PEM M C07

Project Materials Management

Session 4
Deepak Sundrani
In the next session (Monday 17 Feb) bring

scale,
pencil,
eraser,
sharpener,
calculator, etc.

as we will study EOQ using graph paper

Recap
 Purchasing Principles

5 Rs
1)Right Quality
2)Right quantity
3)Right price
4)Right time
5)Right source
 1) Right Quality
(i) Quality of a product is measured in terms of
its design, materials, chemical composition,
heat treatment, surface treatment,
manufacturing process, mechanical property
( Tensile strength of steel, compressive
strength of cement) and electrical
properties, workmanship : Quality
specifications
Seen till here in Session 3
 2) Right Quantity
(i) Replenishment methods :
• Example : Overhead Water tank
Inlet valve

Outlet valve
 Water tank

• The flow of water is controlled in such a manner

as to maintain the desired level so that at no time
do we run out of water while at the same time
ensuring that water does not overflow through
greater input, when consumption or output falls.

• Estimate the future demand : Possible for

materials which are constantly needed. We have
to always have them in stock
 Fixed Quantity, Variable duration
Two bin system
(similar to ordering gas cylinder
in a house )

• When the stock level of an item drops to the

re-order or replenishment level, order is
placed.
• When demands are constant and lead-time is
also known the setting up of an optimum
inventory level is not difficult.
• But when it is not so, what is the right
quantity is difficult to answer. No straight
answer can be given to this question.
• Materials Management is almost always
concerned economic decision problems where
there are two opposite forces at work.
Balance
1)Re-order cost
2)Inventory carrying cost
• Big deliveries of any item will reduce number of
deliveries , which will reduce re-order cost.
• However, big deliveries of any item will increase
the amount of any item held in stock on an
average and therefore will raise the cost of
holding or carrying that item in inventory.
• The optimum level of inventory therefore
depends on the size and behaviour of one kind of
cost compared to the other.
• ( details we will see in Inventory Control)
3) Right Price ( not lowest price) but which
minimised the overall cost
4) Right time
Right time is related to lead time.
Lead time is the time that elapses between
the communication of the need for the item
by the indentor to purchase till the item is
actually received by him.

contingency
5) Right source : Whether to buy Directly from
manufacturer or from dealers/retailers
• In centralized purchasing, only one purchase
department will be there for all the various
sites to buy all the necessary materials for
them. In this all the materials are kept at one
central store.
• In Decentralized Purchasing, Individual sites
are responsible to make their own purchase
according to their requirements.  In this
materials are kept at separate stores.
 Centralised buying
Purchasing responsibility is designated to a
specific person or department.
 Advantages of centralised buying:
1) Better control
2) It develops specialised knowledge, skills and
efficiency for economical purchasing
3) Better performance can be expected from
other departments when they are relieved of
purchasing responsibility
4) It diverts influence or domination by other
departments and thus, makes a greater
contribution to profitability and productivity.
 Disadvantages of centralised buying:
1) It is somewhat slow when different plants
(sites) require immediate supplies, which due
to geographical and locational reasons cannot
be effected.
Due to such barriers, local purchases are often
resorted to and any problem relating to a
particular material can be settled on the spot,
which is often not possible in a centralized
system.
 Sources of supply and
supplier selection
Steps :
1) Past experience with the supplier
2) Interview with salesmen
3) Technical and descriptive catalogues
4) Trade directories and trade journals
(nowadays google : india.com yellow pages Justdial,
Sulekha.com, etc )
5) Visits to trade fairs
6) Consulting trade agencies
7) Open and limited tenders for quotations
8) See advertisements in the newspapers, etc in B2B segment
 Purchasing policy
Purchasing policy is generally determined by
the finances available, but every organisation
has its own policy.
An established policy eliminates the necessity
of making a fresh decision every time when a
comparable situation arises.
Policy of maintaining multi-source is almost
universal since this overcomes the difficulty in
case a particular supplier fails.
 Purchasing procedure
Purchase Procedure means the manner in
which a purchase proposal is carried into
effect.
Therefore, it involves the functions to be
performed by purchasing people from
inception to the conclusion of the deal. These
functions are briefly enumerated as under:
1)ascertaining the need and recognition of it
contd.
 Contd… Purchasing procedure
2) Accurate statement of specifications,
character, quality and quantity requirements
with full description
3) Transmission of the purchase requisition
4) Negotiation with the possible sources of
supply
5) Analysis of the proposal, determination of the
price, availability and delivery time
contd…..
 Contd… Purchasing procedure
6) Selection of the vendor and placement of the
supply order
7) Expediting and follow-up
8) Arranging for receipt, inspection,
replacement of the rejected and defective
materials and goods, etc.
9) Checking of invoices and bill payment, and
10) Completion of records and files.
In order to complete the purchase deal and
maintain proper records of the transaction,
the procedural steps ( seen in previous 2
slides) are necessary, which are called the
purchase inputs.
They are mostly in the form of purchase
requisitions and product specifications and
generally emanate from outside the
purchasing department.
 Purchasing inputs
1) Purchase requisition
( from Production Manager , specifying quality,
quantity, type, etc. in the form of Bill of Materials ) , if it
is standard item in store, give directly.

If special material :
Buyer (person who actually buys) obtains quotations
and, in many cases according to the importance of the
item, invites tenders or special tenders by advertisement
in the newspapers for the supply of the materials
required.
• No purchases should be permitted without duly
authorized purchase requisitions.
• In case of materials which are regularly needed in large
quantities, generally forward contracts are made in
consultation with and approval of higher management.
When such contracts are made, a record of orders
issued against them and deliveries made has to be
kept. These are called open-end purchase orders or
blanket purchase orders. Repetitive orders go directly
to the supplier without being processed by the
purchase department. The contracts are negotiated for
a fixed period, however the delivery dates , quantities
and prices are kept open.
• In other cases , when material is not regularly
required, necessary formalities are to be carried out
and processed, such as invitation of quotations,
tenders, etc.
• A good plan is to prepare a schedule of quotations to
facilitate comparison and then to decide on a supplier
to place the order.
• Apart from price, due weightage has to be given to
such factors as quality and specifications, conditions of
delivery (time, place etc. ) and other conditions
including terms of payment and trade-discounts.
A) PURCHASE REQUISITION FORM
(for stock items)

No. ________________ Date : _________________

Description Quantity Material Balance on Last purchase

Code No. hand Requisition No. and
name of the supplier

Signature

From Storekeeper Approved by

NB. : Sometimes additional information like time, place and date of delivery are also
mentioned
2) Purchase Order
•A purchase order form is then written (in
triplicate) . In many cases, details of the general
terms such as shortages, breakages, spoilages,
including supplier’s warranties needed, damages in
case of supply failures are printed on the back side
of the purchase order.
•The original is sent to the supplier, a duplicate
copy is sent to the receiving storekeeper and the
third one is retained by the purchase department
for reference.
PURCHASING
CYCLE
 PURCHASING CYCLE
Purchase cycle consists of 8 major activities
1) Establishing and communicating the need for
procurement ( Production Department communicates to
Purchase Department through indent / requisition) #
2) Scrutiny of the purchase indents
3 Market study and selection of sources of supply
( Search for potential suppliers, Obtaining proposals from
suppliers , Evaluating proposals and selecting suppliers,
Negotiating ).
contd…
Double glass window
 PURCHASING CYCLE
Purchase cycle consists of 8 major activities
1) Establishing and communicating the need for
procurement ( Production Department communicates to
Purchase Department through indent / requisition)
2) Scrutiny of the purchase indents
3 Market study and selection of sources of supply
( Search for potential suppliers, Obtaining proposals from
suppliers , Evaluating proposals and selecting suppliers,
Negotiating ).
contd…
 Contd… Purchasing cycle
4) Order preparation : Purchase order , it is a
legal document/ contract
5) Follow up
6) Receiving (including counting )and inspection,
7) Storage and record keeping
8) Invoicing and payment
 Methods of buying
Many factors influence selection of buying
methods :
(i)Nature of item
(ii)Regularity of its demand
(iii)Quantities required
(iv)Susceptibility to price variation
 Different methods of buying
1) Hand to mouth buying (buy only when need arises)
2) Scheduled buying
3) Market purchasing ( in advance, when prices
expected to rise)
4) Speculative buying ( buy in large quantity and sell at
a higher price
5) Contract buying ( eg. Every month for one year)
6) Blanket orders ( variety of low-value items from a
stockist, order usually given on phone )
contd….
 Contd… Different methods of buying
7)Tender buying : especially Government Deptt.
8) Seasonal buying ( mainly agricultural products)
9) Group purchasing ( many small things in one
purchase order)
10) Sub-contracting
11) Central purchase organization : large companies,
example MSRTC
12) DGS & D ( central purchase organization for
Government organisations)
 Interdepartmental relations
Good relations of Purchase department with
other departments is absolutely necessary
1) Purchase Department and Production
( Construction Execution ) department
Purchase department has to make available the
required materials on time, sometimes
emergency needs may also arise to avoid
stoppage of work.
Production Department must try to give
adequate lead time for procurement otherwise
unnecessary expenses are incurred
• Sometimes Production Department may not
give sufficient advance notice to Purchase
Department.
• Sometimes Purchase Department may not be
able to procure materials in time, even though
requirements were given well in advance. In
such a situation Purchase Department must
inform the Production Department if there is
expected delay in delivery, so that jobs can be
rescheduled.
• Production Department should assist in
inspecting materials. They should give a fair trial
to new/ substitute materials
• Close co-ordination required between both
departments in case of make-or-buy decision.
• Production department should not
unnecessarily ask for extra quantity.
• Production Department should control
defectives due to poor workmanship.
• Production department should undertake
rework of items on time
2) Purchase Department and Engineering Deptt.
( Architecture / RCC )
(Engineering department prepares technical
specifications for materials and equipment)
Since specifications determine costs , Engineering
Department must specify materials that are
economical. Usually Engineering Department
incorporates materials without regard to cost and
procurement problems.
For economic design, Engineering Department
should hold consultation with Purchase
Department to get acquainted with market
availability of materials.
Engineering Department should prescribe only
those materials which are easily available. They
should not over-specify. They should restrict
variety. Those materials which are already
available should be specified if possible.
Inform Purchase Department in advance if
changing design.
3) Purchase Department and Inspection &
Quality Control Department
QC department should not over-react or
reject materials for minor defects. Repetitive
rejection drives away vendors.
Purchase Department should involve QC
Department in selecting vendors based on
their Qualty Assurance capability.
4) Purchase Department and Sales
Sales Department should give accurate forecasts
of sales. It should give prompt communication in
case of any change in forecast. Also in case of
special orders, inform Purchase Department
well in advance
Purchase Department should provide
information on costs of major items to Sales
Department and increase (if any) so that
products are priced correctly.
5) Purchase Department and Finance Deptt.
Finance should inform Purchase Deptt. About
availability of funds. Timely payments
necessary to vendors for smooth flow of
materials. Purchase should liason with Finance
so that unrealistic commitments are not made.
Sometimes Cash on Delivery / advance
payment
6) Purchase Deptt and Maintenance Deptt.
Maintenance Department should provide list
of consumable spares which are required
regularly . Also inform in advance replacement
spares to be procured based on maintenance
schedules.
Purchase Department should ensure
availability even for emergency requirements
7) Purchase Department and Planning Deptt.
By advance communication , Planning
Department can enable Purchase Department
to provide materials without tying up too much
capital. Purchase Department should inform of
changes in production programme. Check
requirements of non-stock items thoroughly.
Purchase Department should make available as
per commitment.
8) Purchase Department and HR Department
Close liason so that right type of person
selected for Purchase Department
9) Purchase Department and Legal Department
Purchasing is a contract. Purchase Department
should get approval of Legal Department to
avoid litigation later. Many problems can be
avoided by proper drafting of contract terms.
 Qualities of Purchase Personnel
1) Education : Especially knowledge of commercial laws
2) Dependability
3) Initiative
4) Cooperation : Get along with other departments
5) Tactfulness
6) Integrity
7) Good communication ability
8) Habit of going into details
9) Knowledge of products/ materials and their usage.
 VENDOR
DEVELOPMENT
 Source selection
Why source selection ?
Reputed suppliers are intangible assets to any
organization.
They not only supply materials but are also
extremely important sources of information,
with regard to market conditions, price trends
and general industrial climate.
• Source development is also important for
import substitution, cost reduction and quality
improvement,
• Source selection and development is a
continuous activity.
 Stages in Source Selection
1) Searching : Need for material is the starting point.
Some companies use forms. The search process
begins with the finalization of specifications in
consultation with technical department. It consists
in identifying the sources of supply – the initial
survey should be exhaustive. ( Yellow pages, etc)
2) The routine sales calls by suppliers’ representatives
is another important source of information.
• Salesmen should be encouraged to present
the products in which the organisation is
presently interested, and their company’s
entire product line.
• Trade shows, technical exhibitions and
samples are other important source that assist
the search process.
 Selection
( identify best source to meet delivery and quality
requirements in the long run at competitive price )
Supplier’s financial strength, quality, facilities,
efficiency, industry relations, technical excellence and
position in the industry.
Inspect plant of vendor to access the technical
capabilities, efficiency, equipment, financial viability,
quality control, raw material practices, etc.
 Buyer consolidates the information in a
systematic manner :
1) Building and General Impression of good maintenance
2) Production and technical competence
3) Quality control and inspection facilities
4) Financial Resources
5) Other companies supplied to
6) General Observations
7) Conclusion : Should the vendor be added to our list of
approved suppliers : Yes/No
• The buyer may also ask some organisations
which may be using the materials supplied by
the vendor in order to assess vendor’s rating
with his clients. The information thus
collected provides basis for preliminary
selection of suppliers.
 Negotiation and trial orders
• After the preliminary screening and selection,
negotiate with vendors for placing trial orders.
• Various aspects such as terms of delivery,
price and quality are finalised and then the
purchase orders are released for the initial
trial.
 Rating
• After trial orders, it becomes necessary for the
buyer to rate the vendors to enable him to
determine how he should apportion his
requirements among the vendors.
• Continuous rating should be utilised.
 Rating
• A vendor’s performance in meeting the
quality, delivery and price standards set by the
buyer has to be assessed in a systematic
manner.
 Vendor performance rating
Name of vendor PO No.
Date
Item
Value Cat.
1 Delivery performance:

(a)Adherence to time schedule (Weightage 40%)

No. of deliveries made on scheduled date x 40
Total number of scheduled deliveries

(b)Adherence to quantity schedule (Weightage 20%)

No. of correct lot sizes delivered ____ x 20
Total number of scheduled deliveries
2. Quality performance ( Weightage 40%)
Quantity accepted____ x 40
Total quantity supplied
Total
Assessed by Approved by
Special aspects in source selection
1) Local sources : Generally local sources
preferred ( Eg. Hotel construction)
2) Subcontracting ( Make or buy)
3) Small or Big ? ( small orders : small supplier,
large orders : large supplier)