 points).
Based on the data given below, rank the four suppliers:

Supplier Shipment Shipments Unit price Fraction of

received accepted commitments
fulfilled
A 500 480 10.00 0.94
B 600 560 9.60 0.90
C 80 78 1.20 1.00
D 200 192 8.90 0.98
[Ans: Fraction of commitment fulfilled i.e service rating factor
VPRA= f1 . RQ + f2 .RP + f3 . RS= 40 (480/500) + 35(1/1) + 25 (0.95) =96.90(III)
VPRB=94.83(IV), VPRC=99.00(I), VPRD=97.90(II)]
NOTE: Price rating factor (RP)= PL (100/P) =100 or 1
Where PL= Lowest price quoted
P= price agreed by supplier
It is assumed that for each supplier PL=P

Inventory Management

1 An organization is spending Rs.20 crores annually in procuring a total of

50,000 different items. Using simple empirical decision rule to group
items into A,B and C category, determine the cut off values of annual
usage that will decide whether the item should be A, B or C class item.

2 Write true or false against the following statements:

i) Perishable items should have higher value of inventory carrying

charge than imperishable.
ii) EOQ is smaller if backlogging is permitted under deterministic
demand.
iii) ±10% variation around EOQ is not very serious.
iv) Finite replenishment rates enable more economical operation of an
inventory system.
v) Buffer stocks have no relationship with the amount of demand/lead
time uncertainties.

396
3 In an inventory system the cost of placing an order is Rs.100/ order. The Purchase
System and
annual demand is 5000 units and the inventory carrying charge is 20% of Procedure and
the value per year. The item costs Rs.75 each. Find EOQ and total Inventory
Management
system cost if shortages are not to be allowed. [Ans: Qo=258, TC= Rs
3873]

4 If shortages are permitted and allowed to remain back logged at a cost of

Rs.60 per unit short/year, determine the EOQ , maximum stock level,
maximum backlog level and the total system cost under optimal
condition for the data pertaining to problem number 3 above.
[Ans: Qo=289, Max stock=231, Max backlog=58, TC=Rs 3464]

5 In an inventory system using classical EOQ model of Wilson, determine

the range of variation of EOQ if 1% increase in cost over the minimum
total cost is permissible. EOQ has been determined to be 400units.[Ans:
86.83% - 115.47%,(348 to 462)]

6 An item is demanded at the rate of 2000 units per year at a uniform rate.
Ordering cost is Rs.350 per order. Inventory carrying cost is 24% of the
unit price per year. The supplier has offered a unit price of Rs.100/ item
but he is willing to reduce it to Rs.95/ item if a purchase order of 1000
units or more is placed. Should you accept this offer? [Ans: TC(EOQ)=Rs
2,05,797 > Rs 2,02,100 therefore offer accepted]

7 “Inventory management for slow moving expensive items should focus

more on lead time reduction than any thing else”. Critically examine the
statement.

8 Who should be responsible for inventory control? Discuss this statement

from a departmental as well as top management points of view.

9 Consider the following situation:

An inventory system has four items to be procured from different sources.

Procurement action is based on each item to be considered individually and
independently. The following data have been obtained for demand and unit
prices for each item:

Item, i Demand Di (units/year) Unit price Vi (Rs./unit)

1 7500 200

2 4000 90

3 500 500

4 100 80

The inventory control manager argues vehemently that there is no way to

estimate ordering and carrying costs but he is prepared to accept that ordering
cost to fraction of carrying charge is constant for each item. Currently he is
397
Materials following an ordering policy of using a 4-month supply of each item. He is
Management
under pressure to cut down inventory by 25% and is therefore about to adopt
a policy of 3-month supply. Use exchange curve to show that he has better
options available to him. What should he do? [Ans: Adopt a policy of 3-
month supply]

12.22 FURTHER READINGS

Ammer, D.S.,. Materials Management and Purchasing, Richard Irwin, Ind.
Rept. edn., D.B. Taraporevala: Bombay.
Datta, A.K.,. Integrated Materials Management-A Functional Approach,
Prentice-Hall of India: New Delhi.
Gopalakrishnan,P.and Sundaresan, M.,. Materials Management- An Integrated
Approach, Prentice-Hall of India: New Delhi.
Tersine, R.J. and Campbell, J.H.,. Modern Materials Management, North
Holland: New York.
Westing, J.H., Fine, LV., and Zenz, G.J.,. Purchasing Management, John
Wiley,., Wiley Eastern Limited: New Delhi.
Dobler, D.W.,Lee.L.,Jr. and Burt, D.N.,.Purchasing and Materials
Management:Text and Cases,McGraw,Hill,Inc.:NewYork.
Hax, A.C., and Candea, D.,. Production and Invenotory Management,
Prentice.Hall Inc.: Englewood- Cliffs.
Lewis, C.D.,. Scientific Inventory Control, Butterworth: London.
Peterson,R.and Silver,EA.,.Decision Systems for Inventory Management and
Production Planning, John Wiley & Sons: NewYork.
Plossl, G.W. and Wight O.W.,. Production and Inventory Control, Principles
and Techniques, Prentice-Hall of India Ltd.: New Delhi.

398
UNIT 13 STANDARDISATION, Standardisation,
Codification And
CODIFICATION AND VARIETY Variety
Reduction
REDUCTION

Objectives

After completion of this unit, you should be able to:

• familiarise with the need and role of classification, codification and

standardisation in the context of materials management from the viewpoint
of planning, control, purchase, inventory, stores, and so on
• appreciate the importance of standardisation in variety reduction
• design and implement codification system for situation other than
materials
• design and implement standardisation for procedures and forms etc. in
information system design
• introduce computerisation of data system for materials using codification and
standardisation.
Structure

13.1 Introduction
13.2 Classification of Materials
13.3 Codification
13.4 Standardisation and Variety Reduction
13.5 Summary
13.6 Key Words
13.7 Self-assessment Exercises
13.8 Further Readings

13.1 INTRODUCTION
Almost all organisations use and store a large number of items. Some of these
have relatively longer life, for example, buildings, plants, equipments, machines
and furniture etc. while others, in a rather large number, running into lakhs,
spend shorter time with the organisation, for example, materials, components,
tools and stationery, etc. We shall concentrate mainly on materials and parts.

Several departments of the organisation require the information about the

materials and their requirements are usually different from each other. For
example, it is easy to visualise how the information requirements may have
quite a wide spectrum by departments such as receipt, storage, inspection,
design, engineering inventory, accounts and marketing etc. about a given
material. Some departments are interested in the size, volume and shape, some
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Materials in engineering properties, some in financial aspects while some in the
Management
commercial value of the material. It is quite likely and perhaps sometimes
purposeful for an item to get identified by different names by different
departments of the organisation. A dustbin may be known as refuse container,
rubbish-box, etc. An electric company in UK had as many as 118 names, for a
simple screw with a diameter of 3/8 in. and length of 6 in., depending on type of
usage and the department using the screw. These may, however, result in
confusion and tend to duplicate ordering or overstocking. The problem could
really explode beyond dimension when the number of items is very large (as
usually it is) and there are several external organisations, suppliers,
wholesalers, retailers and customers etc. who prefer to call an item by different
names: some by brand name, some by manufacturer reference number, some by
engineering name, and some by serial number.

Quite often, a good number of products or parts may differ very marginally or
insignificantly from each other in dimensional or some similar characteristics.
The functional requirements will be equally well served if all such parts are made
to the same common specifications. This is called standardisation. The
process of standardisation logically leads to reduction in the number of
part, variety that an organisation handles.

For the purpose of convenient understanding of the topic, we shall discuss

classification, codification, standardisation, and variety reduction in that order.

13.2 CLASSIFICATION OF MATERIALS

Classification is defined as the process of arranging things in groups or
classes according to their resemblances and affinities and gives
expression to the unity of attributes that may subsists among a diversity
of individuals.

When there are numerous items handled by an organisation, their planning

and coordination becomes extremely. difficult, if not impossible, if each one of
them is handled separately. Classification of materials involves grouping of items
according to some criteria. We are quite familiar with classifying our domestic
articles into clothes, kitchenware, electric appliances, electronic gadgets,
furniture, professional articles, entertainment articles, groceries, consumables
and non-consumables etc. It is easy to see that an item may belong to more than
one class depending on the criteria used. For example, a radio set is an electronic
gadget as well as a non-consumable and entertainment article.

What is the purpose of classification? Following are the major objectives of

classification:

i) To devise procedures of planning and control for materials in a class.

ii) To devise purchase procedures, inspection methods, and storing and issuing
procedures, common to all materials in a class.
400
iii) To devise accounting and evaluation procedures common to all materials in a Standardisation,
Codification And
class. Variety
Reduction
Obviously; the concentration of effort according to class system would be
more efficient and effective as compared to diluted effort corresponding to each
individual item.

Following are the major classification systems.

On the Basis of Nature of Materials

a) Raw Materials: Raw materials include all those materials which are
purchased from the original producer or other manufacturers and are used
directly in producing the firm's product. For example, cotton and yarn are
raw materials for cotton textile mills for they help in producing the final
product- cloth. Cotton is purchased from the original producer, i.e., cotton
grower, whereas yarn is procured from other manufacturers, i.e., spinners.
The product in one trade may become the raw material for the other trade.
b) Machinery and Equipment: All the machinery, both power and hand-
driven, such as, presses, lathe machines, typewriters, electric motors, fans,
and other machines used in the production and other departments, is
classified as such. Tools also come under this category, and they are issued
on loan basis to the various departments for a definite period, generally till
their life-time.
c) Consumable Items: Those materials used in the manufacturing process
which cannot be used for the second time for the same purpose since their
utility for the purpose in question has ceased and the shape changed are
referred to as consumable items. Coal, coke, mineral oil, lubricants, cotton
waste, paints, varnishes, oxygen, stationery items like pencil, paper, carbon
papers and ink, etc., are a few examples of the consumable items.
d) Chemicals: Substances obtained after undergoing certain processes in
chemistry according to a formula devised for the purpose may be known as
chemicals. They should be stored, preserved and issued very cautiously after
a careful scrutiny and proper analysis since their use involves risk even to
life. Items like carbide, acids and salts etc., can be classified under the
head.
e) Inflammable Items: Items highly susceptible to fire, such as petrol,
kerosene, films, dopes and paints, fall under the category. Due to their
hazardous nature, they are generally stored as far away as possible from the
main building with complete fire-fighting arrangements standing by.
f) Fuel Stock: These are also consumable items. But there is a slight
difference between the two in respect of their uses. When an item is
directly used for production and is a fuel for the furnace and, oven etc., it is
classed as fuel stock. It is a necessary item for completing, rather starting,
the manufacturing process and of course one of the important items in a
manufacturing unit, but it can never constitute the finished product.
401
Materials However, sometimes it may rightly be taken as a raw material. Coal is a fuel
Management
stock but is also a raw material for an iron and steel industry.
g) Furniture: Movable contents of a house or a room like chairs, tables,
almirahs, benches, and stools, etc., are furniture items. Their repairs,
renewals and replacements also require proper maintenance of records since
they are issued temporarily on loan basis.
h) Scrap Materials: On the expiry of life of a particular item, the residue is called
the scrap. Such material as is left over as waste in the process of production is
also known as scrap. The scrap is sold out in the market so as to fetch some
value out of it. Kabadis are the best purchasers of scrap in this country.
i) Packaging Materials: These include all kinds of wrapping materials, such as
paper, wood carvings, sawdust and straw, etc., containers like boxes, crates,
drums and bottles, protective coatings, such as, wax, grease, as also plastic
cans and bags, etc.
j) General Items: This category include all those items which do not fall under
any of the above categories of items. In a large undertaking, general stores
section is separated from other stores under an independent incharge since
they cover a large number of items,.which, although not directly linked with t he
production processes, are required for day-to-day smooth and efficient
running of the enterprise. Cleaning materials like soap, brasso, brooms,
uniforms for the staff, stationery and all other items of general use are handled i n
the general stores department.

On the Basis of Usability of Materials

a) Serviceable, Unserviceable and Obsolete Items: Serviceable items are

those items which go temporarily out of order. Añer repairing and
replacement they may become serviceable again and their usable life may
thus be extended for some more time. Unserviceable items are those
items which have outlived their life. No amount of repairs, renewals or
replacements can bring them back to their usable life. They are thus fit
only for disposal as scrap. Obsolete items are those items which have gone
out of date because of new inventions in design and use, etc., and which
cannot profitably be used again.
b) Finished and Semi-finished Items: Finished items are those goods which
have been manufactured in complete form by the production department
and are ready for sale. On the other hand, semi-finished items are those
which have not yet been manufactured completely and need some further
processing before they can be put to sale in the market. They are thus taken
back by the production department for turning them into a final product.
c) Dead Stock Items: This term is generally used in government
departments. Furniture, equipments, machinery and other items which have
some definite life and which cannot be written off before the expiry date of
their life are classed as dead stock items. They are issued temporarily on
loan basis to their users.
402
d) Unused Items: These are not stock items in the real sense of the term. Standardisation,
Codification And
These cannot be used in the production unit, because, being defective, Variety
damaged beyond use, or because of some other reason they have been Reduction

rendered unusable. Sometimes unused stocks are mistaken for scrap and
unserviceable materials. But this is not the real position. Scraps are
generally left out items from the production unit. They cannot be used, as
either they are less in quantity or less in measurement, weight, etc. But
unserviceable items are movable items which have been rendered
unserviceable by constant use and are now beyond repair.

13.3 CODIFICATION
From the above, it is clear that there must be some means of identifying the
items accurately, uniquely, and adequately. These identification attributes are
achievable by appropriate classification and codification. We are familiar with
the PIN Codes used by Post and Telegraph Department to uniquely and concisely
identify various regions of the country. Codification is a process of
representing each item by a group of numbers and alphabets indicating
the group, the subgroup, the type and the dimensions of the item. Many
organisations in the private and public sectors, railways and DGS & D, have
their own system of codification. The number of digits in a code may typically
be somewhere between eight and thirteen. The role of these digits and some
fundamental principle of codification can be understood from the following
example:

digits 1-2 major group (raw materials, spare parts, subcontracted items, hardware
items, packing material, tools, oil, stationery, etc.),

3-4 subgroup (ferrous, non-ferrous, etc.),

5-7 dimensional characteristics (length, width, head diameter, etc.),
8 minor variations,
9 location of storage,
10-11 user departments of the organisation,
12 product or product lines requiring the item,
13 any other information of inventory accounting and purchasing etc.

This is merely an illustration of codification, process. The codification process

can be based on other aspects also. (i) The codes could be obtained by the nature
of items in grouping all items. of the same metal content, say ferrous, non-
ferrous etc. (ii) The system could be built sometimes on the basis of the end-
use of items, say maintenance, spinning, foundry, welding, packing and
machine shop, etc. (iii) The codification could be thought of on the basis of
source of purchasing where items obtained from one source are grouped
together. (iv) The codification could also be built on the basis of alphabetical
listing.
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Materials Objectives of Codification
Management
1n order to identify the items correctly and logically for processing the
transactions, and to facilitate easy location in stores, a codification system should
be evolved with the following objectives:

a) Accurate and Logical Identification: A separate code is allotted to each

of the items available in the storehouse indicating the size, quality, price,
usability, special characteristics and specification, etc. This distinguishes
one item from the other, even if nomenclature is the same, helps in
accurate identification and eliminates any possibility of confusion. For
example, a lead pencil of black colour, HB quality, for writing purpose and
within a price range of Rs. 3.00-3.50 may have its code as 07.39.1236
where
07 indicates the group (viz stationery item)
3 indicates pencil
9 indicates lead pencil,
1 indicates lead colour (viz. black)
2 indicates quality (viz. HB)
3 indicates use (viz. writing)
6 indicates price range (viz. Rs. 3.00-3.50).
b) Prevention of Duplication: All items are separately codified and are
arranged in a logical order. Similar materials are grouped together (such as
stationery items) and given a code (e.g., 07). Once a code is allotted to a
particular group, it is a decision on a organisational level and in no case it
is changed. Since each item has a different code number and various items
are kept in different bins at different places, there can be no duplication in
placing the orders, and no piling up of the materials will take place in
the storehouse.
c) Standardisation and Reduction in Varieties: For codification,
grouping of identical items is done and it enables the stores to examine the
entire range of items. It facilitates the elimination of those varieties in
place of which other varieties of the like quality can be used; this reduces
the number of varieties to the minimum. 1f proper standardisation is
achieved and the number of items is kept at the minimum, it will
considerably reduce investment in various items as well as the cost of
inventory carrying.
d) Efficient Purchasing: The filling up of purchase requisition, and
preparation of purchase orders are simplified by the use of codes which
easily indicate the materials required. Buying instructions to the suppliers
become easy and quick if there is proper understanding of codification
by the supplier. The entire operation of the purchase department can be
organised according to grouping of items. 1n centralised purchasing such a
404
 system serves well in dealing with the purchase orders and in taking Standardisation,
Codification And
advantage of bulk purchasing. Variety
Reduction
e) Efficient Recording and Accounting: Codes lead to effective stock
control, efficient recording and result-yielding accounting. Chances of
mistakes are minimised. Pricing and valuation also become more
accurate and reliable.
f) Easy Locating, Indexing and Inspection: The materials in the store have
to be kept in an order which may facilitate their placement and location.
For making it less time and energy consuming, items may be arranged
according to the codes allotted to them. This would also facilitate a quick
and efficient inspection.
g) Easy Computerisation: Small size computers such as Personal Computers
(PC) are finding their wide applications in materials management. The
computers work better with codes than with long description of
materials.

Essential Features of Codification System

There could be many possible arrangements of coding symbols (numbers,

alphabets, etc.) which can be used to design a code. However, a great deal of
thought must go into the coding scheme if it is to satisfy a variety of users. The
following considerations must be kept in mind when designing codes.

a) Brevity: The codification system should avoid long and unwieldy

description. This implies that the codes should consist minimum possible
number of digits. The size of the code would normally be dictated by the
number and range of items and the number and types of applications of the
data pertaining to the item. For example, for the pencil code 07.39.1236,
the last digit representing the price range may be deleted if such
information is not needed.
b) Logical: The coding system should be logically fit for the needs of the
users and the methods of data processing employed. For the example of
pencil code, the last digit representing price range should have an
increasing price range with the value of the digit increasing, that is, a value
of digit as 8 may indicate a higher price range of say Rs. 4.00-4.50
c) Flexibility: The code design should be flexible to accommodate changes
without disturbing existing codes. We are familiar with the library coding
system in which codes do never get disturbed by addition of new books and
all books to come in future are easily accommodated by the existing code
structure.
d) Uniqueness: Each code must be a unique representation for the item it
identifies. For example, an inventory item number or employee
identification code must identify one and only one inventory item or
employee.

405
Materials e) Easy Understandability: The code structure must be easily understood by
Management
various users. It should be as simple, practical and meaningful as possible.
f) Proper Choice of the Coding Symbols: While a code may have
numbers, alphabets or a mixture of both, certain precautions should be
taken in selection of the symbols. Characters with similar appearances
should be eliminated. For example, the letters 0, Z, I, S and V may be
confused with the numbers O(zero), 2, 1, 5 and U, respectively. Where
possible, letters that sound the same should be avoided (for example, B,
C, D, G, P and T or M and N).
g) Layout of Codes: The layout of code should be equal in length. For
example a code 001-199 should be preferred over I-199. Codes longer
than four alphabetic or five numeric characters should be divided into
smaller segments for human judgements.
h) Capacity of a System: When calculating the capacity of a given code
for covering all situations while still maintaining code uniqueness, the
following formula applies: C=Sp , where C is total available code
combinations possible, S is the number of unique characters in the set, and
p is the number of code positions. For example a 3-digit code with
numbers 0 to 9 will have 103=1,000 unique code combinations. The size
of code structure, therefore, should be decided before hand by anticipating
the requirements of the unique combinations.

CODIFICATION Systems

There are several systems possible for codification of materials depending on

the choice of coding symbols-alphabets, numbers, or a combination of
alphabets and numbers (alphanumeric). Two popular and fundamental systems-
Brisch and Kodak- are described here.

A) Brisch System: The Brisch system is based on numbers from 0 to 9 and

consists of blocks (typically three) separated by decimal points. The blocks
are assigned specific classification of the materials. The first (left most)
block represents the major classification (such as raw materials, packing
materials, finished materials, etc.), the second block represents the next
level classification (such as nature, use, quality, characteristics, etc.) while
the third block represents the lowest level classification (such as quality of
the material, its components; its facial appearance, price, availability,
source of supply, marketability and frequency of use, etc.). The following
example for stationery items explains the Brisch system. The major item
stationery is classified into four groups based on the nature of each item and
each group in turn is divided into further subgroups.

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 Standardisation,
Codification And
Variety
Reduction

The system proceeds in the following steps:

a) The materials to be coded are grouped together so as to form a major

group. The grouping should be accurate and unambiguous, and should not
overlap. It is based on the classification system described in the previous
section,
b) After the classification or preliminary grouping, the materials are further
divided and sub-divided as explained earlier. The basis of these division
and sub-division describes the materials in as great detail as possible and
simultaneously making them relevant to the users.
c) The codes are assigned in three blocks separated by decimal points. Total
number of digit could be any as per convenience but a general figure is 7
(seven).

B) Kodak System: The Kodak system has been developed by Eastman Kodak
Co. of New York, USA and is supposed to be a very comprehensive system.
It consists of 10 digits of numerical code. The basis of the major or first
level grouping is source of supply. All materials are divided into 100
basic classifications based on purchase and procurement considerations.
For instance, a bolt is listed as hardware item if this is listed in hardware
catalogues and available with hardware suppliers. If this bolt, however, is
available only as part of the machine, it will be available under
maintenance. Each class is divided into 10 sub-classes. For example, if
class 20 represents cutting tool, then 200 represents drills, reamers and
counter bars, etc. The steps of classification can be understood by the
following example:
407
Materials Step I. Major (First Level) Classification (based on purchase and procurement
Management
consideration)

First Two Digits Materials

Class Code
00-20 Raw Materials
21-35 Machine and Mechanical Equipments
36-40 Mechanical Products and Loose Tools
41-49 Electrical Products and Electrical Equipments
50-52 Laboratory Equipments
53-68 Chemicals, Equipments, and Miscellaneous Chemical
Products
69-78 Office Equipments and Other Misc. items.
79-83 Furniture and Fixtures
84-87 Fuel Stock
88-93 Semi-finished and Finished Product
94-99 Miscellaneous

Step II: Sub (Detailed) Classification of materials in class code say 53-68
(Chemicals, Equipments and Miscellaneous Chemical products).

Second two Digits sub-class code Materials

53 Tanks
54 Pumps
55 Mixers
56 Packaging Machines
57 Plastic Materials
58 Paints
59 Lubricants
60 Acids
61 Solvents
62 Phosphorus
63 Sulphur

Step III: Further Sub-classification indicating kinds in a particular sub-class of

materials say 60 (acids).

Third Digit (0-9) Sub-sub-class Materials

code
600 Carbonic Acid
601 Sulphuric Acid
602 Sulphurous Acid
603 Unassigned
604 Unassigned
605 Unassigned
606 Unassigned
607 Unassigned
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608 Unassigned Standardisation,
Codification And
609 Unassigned Variety
Reduction
Step IV: The kind of the materials may further be divided into different types.
For example 601 indicating sulphuric acid may further be classified indicating
the type of the sulphuric acid. For example, one may classify the types of
sulphuric acid as,

86 ….. Type A
87 ….. B
88 ….. C
89 ….. D
90 ….. E
91 ….. F

This level has two digits while the previous level had only one digit. This is
possible. There is no strict pattern to be followed about the number of digits and
the level of the classification. The two digit code in Step IV indicates suitably the
percentage of acid content.

The process of classification and sub-classification may continue to

accommodate subsequent levels of variations. The code may have some digits
left unutilised for future expansion. For example a code 601-87-XX XXX
indicates chemical product (53-68 group) and in that acid (60), and in that
sulphuric acid (1) and in that Type B (87). The digits XX -XXX are left for
future expansion.

Colour Coding Systems: Sometime colour codes are used to identify the
items. Common instances are, red, blue and green in an electric cable, red and
green in electric switches, and so on. Some organisation use the codes locally
such as to identify the steam, water and other pipes while there exist some
national or international colour coding system. The limited number of colours
available narrows the scope. This is however quite an effective system
providing easy identification.

Drawback of Codification

(1) Sometimes the codes become so complicated that it is difficult to

understand.

(2) Coding of some characteristics like tolerance level of finish and degree
of automation is quite problematic.

(3) Wrong identification may be possible if codes are not clear, colour
codification may create confusion amoung materials(and meaningless
for colour blind workers)

(4) It may be confusing to the vendors to handle two or more organizaions

simultaneously to supply them the same article having different codes
by them as per their own convenience and requirement.
409
Materials (5) Some alphabets used in the codes such as I,U,S,B and O may be
Management
wrongly confused with the similar notations like 1(one), V(vee), 5(five),
8(eight) and 0(zero) respectively and that may lead to erroneous
identification of artcles.

13.4 STANDARDISATION AND. VARIETY

REDUCTION
Standardisation is the process of formulating and applying rules for an
orderly approach to a specific activity for the benefit and with the
cooperation of all concerned in particular for the promotion of optimum
overall economy taking due account of functional conditions and safety
requirements.

A standard is defined as a model or general agreement of a rule

established by authority, consensus, or custom, created and used by
various levels of interest. For instance, an individual may be the starting point
of using standard and then his department will use the.sarne standard to suit
its needs. The firm may similarly prepare, by consulting different
departments. a standard for guiding the activities. Related industries in. the
industry group may also prepare industrial standards. At the national level, by
consulting manufacturers, scientists users and government departments,
national standards are evolved. Such national standards lead to the evolution
of international standards. The standards could cover a variety of industries,
such as engineering, textile, chemical, pharmaceutical, agricultural as also
education. The topics covered under standards can include purchase contracts,
forms, sampling, testing and safety measures, etc.

In the context of materials, we are already aware of use of standards for

specifying the items, especially for purchase purposes. Market grades,
commercial standards and performance specifications are the popular examples
of wide range applications of standardisation.

Standardisation enables the materials manager to achieve. overall economy

and ensures inter-changeability of parts. With standardisation more than one
manufacturer can supply and this will imply better availability, better price and
better delivery. Standardisation also implies routinising purchase efforts, less
stock and hence less obsolete items. It also Means less inspection efforts; as a
matter of fact, many organisations do not check routine items bearing ISI marks
in a very detailed manner. but resort to inspection of only a small fraction of
items. It is also possible to enter into rate/running contract with standard items.
This facilitates the production planning and economic lot-sizing at the
supplier's end.

The process of standardisation logically leads to simplification or variety

reduction. This implies reducing unnecessary varieties and standardising to the
most economical sizes, grades, shapes, , colours, types of parts and so on. In
410 large organisations handling lakhs of item, it is quite possible that there are
several items having very little variation in quality, dimension or functional Standardisation,
Codification And
effectiveness. The items can be analysed for their frequency of usage over the Variety
past few years. Such frequency or movement analysis would bring out items Reduction

which are seldom used or not used at all. On the basis of this analysis, the
organisation could get the standards to replace these items. The process of
standardisation and variety reduction can be summarised as foollows:

1) Prepare the list of all items used to make the final product. The list can be
made out of the design blue-print in case the product design is just over but
production has not started, or from the actual record of consumption in
case the product is in production.

2) Classify the items according to their performance (or function) and

dimensional characteristics.

3) Group the items with similar functional characteristics and then subgroup
according to major dimensional values. For example, all bushes around 5
cm dia will be in one group while all around 3 cm dia will be in other group
and so on.

4) For a group of items with similar functional characteristics, study the

dimensional features. In case of large number of items, several item with
the same or similar functional requirements, are likely to show the
dimensions clustered in a very closed vicinity. Analyse the effect on
performance of items if all items are made to the most representative
(mean or mode of the frequency distribution) value of the dimension. If
the performance characteristics are within satisfactory zone, these items
are produced of the same dimension. It may be noted that this is a very
important step in variety reduction.

5) Check from the national or international standards if there is already a

dimension existing equal to the most representative dimension found after
analysis in the previous step. If such a dimension is found, the items can be
deemed as standardised. If an exact dimension is not found, select the
closest dimension and study again the performance of all items in the
group around this dimension. If performance is acceptable, the item has
been standardised according to national or international standards. If the
performance is not satisfactory, organisation will adapt a local standard,
the dimension being of the representative value.

In addition to the dimensional and performance characteristics of materials,

standardisation concepts are equally meaningful for the forms, procedures and
reports etc. in relation to purchase, stores, and even planning activities.

Benefits of Standardisation

The important benefits are summerised as below:

(i) Standardisations helps reduce inventory items increasing efficiency

411
Materials (ii) It helps in evolving better means of communication. Common standards
Management
for weights and measures and traffic signals etc. ensure better
communication in our world of innumerable different cultures and
languages.
(iii) It ensures interchangeability and thereby convenience to use various
products. Plugs and sockets, batteries and bulbs of different brands are
interchangeable.
(iv) It aims to ensure safety of human life. A helmet is an example of
personal protective equipment(PPE) used by industrial wokers,
firefighters and 2-wheeler riders.
(v) Standards also aim to protect health. Standards on infant milk food and
infant formulae ensure that there are adequate nutrients for optimal
growth of the child and in standards for food products, limits are set for
elements injurious to health.
(vi) Standards have been developed to safeguard the environment from
pollution by prescribing limits for toxic emissions from industries and
automobiles.
(vii) Hallmarking on gold and silver ornaments effectively arrests the fraud
and forgery on the making and sales of precious jewellery.
(viii) The specification of items can be more clearly spelt out, making quality
control firm
(ix) In a developing economy like ours, where the need is to promote
exports, insistence on standards helps in creating confidence in the
international market.
(x) With standardization also comes overall economy, reduction in cost,
minimization of human effort and conservation of essential materials.

By using national standards, it is easier to locate sources of supplies and in the

case of machine parts, the replacements can be obtained easily. It could also be
used in advertising for the products as well as spare parts.

Effective steps have been taken in a number of organisations in India for cost
reduction in the number of stores items. The aim of standardisation should be to
have uniform standards for similar items, and the standards evolved should
take cognizance of the indigenous availability of the materials to the
maximum extent possible. With these broad national objectives in view,
Bureau of Indian Standards(BSI) has developed and promoted more than
20,000 standards covering raw materials, components, and finished products by
the end of the year 2021.

Disadvantages of Standardisation: The following are the disadvantages-

(i) Change of public taste or liking, fashion and trend may seriously effect a
company producing only standardized product range

412
(ii) It reduces the variety of products to be offered to the consumers and the Standardisation,
Codification And
workers feel boared and fed-up doing the same routine again and again Variety
if too much standardization is enforced Reduction

(iii) The process of product development is hampered due to monotony and

non-flexibility of the product range.

13.5 SUMMARY
Organisations deal with a large number of materials with varying degree of
characteristics in terms of size, shape, price, physical and chemical properties,
sources of supply, modes of handling, user departments (destinations) and
accounting procedures, etc. In addition, there are several departments of the
organisation which require only the information about the materials, e.g. design,
engineering, production scheduling etc. In order to meet these complex
requirements the items need to be classified properly.

Often, an item would require a very long description to get uniquely and
adequately identified. Using number and alphabets with appropriate meanings,
the description can be reduced to six to thirteen digits. This helps in easy retrieval
of information and data processing. Several aspects of the codification have
been discussed for the readers and users to follow a standard system or to
enable to design own system.

Several items with similar functional and dimensional characteristics can be

grouped to a single dimension and other technical characteristics with
negligible loss of functional requirements through the standardisation. This
helps in reduction of variety of items in the stores. This concept of
standardisation is well suited for standardisation of things beyond materials such
as processes, inspection procedures, forms, charts and reports etc. The
standardisation also makes the users aware of the performance expected from
the product.

13.16 KEY WORDS

Brisch System: A codification system using numbers in blocks separated by
decimal points. Usually it consists of 7 digits.
Classification: Grouping of items with similar attributes.
Codification: Condensing the long information with the help of few digits
comprising alphabets and numbers. The location of digits and their values
suggest the meaning of the information.
Kodak System: A codification system consisting of 10 digits of numeric
characters.
Standardisation: Process of grouping of items to conform to widely
acceptable representative features and characteristics.
Variety Reduction: Process of reducing a large variety of items with close
characteristics to fewer items (through standardisation).
413
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Management
13.17 SELF-ASSESSMENT EXERCISES
I. Review Questions

1. What are reasons for classifications, codifications, and standardisation of

materials?
2. What are the common classification systems?
3. What are the advantages of codification?
4. What are the possible disadvantages of the codification?
5. What are the essential requirements that a coding system should satisfy?
6. What are the differences between Brisch and Kodak systems?
7. How does standardisation help in variety reduction?
8. What are the steps in variety reduction programme?
9. What are the roles of Indian Standard Institution (ISI)?
10. How standardisation would help consumerism?
II. Design Exercises
1. You are the incharge of the purchase department of an organisation. The
department is responsible for receiving the requisition form from various
departments, processing them, selecting the supplier, determining the price,
time, and quantity of purchase. The department as usual would prepare
various reports for the management. The organisation would also be
interested in vendor development and evaluation.
2. You are to design a suitable coding system for identification of files of
correspondence externally as well as inside the organisation.
3. Consider the following data pertaining to a shirt company.
Sleeve length Price
Neck size Market region
Colour Sales person
Style
Material
Design. a suitable coding system with appropriate selection of the coding
symbols.

13.18 FURTHER READINGS

Burch Jr., John G., et al.. Information Systems: Theory and Practice , John Wiley
and Sons: New York.
Gopalkrishnan P. and Sundaresan M.,. Materials Management-An Integrated
Approach, Prentice-Hall of India: New Delhi.
Sharma, P.C.,. Materials Management, Ketab Mahal: Allahabad.
Varma, M.M.,. Essentials of Storekeeping and Purchasing, Sultan Chand and
414 Sons: New Delhi.
UNIT 14 WASTE MANAGEMENT Waste
Management

Objectives

Upon completion of this unit, you should be able to:

• conceptualise Waste,realise the scope and need for a systems’ approach to

waste management,identify the multi-disciplinary character of waste
management and establish the relationship between wastivity,
productivity and resource management
• realise the need for adopting a preventive policy of waste generations,
devise and apply suitable means for waste reduction, realise the
importance of devising good systems for waste collection, recycling and
disposal, appreciate the necessity or introducing concept of waste in the
traditional input-output model and devise a method of cost accounting for
wastes.
Structure
14.1 Introduction
14.2 Complementarity of Waste Management and Resource Management
14.3 Taxonomy of Wastes
14.4 Definition of Wastivity: Gross and Net Wastivity
14.5 The Functional Classification of Waste Management
14.6 Outline of I-O-W (lnput-Output-Waste) Model
14.7 Treatment of Wastage in Cost Accounts
14.8 Concluding Remarks
14.9 Summary
14.10 Key Words
14.11 Self-assessment Exercises
14.12 Further Readings

14.1 INTRODUCTION
The diverse and seemingly boundless developments taking place in industry
bring with them a whole new series of complexities associated with waste.
From a systems’ viewpoint, waste is any unnecessary input to or any
undesirable output from any system encompassing all types of resources.
Waste Management (WM) is a multi-disciplinary activity involving
engineering principles, economic. urban and regional planning,
management techniques and social sciences, to minimise the overall
wastivity of the system under consideration. A systematic approach to waste
management encompassing the waste of all kinds of resources at all stages should
be adopted. However, as the material constitutes a major fraction of ihe total
product cost, material wasted are of critical importance.
415
Materials
Management
14.2 COMPLEMENTARITY OF WASTE
MANAGEMENT AND RESOURCE
MANAGEMENT
A system basically takes some input, processes it and gives the desired output,
as shown in Figure 1, i.e. , some input is essential, in whatever form for the
functioning ot’ a system. An ideal system is conceptualised to transform the total
input into useful or desirable output. In view of the known physical laws of
nature the existence of an ideal system is not possible, i.e., 100 per cent
utilisation of resources is not practically possible for any system. To paraphrase,
some waste is inevitable in the fu nctioning of any system.

Fig I. Input- Processing- Output system

The main objective of WM is to minimise the waste thus aiming at the ideal
system, while the resource management aims to maximise the utilisation of
the resources. The goal of waste and resource management is same, i.e.,
optimal utilisation of the available resources for higher efficiency and growth of
the system; but the approaches are different. The relationship of waste and
resource management is shown in’ Fig II.

416 Fig II. Complementary Relationship of Waste Mngt. And Resource Mngt.
It can be said that waste and resource management are complementary to each Waste
Management
other. If one is primal formulation of a problem, the other is a dual. Both
approaches have their advantages and limitations. Depending upon the situations,
the constraints and primary and secondary objectives, resource management
techniques prove to be promising in some cases, while in others WM offers an
added advantage.

14.3 TAXONOMY OF WASTE (The science or

technique of classification of waste)
Lack of coordinated work in the field of WM has given rise to multiplicity of
terms and definitions of various types of wastes. The need for standardisation
of the nomenclature has been felt for systematic research and effective
implementation of WM programmes. Wastes can be classified in a variety of
ways depending upon the purpose for which classification is done. There could
be four basic classifications as follows.

Figure III: Resource Based Classification of wastes.

a) On the basis of the resource wasted: Various types of resources are wasted
at various stages in the system. Taking the resource as a basis, the
classification of waste is shown in Figure III.
b) On the basis of source of origin: The source of origin may serve as an
efficient and practical way or classifying waste, e.g.,
i) Agriculture 417
Materials ii) Industrial
Management
iii) Municipal
iv) Residential or domestic
v) Commercial
vi) Construction and demolition etc.
c) On the basis of property: This classification is meant for material wastes
only; depending upon the property that effects the environment, waste
may be of two types:
i) Hazardous
ii) Non-hazardous
d) On the basis of recoverability: As per the characteristic of resource the
waste may be:
i) Recoverable: The waste that can be converted into some useful resource,
e.g. material waste, energy waste reused in other processes, etc.
ii) Non-recoverable: This includes the resources that are lost with time
and cannot be regained afterwards, e g. manpower, energy, capacity
and services. etc.

14.4 DEFINITION OF WASTIVITY: GROSS AND

NET WASTIVITY
Most of the productivity measure at present compare the total output to
individual inputs, viz., material, enery, manpower and capital etc, while they
usually fail to directly compare the fraction of a particular input that goes into
output.Further, it is difficult to measure the output of various individual inputs
invested in various finished products, whereas it is comperatively easier to
assess the waste of various inputs. Henve a new concept of “Wastivity” has
been propounded, that can serve as an adequate measure of performance of
any system, and is rather easy to measure

“Wastivity of any system is defined as the ratio of the waste to the input”.

Wastivity =

Depending upon the level of waste under consideration the wastivity may be
categorised as gross wastivity, and net wastivity.

“The gross wastivity is defined as the ratio of total waste generated by a particular
system to the total input to that system”.

418
H owever, a fraction of total waste generated is intermediate to the system and gets Waste
Management
recycled. Thus the net waste to be disposed off or reused in other systems is less than
the gross waste generated.

Net waste = Total waste – generated Waste recycled within the system

“The ratio of the net waste to be disposed of to the total input to the system is
termed as net wastivity”. The net wastivity will be dependent on the extent of
recycling.

Net wastivity=

Wastivity as a Performance Measure

An ideal or perfect system will be one that consumes just the right amount of
resources, leaving no idle, unutilised (nonrecoverable) or lost resource, or any
undesirable output. The presently known laws of nature obviate the existence of
any such idea system, indicating that the occurrence of waste is inevitable. The
concept of “Wastivity” which is yet in the rudimentary stages may prove to be a
good measure of performance, both at macro and micro levels, and will be
helpful in the sound planning and monitoring of various systems at different
levels of hierarchy.

Wastivity and Productivty

Waste can indirectly serve as a good measure of productivity. “Productivity of

any system has been defined as the ratio of the desired output to input”. Most
of the productivity measures at present compare the total output to individual
inputs, viz. labour, material, energy and capital etc. , while they usually fail to
directly compare the fraction of a particular input that goes into output.

Hence a new concept of ‘Wastivity’ had been propounded, which can serve as an
adequate measure of performance of any system and is rather easy to measure.

Let Ir be the wastivity index of rth resource and Wr be the relative weightage
(depends upon a number of tangible and intangible factors) of rth resource,
then
n
Composite Wastivity Index Wr I r
r 1
n
For n types of resources Where, Wr 1
r 1

It will be very convenient to measure the waste as well as input for each type
of resource for a specified period.

We have,

I = O+ W

Dividing both sides by I, we have 419

Materials
Management

or 1 = Productivity + Wastivity or Productivity = 1—Wastivity

The Wastivity for each type of input thus indirectly assesses the productivity for
each type of input. Both productivity and wastivity are complementary to each
other, which bears in it the inherent cause and effect phenomenon. if the cause, i.e.
wastivity is checked, the effect, i.e. productivity, will automatically be
improved.

14.5 THE FUNCTIONAL CLASSIFICATION OF

WASTE MANAGEMENT
The problems associated with the management of wastes in today’s society
are complex and diverse in nature. For an effective and orderly management of
wastes the fundamental aspects and relationships must be identified and
clearly understood. The efficient WM comprises of the quick identification of
the waste generated/caused, economic reduction, efficient collection and
handling, optimal reuse and recycling, and effective disposal of waste leaving
no environmental problems. WM can thus be functionally classified into five
basic elements, viz. , generation, reduction, collection, recycling and disposal.
However, WM should be viewed in totality considering the inter-relationship
of basic functional elements/system as shown in Figure IV. One of the objectives
of WM is to optimise these basic functional systems to provide the most efficient
and economic solution, commensurate with the constraints imposed. By
considering each element separately it is possible to:

i) identify the fundamental aspects and relationships involved in each

element,
ii) develop, wherever possible, quantifiable relationships for the purpose of
making engineering comparisons, analysis and evaluation.

420
 Waste
Management

Figure IV: Functional Elements of Waste Management

Generation of Waste

There may be numerous causes responsible for the generation of waste in

different systems. However, some general causes of waste generation at different
stages had been perceived. The check list of causes of waste generation is
shown in Table 1 out of which some causes may be critical. If it is possible to
account for the amount of waste generated against respective causes, then the
most critical cause will be one that contributes to the highest aggregate cost of
waste.

Table 1

Checklist of Causes of Generation

1) Ineffective policies
2) Lack of Planning
3) Political pressures
4) Defective organisational structure
5) More emphasis on sub-system objectives rather than organisational goals
6) Poor management
7) Faulty systems and procedures 421
Materials 8) Personal interests
Management
9) Carelessness and neglect
10) Lack of individual responsibility
11) Non-acquaintance with latest technological development
12) Resistance to adopt automation and computerisation
13) Wrongly laid-down design standards
14) Lack of standardisation and codification
15) Wrong choice of raw material
16) Ignorance of inventory control
17) Inappropriate storage facilities
18) Poor handling of materials
19) Poor layout of facilities
20) Information delay
21) Improper work methods
22) Less emphasis on PPC function
23) Inadequate supervision and control
24) Improper recruitment and lack of training
25) Lack of motivation and incentives
26) Unhygienic work environment
27) Insufficient skill and use of unsafe practices
28) Poor labour relations
29) Frequent power failures
30) Poor maintenance
31) Less emphasis on quality control
32) Poor distribution network
33) Less emphasis on collection and segregation of waste
34) Technological obsolescence
35) Miscellaneous causes.

Accurate intormation on waste generation rates and composition provides a basis

for the design and operation of various waste control programmes, recycling
and processing plants, waste disposal projects, and the choice of most
effective disposal alternative. The problems in obtaining the information on this
aspect are complex and involve following factors:

• Various establishments may differ widely in their waste generating

practices.

422
• Most firms are reluctant to reveal production and related statistics for fear Waste
Management
of the data being used to the competitive advantage of others.
• Generally, the firms are reluctant to provide information on quantity and
composition of waste for fear of it indicating non-compliance with
pollution-control regulations.
• The quantum of waste generated reflects the inefficiency of the
organisation.
• Some industrial activities are subject to seasonal variations.
• The extent of salvaging, recycling or other reclamation of wastes differ
greatly among manufacturers.
• Many firms themselves have little understanding of, and few records on this
aspect.

A Systematic Approach to Waste Reduction

A systematic approach to minimise the total system waste minimising the waste
at individual stages in conjunction with other stages has become proposed in
Figure V.

Figure V: Stage Wise Waste Redaction: A Systematic Approach.

423
Materials It provides a scientific and systematic method for waste reduction at individual
Management
stages and finally for the whole system. The procedure for approaching from
whole to part, and, then, from part to whole is proposed. The basic steps of the
approach are as follows:

i) Recognise the waste for whole system.

ii) Identify the stages at which waste is caused/generated.
iii) Visualise the whole waste into fractions caused at various stages as identified
in step (ii).
iv) Apply the systematic waste reduction procedure at each stage separately, i.e.,
• recognise the waste,
• identify the cause,
• plan corrective action,
• eliminate the cause.
v) Find the correlation of various stages to assess the effect on waste
generation at one stage due to waste reduction at other stages.
• If there is no such correlation, then establish controls separately at
each stage to prevent recurrence of the cause of waste generation.
• If such correlations exist and waste is caused, then find the stages
affected.
vi) Try to obtain a break-even of wastes at the related stages so as to minimise the
total aggregate waste at all the stages.
vii) Establish controls to prevent recurrence of the cause of waste generation.

The Waste Management systems for individual organisations, sectors as well as

the whole economy should be designed to fulfil the goal of zero waste. Zero
waste should not be misinterpreted at if no waste is generated. Such an
interpretation will be neither feasible nor justified. As some waste is inevitable
with the function of any system, a 100% efficient system is only hypothetical.
Further, such a system will be closed and will have a zero growth rate which is
not desirable. The main theme of the philosophy of zero waste is to (first of all
try to minimise the waste generated as far as it be technologically and
economically feasible; and whatsoever little waste is generated should be put
to some effective use.

The goal of zero waste should be visualised from systems point of view, i.e. to
have zero waste of all types of resources simultaneously. Otherwise, it may be
futile to aim towards zero waste for one type of resource if it causes the waste of
another type of resource.

Waste Collection Systems

Waste collection has got a significant effect on subsequent functional elements,

public health, aesthetics, housekeeping and public attitudes concerning the
424
operation of the system. As collection and transportation constitute a major cost Waste
Management
in waste treatment (up to 80 per cent), streamlining of collection techniques
can greatly improve the efliciency, and effect a significant saving in the
overall cost of WM. This will be beneficial in two ways, viz., reduced
disposal efforts and advantages of resource recovery by effective recycling of
waste.

The proposed strategies for waste collection are:

i) Design of economic basis to facilitate separation at source.

ii) To provide every organisation with a set of four standard bins to separately
collect the metallic, plastic, paper and other miscellaneous waste, the bins
should be designed after careful investigation of the types and quantum of
waste generated.
iii) Design of appropriate collection system governed by public or private
agencies to regularly collect the segregated‘waste at time intervals
depending upon the generation rate.
iv) Incentives to encourage segregation of the waste at source.
v) Timely collection of ‘scrapped organisations’ appliances along with
segregated waste, and its flow through salvage industry for ultimate reuse.
vi) Development of appropriate collection systems for the collection of
miscellaneous organic and inorganic waste.

Recycling of Wastes

In the absence of conservation or recycling, certain of the World’s finite resources

will diminish to a level incapable of maintaining an acceptable environment and
adequate life support. Fortunately, in India, there is a growing awareness to
recycle/reuse the waste. The National Committee on Science and Technology
(NCST) has identified number of recycling projects.

The terms recycling, reuse, reclamation and recovery have different

interpretations, though these terms are generally used as synonyms. In this study
the term recycling is adopted to mean all these terms.

Recycling generally refers to the use of undesirable outputs or wastes as input to

the same process or system, e.g., recycling of foundry scrap. Reuse may be
termed as the use of waste generated from one process/system as input to some
other process system as a raw material, or for the generation of power or by-
products.

The conversion of damaged, rejected and undesirable outputs into the

desirable outputs by repair or processing is termed as reclamation. The term
recovery is utilised to denote the gain of resources from the wastes.

The recent developments of recycling of waste in our country have been noted
with concern:
425
Materials 1) New jersey for the players of cricket and football is being prepared from
Management
the used water bottles (STAR-India).

2) Plastic sieves made from the damaged and rejected polyethylene bags
for separating coarse grains from the fine ones are under circulation for
domestic use:

3) A great achievement is made by manufacturing composite coloured wall

tiles with the help of nano-tecnology by using old tattered carpet wastes
and worn and torn door mats. These tiles are heat and sound resistant.

4) Environmental friendly writing papers are being prepared from the

recycled plastic bags, chappals and containers.

5) Flowers and other pujah materials after performing the rituals from
places of worship like temples etc. are recycled for the making of
agarbattis, dhupbattis and artificial leather.

6) Great progress has been made to make buildings from flyash bricks and
highways with plastic waste and rubber combined.

The list does not stop here. Many more such innovating ideas are taking
concrete shape regularly in India to make the planet earth a lovely and eco-
friendly place to live in.

Waste Disposal Systems

This element links the waste management system with environment and other
systems, and has got a significant impact on the same. The adoption of poor
disposal practices have resulted in severe environmental pollution in different
parts of the world, particularly in the big industrial centres and have posed
serious threat to human life. Some of the developed countries have taken the
problem on war-footing and have started developing and adopting latest
technology in this regard. In India the awareness has grown recently and the design
of effective waste disposal systems has become a challenging problem area.
From disposal viewpoint wastes may be categorised into:

i) Salvable waste, and

ii) Non-salvable waste.

The wastes that have got some salvage value are termed as salvable waste. The
scrap, rejected goods, surplus / obsolete items and equipments etc. fall under this
category. The well designed disposal system for salvable wastes may provide best
return to the organisation, contribute to cost reduction and higher profit and aid to
material conservation.

Wastes which do not have any salvage value, but need further processing and
treatment for disposal are termed as non-salvable waste. The non-salvable
wastes are primarily responsible environmental hazards. Proper management

426
of salvable wastes may amount to resource recovery and reduced environment Waste
Management
and other social costs.

A) Guidelines For Disposal of Salvable Wastes: The salvable waste, e g. scrap,

surplus/obsolete stores and equipment, unserviceable appliances and
machinery, abandoned vehicle etc. is generated in almost all sorts of
manufacturing and service providing establishments. No particular attention
has been paid in most of the organisations for the disposal of salvable
wastes. The most common practice is to dispose the scrap surplus through
auctioning. No systematic procedures have been developed in this regard.
Another mode of disposal adopted is to salvage the scrap through
specialised agencies. The traditional “Kabaris” or Junkmen are
performing this work. Directorate General of Supplies and Disposals (DGS
& D) is playing a vital role in public disposals. It disposes the stores worth
several crores of Rupees, every year for various Government Departments.
A special Surplus Disposal Committee was set up for analysing the large quantities
of accumulated surplus. The Committee in consultation with Metal Scrap Trade
Corporation and Minerals and Metals Trade Corp. Ltd (MMTC) has
suggested some procedures for the manner of disposal and the market
analysis of the huge ferrous and non-ferrous scrap in the country.

The procedures for the disposal of different types of salvable waste vary from
situation to situation. Some broad guidelines have been suggested to aid the
design of systems and procedures for disposal in individual cases:

i) First of all the feasibility of recycling should be analysed to dispose the

scrap.
ii) Try to use the scrap for producing by-products.
iii) Try to transfer the surplus from one department to another or to other plants in
case of multi-plant organisation.
iv) Analyse the feasibility to sell the scrap as raw material to other plants.
v) To sell the scrap surplus to external export agencies dealing with it.
vi) Selling of scrap through advertisement and auctioning. The frequency of
auctioning should be decided after analysing the generation rates and by
obtaining a break-even between the scrap/surplus carrying cost and
auctioning cost.
vii) vii) Selling the surplus in open market, or to the employees itself, particularly
in case of consumer goods. If the product is not meeting the quality
requirement, then classify it as seconds and give a discount. This may act
as an incentive to employees.
viii) To consult the vendor and return the surplus to vendor.
ix) To sell surplus/obsolete equipment through advertisement and invite the
offers from other parties.

427
Materials x) In case of damaged equipments try to sell the parts after classifying into the
Management
categories of good, serviceable, repairable or reclaimable, and scrap.
xi) To donate the rejected material to charitable organisations to gain socio-
economic respect.
(B) Processing and Disposal Techniques for Non-salvable Waste:
Processing techniques are used in solid waste management system to
improve the efficiency of operations, i.e. , to reduce storage requirements,
facilitate disposal to recover resources, conversion products and energy,
and to minimise harmful environmental eflects. Disposal is the ‘no
alternative’ option and the ultimate fate of all wastes that are of no further
value. Various alternative processing disposal techniques have been briefly
discussed as follows:
Mechanical Processing: The mechanical processing of the waste is done to
reduce its volume and size for easy handling and disposal and to recover valuable
materials by separation.
i) Compaction: This technique reduces the volume of the waste by
mechanical compaction.
ii) Baling: This is also a mechanical volume reduction method which
uses specialised compaction equipment to produce solid wastes in block
or bales of various sizes. This offers the advantage of less landfill
requirements, neat and clean operation of land filling, easy
transportation and thus saving in cost of covering material etc.
iii) Shredding: This refers to the mechanical size reduction of wastes by
pulverising. The volume is reduced up to 50% and a homogeneous mass
is obtained which is relatively odourless, unattractive to flies and
vermins, and is relatively non-combustable leading to easier disposal.
Milled refuse can be disposed of, at locations close to residential areas.
iv) Component Separation: Component separation is a necessary
operation in the recovery of resources from solid wastes both manual
and mechanical method can be used. The separation may be done at the
source or centralised separation may be adopted.
Thermal Processing: Thermal processing of wastes result in volume
reduction, generation of energy and by-products. The overall heat contents of solid
wastes including moisture and ash etc. is approximately 10.5 million BTU/Ton,
which is most nearly comparable to that of low rank lignites.

i) Incineration: High temperature oxidation of the organic and toxic

compounds present in gaseous wastes is employed to destroy the
offensive effluents and odours by converting them into harmless gases,
i.e. Oxygen and waste vapour.

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 ii) Pyrolysis: The pyrolysis of solid wastes strictly refers to the Waste
Management
destructive distillation or the thermal decomposition of the wastes in
an inert atmosphere.

Bio-Processing: For agriculture based economy like India bio-processing is

becoming an important research field to produce fertilisers, alternative fuels and
feeds etc. Some bio-processing methods are composting, fermentation, and
hydrolysis etc.

Composting: Composting of solid wastes may be defined as the bio-chemical

stabilisation of those organic materials to a humans like substance through
scientifically producing and controlling an optimum environment for the
process.

There is vast potential for composting as a disposal process in India. It has been
used from long time in rural area, but there is a need to make the people aware of its
benefits and rigorous organised efforts should be made.

Ultimate Disposal: Ultimately something must be done to solid wastes that are of
no use and are left after recycling and processing etc. The option available is
the disposal in the earth’s mantle (e.g. land filling) .

Sanitary land filling: Sanitary landfills have been proclaimed as the low cost,
safe way of disposing of municipal refuse. Rain water and surface run off water
percolates through the landfills and the resulting leachate has a high
concentration of organic wastes and harmful salts. Also, the evolution of methane
gas from the refuse can create fire and explosion hazards.

C) Design of Effective Waste Disposal System: The design of effective waste

disposal system is an important aspect of waste management. The system
should be designed to promote the maximum possible recycling/reuse of
wastes, and for minimum environmental hazards. The flow diagram of
waste disposal system has been shown in Figure VI.
First of all the technical economic and social feasibilities of recycling/reuse
should be analysed and attempts should be made to recycle the waste as it is
without any processing. If the residue left after optimal recycling reuse is
disposed as it is, then the mode of disposal should be selected; otherwise
various processing techniques should be evaluated by considering various
social and economic factors. Both the source as well as centralised
processing methods should be selected properly. Finally. Plans should be
prepared for the ultimate disposal.

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Materials
Management

Fig vi. Flow Diagram of Waste Disposal System.

Various factors that should be considered in the design of waste disposal

system are:

i) The public attitudes

ii) The regional and national policies
iii) The economic considerations
iv) Land availability
430
v) Equipment requirements Waste
Management
vi) Ground water protection
vii) Environment control
viii) Fire prevention
ix) Litter control
x) Operation plans
xi) Employer facilities
xii) Equipment maintenance
xiii) Operational records

14.6 OUTLINE OF I-O-W (INPUT OUTPUT-

WASTE) MODEL
It has been visualised that it is possible to take waste as an explicit parameter
and the existing input-output model can be modified to incorporate WM
constraints. To provide a closer representation of real life system it is proposed to remodel
them in the framework of an I-O-W (Input-Output-Waste) model. The proposed model will
be able to define the resource balance more realistically by incorporating the
reduction, recycling, abatement, disposal and related functions of WM. The I-O-W
physical system defined the resource constrained for every viable system as the
balancing of inputs to the sum of outputs and wastes for each type of resource:

Input= Output + Waste

Basic Framework: The basic framework of I O-W model defines I-O-W flow
matrix, I-O-W coefficient matrix and consistency equations. The I-O W flow
matrix consists of a set of conventional intermediate demand or resource flow
matrix extended to include WM sectors final demand matrix plus added waste
flow matrix. An aggregated I-O-W matrix is shown in Table 2.

Table 2

l-Q-W Flow Matrix

Intermediate demand or Resource Final demand matrix Total

flow matrix output

Input of resources Total final demand

Waste flow matrix Total waste

Total input = Resource inputs + Recycled Wastes

The I-O-W coefficient matrix consists of technological coefficient matrix,

final demand coefficient matrix and WM coefficient matrix partitioned for
intermediate and primary inputs, and intermediate and final wastes as shown
in Table 3. 431
Materials Table 3
Management
I.O.W. Coefficient Matrix

Consuming Sectors
Technological Final demand
coefficient matrix coefficient matrix
(intermediate input
coefficient)
Primary input Primary input to Final
coefficient demand
WM Coefficient Final Waste
Matrix Intermediate Coefficient
Waste Coefficient

The model may be generalised for 'n' production sectors and 'm' WM sectors.
The source of primary inputs are aggregated as trade, habitat and nature,
whereas the final demand is clubbed into domestic consumption trade and
change of stocks. The inter-sectoral waste flow is treated as intermediate
waste, while final wastes include waste recycled in habitat by changing life
styles, waste disposed of by trade and the wastes ultimately disposed of to
nature.

14.7 TREATMENT OF WASTAGE IN COST

ACCOUNTS
It is realistic to expect that all materials put into process will not end up as
good saleable product. Some loss, scrap and wastage are inevitable in process
industries. These losses must be computed in advance before the processing
operation begins. Process loss can be divided into two categories; (i) Normal loss,
(ii) Abnormal loss. Normal loss is the loss which is unavoidable, uncontrollable
and expected in normal conditions. It may be inherent in the manufacturing
process. If the loss is inevitable. i.e. unavoidable and within the limit, it is called
normal process loss. Abnormal process loss is controllable and generally caused
by abnormal or unexpected conditions, such as bad designing, poor materials,
accident and negligence etc.

The treatment of normal and abnormal lœses differ in inprocess accounts. Normal
losses are absorbed by good production. Assume, for example, that 25,000 units of
a mixtures were put into process and that during proœssing 5000 units were
lost through evaporation. This is an unavoidable loss. If the total cost recorded
was Rs. 25,000 the remaining 20,000 units would be assigned a unit cost of
Rs. 1.25

Cost of Production Rs. 25,000

1.25
No. of Units Completed Rs.20, 000

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Abnormal losses are valued as good units. The unit cost which is used to value Waste
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good units is also applied for the valuation of abnormal loss units. The cost of
abnormal loss units computed in this manner is transferred to a separate abnormal
loss account and credited to the relevant process account. Subsequently, this loss is
transferred to the costing profit and loss account and the abnormal loss account is
thus closed.

The following procedure will help in the preparation of process cost accounts
that do not present any difficulty:
1) Normal loss should be computed on the basis of information given in the
question.
2) The cost per unit of production, after taking into account normal loss units,
should be determined assuming that abnormal loss does not exist. The
cost per unit is calculated on the basis of the following information:
a) Normal production, i.e. , inputs (units) minus normal loss units.
b) Normal cost of production, i.e. , all costs incurred (appearing on the debit
side of a process account) minus proceeds (if any) realised from the sale
of normal loss units.
Normal cost of production divided by normal production will give the cost per unit
of output.
3) The cost per unit determined as above is used to value abnormal loss units and
that would be the cost of abnormal loss.
4) The abnormal loss account is debited and the relevant process credited with
the amount and quantity of abnormal loss as calculated in (3) above.
5) The cost per unit as obtained in (3) will also be applied to determine the cost
of good production units produced by the process.
6) The proceeds realised from the sale of normal loss representing scrap (if any) is
transferred to the relevant process account.
7) The proceeds realised from the sale of abnormal loss representing scrap is
transferred to a separate abnormal loss account and not to the relevant
process account.
8) The abnormal loss account is closed by transferring the total cost of abnormal
loss units to the costing profit and loss account if there is no scrap. In case
abnormal loss represents scrap, only the net amount (total cost of abnormal
loss units minus scrap) will be transferred to the costing profit and loss
account.

14.8 CONCLUDING REMARKS

The problem of Waste Management should be visualised in a broader
perspective and an organised systems’ approach to Waste Management should
be adopted. lt is unfortunate that despite the cruciality of Waste Management
in socio-economic resource structure in its ecological and environmental 433
Materials compatibility, it has been ignored most of the time. There is a need to
Management
standardise the taxonomy of the wastes and to critically analyse the functional
elements of waste management. Waste management is a dynamically
emerging field with vast scope. Though awareness in this field is growing
slowly, if proper attention is paid, it may rapidly gain momentum.

To accelerate the efforts to achieve universal sanitation coverage and to put

the focus on cleaniness, Government of India has launched “Swachh Bharat
Abhiyan” on the 2nd Oct 2014 on the birthday of Mahatama Gandhi to
effectively handle the waste management

14.9 SUMMARY
In this unit we have proposed a new enlarged concept of waste and wastivity. The
best way of waste management is not to generate waste at all, viz. a preventive
policy of waste generation is advocated. We have established the close
relationship between wastivity, productivity and resource management. A seven
step systematic approach has been given for waste reduction. Guidelines for
waste collection, recycling and disposal have been discussed. Some processing
and disposal systems have also been overviewed. A brief outline of an input-
output waste model has been given. It is difficult to accurately account for all
wastages. Yet another procedure has been suggested that wiil help in the
preparation of appropriate cost accounts.

14.10 KEY WORDS

Gross Wastivity: Ratio to total waste generated to total input.

Incineration: High temperature oxidation of the organic and toxic compounds

present in gaseous wastes that is employed to destroy the offensive effluents
and odours by conversion into harmless gases.

Productivity: Ratio of output to input.

Pyrolysis: Destructive distillation or the thermal decomposition of solid

wastes in an inert atmosphere.
Waste: Any unnecessary input to or any undesirable output from any system
encompassing all types of resources.

Waste Management: A multi-disciplinary activity involving engineering

principles, economic, urban and regional planning, management techniques and
social sciences.

Wastivity: Ratio of waste to input.

14.11 SELF-ASSESSMENT EXERCISES

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1) Explain how the system concept can be used in explaining the terms waste and Waste
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waste management.

2) 'Waste ‘Management’ is complementary to ‘Resource Management’.

Critically comment.

3) Differentiate between wastivity and productivity and explain whether

reducing wastivity and increasing productivity imply one and the same
thing.

4) What are the basic waste generation stages in a production system?

Explain with the help of an example.

5) Explain how would you proceed in designing a waste disposal system for a
manufacturing enterprise.

6) Write short notes on:

c) Systematic waste reduction procedure

d) Wastivity Indices

7) Write short notes on:

a) Identification of waste
b) Taxonomy of wastes
c) Systematic waste reduction procedure

8) Briefly explain what do you understand by the term I-O-W (Input-Output-

Waste) model.

9) Devise a method of cost accounting for wastes.

14.12 FURTHER READINGS

Anderson, L.L. and Tillman D.A., Fuels from Waste, Energy Science and
Technology Management—an International Series.

Bond, R.G. and Strane, C.P. (Eds.), Handbook of Environment Control, Vol 2-Solid
Waste, CRC Press.

Gopalakrishnan P. and Sundaresan M., Materials Management: in Integrated,

Prentice-Hall of India Pvt. Ltd.: New Delhi.

Kirov, N.Y., Waste Management? Reuse, ANN Arhour Science.

Lee Jr. L. and Dobler, D.W. Purchasing And Material Management: Text and
Cases, Tata Mc-Graw Hill Publishing Co. Ltd.: New Delhi.

Lochr, R.C.; Agricultural Waste Management: Problems, Processes and

Approaches, Academic Press, Inc.: New York.

Neal, A.W., Industrial waste, Business Books Ltd.: London.

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Materials Pratt, A. (ed.), Directory of Waste Disposal and Recovery, George Godwin
Management
Ltd.: London.

Tehbanoglous G. Theisen, H. and Eliassen, R., Solid Wastes. Enginecring

Principles and Management Issues, McGraw Kogakusha Ltd.: Tokyo.

Thome-Koziniensky, K.J,. Recycling Berlin 79 Vol I and II, International

Recycling Congress: Berlin.

Wilson, D.G., handbook of Solid Waste Management Van Nostrand Reinhold:

New York.

Vrat P. Waste Management in India: The Need for Organised Systems

Approach: Proceedings of APO Symposium on Waste Management, Asian
Productivity Organisation: Tokyo.

Treatment and Disposal of Wastes WHO Technical Report Series, 367.

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