E : OPERATIONS

ELECTIVE COURSE - IV : MATERIAL MANAGEMENT

Objectives :
The key objective of this course is to acquaint the students with Decision – making for
effective and efficient purchase, storage and flow of materials in manufacturing and service
organizations.

Unit I PURCHASING
Material management-meaning, advantages. Codification. Purchase management-
Objectives, ,Functions, responsibilities and duties of purchase department .8R’s of Purchasing.
Kardex system. Methods of purchasing. Buying procedure.

Unit II VENDOR DEVELOPMENT

Scope of vendor development, stages in source selection, vendor rating- criteria, methods
of rating .

Unit III RELATED MATERIALS FUNCTION

Spare parts management- definition, classification of spares, problems and issues in
spares management.
Store keeping – types of stores, benefits, store location, store layout, principles in stores
management.

Unit IV MATERIAL HANDLING

Definition, objectives of material handling, Importance, symptoms of poor material handling,
principles of material handling. Material handling equipments, symbols, costs.

Unit V
Out sourcing, Make or buy decisions. Value engineering. Stores material accounting-Bin card,
stores related ledgers. Recent development in material handling.

Recommended Text books

1) Materials Management procedures Text and cases, By A.K. Datta, PHI Learning India,
www.phindia.com
2) Materials Management Text and cases, PHI learning India, New Delhi.
3) Materials Management case study and solutions by H. Kaushal Macmillan India Ltd.,
4) Purchasing and materials management – NK Nair Vikas Publishing House PVT Ltd.,
5) Material Management
An Integrated approach by Dr. Pawan Arora Global India Publications PVT Ltd., New Delhi. Email :
[email protected]
6) Purchasing – By Monczka, Trent and Hand field – By cengage learning, India Edition.

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 UNIT I
PURCHASING

Definition & Scope of Materials Management

Material management is an approach for planning, organizing, and controlling all those activities
principally concerned with the flow of materials into an organization.
The scope of Materials Management varies greatly from company to company and may include
material planning and control, production planning, Purchasing, inventory control, in-plant
materials movement, and waste management
It is a business function for planning, purchasing, moving, storing material in a optimum way
which help organisation to minimise the various costs like inventory, purchasing, material
handling and distribution costs.

L.J. De Rose:
“Material management is the planning, directing, controlling and co-ordination of all those
activities concerned with material and inventory requirements, from the point of their
inception to their introduction into manufacturing process.”

The fundamental objectives of the Materials Management function, often called the famous 5 Rs
of Materials Management, are acquisition of materials and services :
 of the right quality,
 in the right quantity,
 at the right time,
 for the right price,
 from the right source.

From the management point of view, the key objectives of MM are :

 To buy at the lowest price , consistent with desired quality and service
 To maintain a high inventory turnover , by reducing excess storage , carrying costs and
inventory losses occurring due to deteriorations , obsolescence and pilferage
 To maintain continuity of supply , preventing interruption of the flow of materials and
services to users
 To maintain the specified material quality level and a consistency of quality which
permits efficient and effective operation
 To develop reliable alternate sources of supply to promote a competitive atmosphere in
performance and pricing
 To minimize the overall cost of acquisition by improving the efficiency of operations and
procedures
 To hire, develop, motivate and train personnel and to provide a reservoir of talent

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  To develop and maintain good supplier relationships in order to create a supplier attitude
and desire furnish the organisation with new ideas , products, and better prices and
service
 To achieve a high degree of cooperation and coordination with user departments
 To maintain good records and controls that provide an audit trail and ensure efficiency
and honesty
 To participate in Make or Buy decisions

Materials Management thus can be defined as that function of business that is responsible for the
coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an
optimum manner so as to provide service to the customer, at a pre-decided level at a minimum
cost.
Planning and control is done for the materials taking into account the materials not available for
the operation and those in hand or in pipe line. This involves estimating the individual
requirements of parts, preparing materials budget, forecasting the levels of inventories,
scheduling the orders and monitoring the performance in relation to production and sales.

Scope of Materials Management:

The scope is vast. Its sub functions include Materials planning and control, Purchasing, Stores
and Inventory Management besides others. Basically, under its scope are :
emphasis on the acquisition aspect
inventory control and stores management
material logistics, movement control and handling aspect
purchasing, supply , transportation , materials handling etc
supply management or logistics management
all the interrelated activities concerned with materials

Materials management can thus also be defined as a joint action of various materials activities
directed towards a common goal and that is to achieve an integrated management approach to
planning, acquiring, processing and distributing production materials from the raw material state
to the finished product state.
In its process of managing, materials management has such sub fields as inventory management ,
value analysis, receiving, stores and management of obsolete , slow moving and non moving
items. The various activities represent the following four functions:
• Planning and control
• Purchasing
• Value analysis and
• Physical distribution

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Every organization, big or small, depends on materials and services from other organizations to
varying extents. These materials and services are obtained through exchange of money and the
physical arrangement of it all is called Materials Management .

Various materials used as inputs, such as raw materials, consumables & spares, are required to be
purchased and made available to the shops / users as & when needed to ensure uninterrupted
production. Therefore, efficient management of input materials is of paramount importance in a
business organization for maximizing materials productivity, which ultimately adds to the
profitability of the organization.
The main concern of any Business management is to maximise the Return on Investment (ROI).

All the materials related activities such as material planning & indenting, purchase systems &
procedure, variety reduction through standardization & rationalization, reducing uncertainties in
demand & supply, handling & transportation, inspection, proper storage & issue of materials to
the internal customers, inventory management, vendor management & finally disposal of
obsolete, surplus & scrap materials etc. taken together is termed as “INTEGRATED
MATERIALS MANAGEMENT”

To carry out these functions efficiently, it is essential to have a very good supplier base, order
booking process & inventory management system as well as expert MATERIALS
MANAGEMENT (MM) professionals.

Organization of Materials Management Functions

The overall objectives of an organisation tend to be achieved most efficiently when the
organisation is structured by grouping similar activities together. The process begins by dividing
the total operation into its basic functional components. Each component, in turn, is divided into
a number of sub-functions.
The process is continued until each individual job encompasses a reasonable number of related
tasks. The basic aim is to have a system that is functionalised , has proper control over the
activities and is well co-ordinate. Materials Management provides an integrated systems
approach to the co-ordination of the materials activities and the control of total material costs.
The whole Materials Management function has been divided into its different sub-functions as
follows.
Purchasing
• Administrative : Purchasing administration involves all the tasks associated with the
management process, with emphasis on the development of policies , procedures, controls and
the mechanics for coordinating purchasing operations with those of other departments.

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• Buying : It addresses to a wide gamut of activities such as reviewing requisitions , analyzing
specifications, investigating vendors, interviewing sales people studying costs and prices and
negotiating.
• Expediting : This is basically the order follow up activity involving various types of vendor
relationship work. Reviewing Order status, providing clarifications on transportation, writing and
emailing vendors etc.
• Special projects (Non routine) : In order to facilitate smooth purchasing in a highly competitive
business environment , purchasing authorities have to keep building the capacity to do better by
taking up as special projects activities such as vendor development, vendor registration, value
analysis, market studies, system studies etc
• Routine : Purchasing process or procedure involving routine or every day activities such as
dealing specific purchase file , placing orders, maintaining records of commodities, vendors etc.

THE ADVANTAGES OF MATERIAL MANAGEMENT

1. Better accountability: Through centralization of authority and responsibility for all aspects of
materials function, a clear-cut accountability is established. Various user departments can direct
their problems with regard to materials to one central point so that action can be taken
immediately. This helps in evaluating the performance of materials management in an objective
manner.

2. Better coordination: When a central materials manager is responsible for all functions, the
departments under the materials manager create an identity, which is common. This results in
better support and cooperation in the accomplishment of the materials function. The user
departments also find that they have to approach one department for discussing and solving then:
materials problems. This creates an atmosphere of trust and generally betters relations between
the user departments and the materials management department.

3. Better performance: As all the interrelated functions are integrated organizationally, greater
speed and accuracy results in communication. Need for materials are promptly brought to notice
by materials planning. Purchase department is fed with stock levels and order status by stores or
by inventory control departments. All this calls for judicious decisions leading to lower costs,
better inventory turnover, reduced stock-outs, reduced lead time and a general reduction in paper
work.

4. Adaptability to EDP: The centralization of the materials function has made it possible to
design data processing systems. All information with regard to material function is centralized
under the integrated materials management fiinction. This has facilitated the collection, collation
and analysis of data, leading to better decisions. Advanced and efficient electronic data
processing systems can be economically introduced under an integrated set-up.

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5. Procurement at the right time: The principal objective of materials management is to obtain
raw materials, tools, general supplies, etc, at the right time. This involves recoupment on time by
inventory control, processing the purchase order and follow-up by purchase section; sending
shortage reports by inventory control as well as by stores at different stages; clearing the goods
from docks, railways or road transport offices in the case of purchases from distant sources;
checking and taking materials into finished stock by stores, etc. The combined set-up brings
about greater coordination and increased sense of responsibility with regard to getting materials
at the right time. This avoids passing the buck between purchasing and stores.

6. Improved Inventory control: Variations that may occur in delivery time, its effect on
inventory and production, the necessity of adjusting the minimum and maximum levels on
inventory will be better understood by integrated approach which fosters better understanding
between purchase and stores.

7. Increased productivity: Productivity is the ratio between input and output. As far as
materials management is concerned, it implies reduction of costs and increase in profit. Materials
management tools such as value analysis, standardization, simplification, reduction of
procurement cost by bulk order, reduction of investment and carrying cost by staggered rate of
delivery, avoiding obsolescence, control over consumption of materials, etc. enhance
productivity. Some factors such as procurement cost and carrying cost pull in opposite directions
and complicate the issues of materials management. Therefore, the solution, which will curb the
conflicting interests, can be to have a common department head. Integrated approach results in a
better solution.

8. Control of price: The price depends upon the quantity. If the decision regarding the quantity
to be bought rests with a separate department, the work of the purchase officer is handicapped. In
a combined department, the department head is in a position to negotiate the price on the basis of
the present and future requirements and acceptable delivery. Advantages of price break can be
availed of after proper analysis through price break mathematical model under the guidance of
the department head, materials.

9. Improved Inventory control: One of the main objectives of materials management is to keep
inventory at a low level. This can be achieved by staggering delivery and control of Safety stock.
There should be close coordination between inventory control and purchase. In a combined
inventory control and purchase, the head of the department is in a position to see that material
requisition is raised on time.

10. Dead stock: Dead stock will often come to the notice of a common department head during
his supervision to the stores, and this facilitates quick disposal action.

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11. Effective classification and codification: The classification and codification work requires
through knowledge of the materials and their application or use. Often this calls for actual
examination of the materials in the stores and consultation of the papers received in the purchase
section. For large industries involving multitudes of items, codification project is very important
and usefiil. Many times the help of an outside consultant is needed to complete the job.

12. Heavy packages; Handling of receipts, particularly heavy packages, is simplified when the
stores and purchase sections are combined. When separate, the stores often gets advice regarding
unloading too late which creates problems, pressure and irritation.

13. Assurance of verifying right materials: In the integrated approach the vice-president
materials gets opportunity to see what is being supplied against his orders and to assure that he
receives the right material for the money paid.

14. Better focus on urgent materials: In an integrated set-up, a single executive is the head of
both the stores and purchase. This enables him to understand the urgency of various purchases.
From daily reports, he gets first hand information regarding materials which have arrived, and
therefore he is in a position to expedite issue of urgent materials.

15.Quick return of defective: The integrated set-up monitors quicker return and replacement of
rejected materials and takes action accordingly.

16. Better utilization of stores space: Although bulk purchases may be an advantage for better
price, it may create storage difficulties. If Stores and purchase are separate, such a factor is likely
to be overlooked.

17. Reduced paperwork: In a combined set-up, the inventory control will be adjacent to the
purchase section. This enables the purchase section to utilize the information available on the
Inventory for the purchase work. In a separate set-up, the inventory control goes with the stores.
This means dual records and added cost.

18. Reduced Correspondence: Correspondence between stores, purchase and inventory control
is reduced in the integrated set-up. Reduced paperwork improves office efficiency.

19. Ease for accounting department." The work of accounts is easier in the integrated set-up.
Otherwise, accounts department has to shuttle between the stores, purchase and traffic for
settling and reconciling issues.

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20. Miscellaneous advantages; Under a central materials manager, a team spirit is inculcated.
This boosts morale and enhances cooperation. The opportunities for growth and development are
better in an integrated set-up.
1. The material cost content of total cost is kept at a reasonable level. Scientific purchasing helps
in acquiring materials at reasonable prices. Proper storing of materials also helps in reducing
their wastages. These factors help in controlling cost content of products.

2. The cost of indirect materials is kept under check. Sometimes cost of indirect materials also
increases total cost of production because there is no proper control over such materials.

3. The equipment is properly utilized because there are no break downs due to late supply of
materials.

4. The loss of direct labour is avoided.

5. The wastages of materials at the stage of storage as well as their movement is kept under
control.

6. The supply of materials is prompt and late delivery instances are only few.

7. The investments on materials are kept under control as under and over stocking is avoided.

8. Congestion in the stores and at different stages of manufacturing is avoided.

CODIFICATION

Due to the growth of industrial activity and diverse kind of industrial requirements, a large no. of
organizations have to store a large number of items, often running into several thousands and
even lakhs. Therefore, there should be some means of identifying them. A common practice is to
describe the items by names. Since several departments use the same item, they call the same
item by different names and store them in different places. One of the most useful techniques of
“Materials Management’’ is a rationalized codification system for properly classifying
equipments, raw materials, components and spares to suit to the particular needs of any
organization. Old system of functional codification is no longer suitable for the already large and
increasing inventory range of stocks and stores. It has come across several instances of
duplication of stock of the same item under different nomenclature and codes and under different
stores categories where such items are common to more than one consumption center. It is
necessary that items are brought together for the purpose standardization, variety reduction and
the application of other modern materials management techniques such as value analysis,
operational research etc. so that the maximum return could be secured with the minimum of

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inventory range and values. Standardisation leads to cheaper &easier procurement and cost of
replacement can also be reduced.

CODIFICATION

The process of giving name or symbol or numerical code to a particular item. This code can be a
no. alphabet or both. Eg. Blue colour for painting iron parts is used and its code no. can be
pb2054.
To avoid confusion and to purchase , store and supply to production department a specific item
of recquired quality and characteristic. The material management identify every item by unique
code. An article of stores is identified by its simple description or nomenclature. Difficulty arises
when the same article is known by different names.
For example;
chipping goggles, grinder goggles, or white goggles are one item but may be stored separately
under same nomenclature as different items.
One storekeeper might classify an item as Sal Ammoniac, whereas a research chemist might
identify it under the name of Ammonium Chloride, only to be told that it is not available.
A classic example comes from the U.K. An electric firm found that a simple item of a screw
with a width of 3/8” and length of 6” had as many as 118 names depending on the type of usage
and the department using the screw. A few names are:

The need for Codification arises because of the following reasons:

(i) Speed,
(ii) Unambiguity,
(iii) Saving of Effort,
(iv) Space Saving on forms,
(v) Ease of classification,
(vi) Mechanization.

Characteristics of Codes
As far as possible uniform dimension say, the metric system should be adopted.
i) Code should be Simple.
ii) Code should be unique.
iii) Coding should be compact, concise and consistent.
iv) Code should be sufficiently flexible to meet future demands.

Basic Requirements of a Code

i) Identify commodities
ii) Name commodities

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iii) Specify commodities
iv) Classify commodities
v) Indicate inter-relationships between commodities
vi) Indicate the source of origin of commodities
vii) Refer specifically to an individual and unique commodity.

Objectives of Codification
In 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.
Accurate and logical identification:
A separate code allotted to each of the items available in the warehouse indicating the size,
quality price, usability, special characteristics, specification etc.

Prevention of duplication:
All items are separately codified and are arranged in a logical order. Similar materials are
grouped together (such as stationery items, hardware items) and given a code.

Standardisation and reduction of varieties:

For codification, grouping of identical item 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 same quality can be used. This reduces the number of varieties to a minimum. If 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.

Efficient purchasing:
The filling up of purchase requisition, and preparation of purchase orders are simplified by the
use of codes which easily indicates the materials required. Buying instructions to the suppliers
become easy and quick if there is proper understanding of codification by the suppliers.
Efficient recording and accounting codes leads to effective stock control, efficient recording and
it results in yielding accounting. Chances of mistakes are minimized. Pricing and valuation also
become more accurate and reliable.
Easy locating, indexing and inspection of all materials is possible.

Easy computerization:
The computer work better with codes then with long description of materials.

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CODIFICATION SYSTEMS

One of the prerequisites of classification and codification is to know the basic nature and
characteristics of all materials used in an enterprise and then classify them in broad categories
and then to group and sub-group them in logical progression of kinds, type and sizes etc.
Raw materials, Semi processed Materials, Mechanical (Products and equipment), Electrical
(products and equipments), Chemicals (Allied products and chemical processing equipment),
Laboratory and office (equipment and supplies) etc. can be classified, grouped and sub-grouped
first. After classification in a broad way, a code or symbol is allocated to each of element, the
code or symbol so allotted should be simple, flexible and it should be easily adaptable in order to
exploit the full advantages of codification.
Therefore, codification is a process of representing each item by a number, the digits of which
indicate the group, the subgroup, the type and the dimension of item. The first two digits
normally represent the major groups, such as raw tools, oil stationery, etc. The next two digits
indicate the sub-groups, such as ferrous, non-ferrous, etc. Dimensional characteristics of length,
width, head diameter usually constitute the further three digits and the last digit is reserved for
minor variations.
Many organizations in the private and public sectors like, Railways and DGSD have their own
system of codification. The number of digits in a code may typically be somewhere between
eight to thirteen.
There are several methods of codification but the most useful method is that,which give along
with standard form, the history size and type of material.However, a great care should be taken
to develop the code to satisfy a variety of users.
Some of the systems of codification are:
1) Arbitrary system
2) Numerical System
3) Mnemonic system or alpha numeric system
4) Decimal system
5) Brisch system
6) Kodak system

Arbitrary Systems
Arbitrary system as the word ‘arbitrary’ indicates, is based on the serial number under which a
material is received and the same is allotted as a code number.
Using this approach, all inventory items are simply assigned arbitrary numbers in sequence as
they are added to the stores account. Each item thus has a discrete number, but it bears no
systematic relationship to the numbers assigned to related items. Two similar items or two
mating parts may have numbers several thousand digits apart. For example, if bearings are
received and suppose a number 5090 has already been allotted to the previous item received,
then the code number of these bearings will be 5091. This system has the advantage that there is

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no fixed limit for codifying any number of items. Moreover, one cannot know the history of the
items. This is the reason why the system is not popular.

Numerical System
A numerical system assigns a six to ten digit code number to each item. The first several
numbers usually indicate the classification to which the item belongs, the next several numbers
typically indicate the sub-class, and the last three numbers are usually uncoded. The following
example illustrates the concept:
3 129 017 503
General Class Generic Class Sub-class Specific item number
This ten digit code number is one firm’s stock number for a ¼ by ¾ inch stainless steel square
neck carriage bolt. The first digit indicates that the item is a purchased part as per the following
general classification :
1) Raw material
2) Manufactured parts
3) Purchased parts
4) MRO supplies
5) Work in process
The next three digits indicate the generic classification of the item. In this case it is a fastener,
code number 129. All items are generically classified by their nature and carry a number from
000 to 999.
The next three digits indicate the sub-class to which the item belongs. In this case, 017 is a
carriage bolt with a square neck. All fasteners are sub-classified into a class bearing number from
000 to 999.
The last three digits indicate the specific part number of the item. In this case,all part numbers
under 500 designate plain steel and numbers over 500 represent various alloys; 503 is stainless
steel, ¼ by ¾ inch.

Mnemonic System
A mnemonic system functions much like a numerical system. However, it combines numeric
and alphabetic notations in its symbols. For example, the carriage bolt described under the
numerical system in the following manner :
P Fa BCS 503
P denotes a purchased part,
Fa is a fastener,
BCS stands for bolt, carriage, with a square neck, and
503 represents the specific number of the bolt.
Mnemonic systems, particularly where a small number of items are involved,frequently make
visual identification easier because they are more descriptive and they are often shorter. As more

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and different types of items are added to the inventory, however, this advantage diminishes
because the number of good symbols are limited.

Decimal System
Decimal system of codification may said to be the universal in its working. It is simple and easy
to codify items under this system. Day by day, the number of items in almost every sphere of
industry is increasing. Hence, codifications should be such as may meet the increasing
requirements and it should also be simple, handy and easily adaptable. Under this system items
up to 5,00,000 can be easily codified and at the same time each symbol will give the history,
size, specification and complete picture of the item. Modern industrial concerns are generally
adopting 7 to 11 digits for codifying the materials.
In the decimal codification system, each digit indicates some thing or the other.
For example : 1st digit –Section 2nd digit-Class 3rd digit –Group
4th digit -Type of materials 5th digit -Size, part no. specification or any other details required
Example:
Section 0 — Plants and machinery
1 — Machine and hand tools
2 — Construction materials etc.
Class 0 — Hand tools
(For section-1) 1 — Machine tools
2 — Holding tools
3 — Cutting tools
4 — Tripped cutting tools etc.
Group 0 — Cutters
(For section-1) 1 — Files
2 — Knurls
3 — Scrapper etc.
Suppose a file flat, single cut smooth, size 25 mm is to be codified.
It will be indicated by 1st, 2nd and 3rd digits as 131.
Further fourth and fifth digit will be classified as :
4th digit to indicate the shape of the file, thus
0 — for flat
1 — for hand
2 — for sqaure
3 — for round
4 — for tappered etc.
5the digit to indicate the teeth of file, thus
0 — for single cut, rough 1 — for single cut, coarse
2 — for single cut, smooth
3 — for double cut, coarse etc.

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The 6th, 7th and 8th digits indicate the size of the file in mm.
Therefore, file flat,single cut smooth size 25 mm will be codified as –
13102025.

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

Kodak System
The Kodak system consists of 10 digits of numerical code. The logic of major grouping is based
on sources of supply. All materials are divided into 100 basic classifications, contributed only by
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 is available as a part of
the machine, it will be available under maintenance.

ADVANTAGES OF CODIFICATION
a) As a result of rationalized codification, many firms have reduced the number of items.
b) It enables systematic grouping of similar items and avoids confusion caused by long
description of the items.
c) Since standardisation of names is achieved through codification, it serves as the starting point
of simplification and standardization.
d) It helps in avoiding duplication of items and results in the minimization of the number of
items, leading to accurate records.
e) Codification enables easy recognition of an item in stores, thereby reducing clerical efforts to
be minimum.
f) If items are coded according to the sources, it is possible to bulk the items while ordering.

Process of codification:

List the inventory items
Define the class of items such as (for example) :
Abrasives Bearings Belt and beltings
Bolts, nuts & washers Brooms & brushes Cans & containers
Chemicals & reagents Cloth, leather & rubber Electricals
Raw Materials Glasswares Oil & lubricants
Pipe & Pipe fittings Photographic items Safety items
Tools & tackles Stationeries Welding materials

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Refractory Building materials
Define the sub class under each class

Depending upon the number of classes , their subclasses and probable number of items under
each sub class decide the length of codes which shall remain fixed for all the inventory items (10
digit, alphanumeric etc.)

Start assigning codes as per the detailed list of inventory

Who does the codification?

Normally, it is the custodian who does the codification for the items he keeps in his inventory.
However, in firms of substantial sizes where good number of items are received on regular basis
, codification is usually done by a team consisting of representatives drawn from Stores, user
department and Industrial engineering department. Still, for Automatic procurement items the
responsibility lies with the Stores department.

PURCHASE MANAGEMENT

Purchasing is the vital function of materials management apart from stores keeping, inventory
control, traffic and waste control. After the approval of the material plan and preparation of the
material budget, it is the responsibility of the purchasing department to follow strictly the
scheduled production plan and procure the material of good quality, in desired quantity and on
time. 106 Purchasing is not an end in itself. Material and supplies are purchased or procured for
use in other departments and the purchasing department's role is to meet their needs. Purchasing
is deeply involved in the management of material flow from the outside sources down to
production through the inventory pipeline. S.N Chari calls purchasing manager external
production manager. Material costs form the major part of the production costs. Therefore,
production costs can be brought down by exercising control over the material costs which,
ultimately, depends upon the purchase of material at a proper price. Material should be
purchased in such a way that there is neither any overspending it nor any shortage, causing
stoppage in production. Right quantity and quality purchasing will not only lead to reduction in
the production costs but the quality of production will also improve. Thus a purchasing manager
has a pivotal role.

Definition: Alford and Banks in his book "Production Handbook' describes purchasing as the
'procurement of material, machines and tools on payment. It is the act of exchange of goods and
services for money. It is procurement of material at competitive prices. It also includes getting
the quality material to facilitate the standardization and competitive marketability of the product.
It is the process which includes all the frictions from the time the need for the material is felt till

15
the receipt and approval of the material so purchased. In a way, purchasing has become a very
important managerial activity and requires a great deal of policy formulation and planning on the
part of managers.

Some other definitions of purchasing are: "Buying comprises all those activities involved in
finding a suitable source of supply, selecting the desired quantity, quality, grade, style and size
and coming to an agreement with reference to the price, delivery date and other conditions". -
Pyle

"Scientific purchasing is the procurement by purchasing of the proper material, machinery,

equipments and supplies of stores used in the manufacturing of a product, adopted to marketing
in the proper quantity and quality at the proper time and lowest price consistent with the quality
desired" Dr. Walterz

"Purchasing is the business activity directed to secure the material suppliers and equipment
required in the operations of an organization."— Fine and westing

Thus, purchasing is concerned not only with the procurement of material but also all the
economic issues which affect the cost of production.

Objectives of Purchase department

The objectives of purchasing/ purchase department, according to the classical definition, are to
buy materials and services of the right quality, in the right quantity, at the right price, from the
right source, and at the right time.
In general management terms, there are eight basic objectives of purchasing:

 To ensure smooth operations with an uninterrupted flow of materials and services.

 To buy competitively and prudently, this includes two distinct considerations. To buy
competitively involves keeping abreast of the forces of supply and demand that regulate
prices and availability of materials. To buy prudently involves a constant search for better
alternatives that give the best mix of rice, quality, and service. A buyer who pays more
for a cheaper material than a competitor is not buying competitively. A buyer who
purchases costly material when a cheaper material could perform the function equally
well is not buying prudently at all. It is the combination of competitive buying and
prudent buying that contributes most to maximizing a company's profits.

 To keep inventory investment losses due to deterioration, obsolescence and theft to a

minimum.

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  To develop reliable alternative sources of supply in consultation with other departments.

 To develop; good vendor and supplier relationships. Good supplier relationships are
invaluable. Under such relationships, the problems that arise between the buyer and the
seller are readily solved. Suppliers also provide useful information to buyers.

 To achieve maximum integration with other departments of the firm. This needs
understanding the requirements of other departments so as to translate them into materials
support actions. The most common areas of support are in developing effective design
and standardization programs, forecast of future prices and general business conditions,
economic makeor-buy decision, and a repository of information and knowledge j&om
suppliers regarding new materials, processes, prices, and materials availability.
 To train and develop highly competent personnel who are motivated to make the firm as
well as their department succeed. Such personnel, in addition to fiilfilling the
responsibilities of the purchasing department, also serve as a reserve talent from which
future executives of the firm can be selected.

To develop policies and procedures which permit accomplishment of the preceding seven
objectives at the lowest reasonable operating cost. These objectives in principle apply to
all categories of industrial buying activities, manufacturing concerns, governmental units,
universities, hospitals, and all other types of activities that do not buy for resale.

Duties and Responsibilities of Purchase Department

Purchase department has to perform several duties and shoulder responsibilities. They are as
follows:

1. Receiving purchase requisitions;

Purchase department does not start any activity of purchase of material on its own. The
department in need of a material usually presents a complete purchase requisition form.
Purchase requisition is a written list of material for recoupment, sent to the purchase
department. It is submitted to the head of purchase department and is generally prepared
in triplicate. In other words, it is a formal request to the purchase department for the
purchase of materials. Purchase department, after receiving the purchase requisition
related to will decide about the material to be purchased. It is also the responsibility of
the purchase department to get, information about the required material and its use. The
purchase department should not make alternations the purchase requisition without
consulting the department concerned.

2. Selection of sources of supply:

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After receiving the purchase requisition, it is the day of the purchase department to select
the source of supply. This involves preparing a list of suppliers and then deciding with
whom to do business. In preparing the list, the following steps should be taken to elicit
information:
• Past experience with the supplier
• Interview with the salesmen
• Technical and descriptive catalogue
• Trade directories and trade journals
• Visits to trade fairs
• Consulting trade agencies
• Open and limited tenders for quotations
• Periodical advertisements in the press
If the material is to be purchased from the existing supplier, material order will be placed
according to the previous terms and conditions. But, if the supplier is new, the order will
be placed only after deciding upon the terms and conditions.

It is also the responsibility of the purchase department to invite quotations from the new
suppliers so that these can be compared with the price lists of the existing suppliers.

3.Placing the order: After selecting the source of supply, the purchase department
prepares the purchase order. The purchase order is, in a way, an agreement, between the
purchaser and the supplier in which the latter is ordered to supply goods under certain
conditions. Six copies of the purchase order are prepared.
The following details must be included in the purchase order: • Price and terms of
payment • Purchase order number • Quantity of the material to be purchased •
Description of the material • Delivery conditions • Special remarks

4. Delivery at right time: It is the duty of the purchase department to ensure the delivery
of the material at the right time. The right time for the purchase of an item is said to be
the point of minimum stock, the pint at which the material is expected to arrive is the
storehouse. The purchase department should take immediate steps to replenish the stock
as soon as the material touches the reorder level.

5. Inspection and passing of bills: It is also the duty of the purchase department to
verify the invoices with quotations inspect the materials received and ensure that the
material is received as per the conditions laid down in the purchase order. It should also
get the bill passed by the accounts department within a reasonable time. The accounts
department should be instructed to make the payment at the earliest.

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6. Preservation of purchase records: Purchase order is a legal document. Therefore, it
is to be preserved by the purchase department. Besides, the list of sources of supplies, the
vendor's record, contract file and record of printed forms are also to be kept safety by the

7. Good relations: The purchase department has a responsibility to establish cordial

relations with suppliers. If suppliers are good, their performance in supplying the right
quality in right quantity and at the right time is outstanding. The relation between the
buyer and the seller and at the right time is outstanding. The relations between the buyer
and the seller are seldom spoiled if they maintain business like relations.

8. Moral and ethical standards: The buyer keeps the purse of his organizations as a
custodian. The management expects him to follow an ethical approach to the problems of
purchasing. An official favouring a supplier, a friend or a relative of the buyer accepting
a gift, the buyer himself accepting money or gift, in exchange of granting favour to a
particular supplier are a few of the unethical practices which one may come across
occasionally. It is the duty of the purchase officer to maintain high ethical standards.

9. Coordination: Coordination is the essence of good management for an organization to

be successful. All the departments must act as cogs of welloiled machine. And purchase
department is no exception to it. It is one of the duties of the purchase departments to
maintain coordination with other departments in order to properly assess the purchasing
needs.

10. Purchase budget: Since purchasing activity accounts for substantial portion of the
corporate finance, it assumes a great importance among various budgets such as sales
budget, personnel budget and revenue budget. The purchase budget indicates the
purchases to be made for achieving the complete budget plan. This represents the
requirements of capital expenditure budget. The purchase budget enables the purchase
department to plan its purchases and place long-term contracts after considering all
relevant factors.

Principles of Purchasing: 8 R’s of purchasing

As stated earlier, purchasing is one of the most important functions of materials

management. It is impossible to achieve the desired results for which the business exists
without successful purchasing. Purchasing practices may vary according to the policy of
management size and type of industry. However, there are five well-recognized
principles of scientific purchasing (Fig.2.6) agreed upon unanimously by most authors
and research workers.

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They are as follows: 1) Right quality 2) Right quantity 3) Right time 4) Right price
5) Right place 6) Right Source 7) Right Terms

Right Quality: A very clear specification of quality should be made in the terms of
contract. The acceptable quality level and method of testing should be made discrete in
the contract document. There should not be any compromise on the quality of the
material at the time of purchase because it will reduce the quality level of the product if it
is below the specification. A particular quality of an item may be right quality for a given
purpose but the same may not b right for another purpose. Quality should be measurable
and understandable as far as possible.

Right quantity: The main objective of the purchase department is to ensure flow of
materials to the production department without any interruption. This is the most
important parameter in buying. The decision of right quantity is related to the period for
which it is to be purchased and also to the minimum total cost which may prevent
shortages. Excess purchases result in overstocking. Capital is unnecessarily blocked and
inventory carrying cost goes high. Concepts such as economic order quantity, fixed
period and fixed quantity system, etc, serve as broad guidelines. But the buyer has to use
his knowledge experience and analytical ability to determine the quantity after
considering factors such as price structure, discounts, availability of the item, favorable
reciprocal relations and make or buy decisions. The purchase manager should not follow
the beaten path; he should be creative and his long-term objective should be tominimize
the cost of ultimate product. He has to adopt separate policies andprocedures for capital
and consumer items. He should apply appropriatemathematical models and selective
control (ABC, VED, etc) wisely.

Right Time: Material should be purchased at proper time so that production costs can be
kept under control. For determining the right time, the purchase manager estimates the
lead time information for all components. Lead time is the total time that elapses between
the recognition of the need of an item till the item arrives and is provided for use. While
deciding upon the purchases, the buyer has to consider emergency situations like strikes,
lock outs, etc. Which might add up to the lead time in exceptional cases. The right time
for ordering of material is termed reorder level of materials, which s decided on the basis
of demand during lead time plus safety stock. The responsibility for purchasing the
material lies with the purchase department. The store department sends the requisition to
the purchase to the purchase department as soon as the material touches the reorder level.
The purchase department takes immediate steps to replenish the stock in order to procure
the material by the time the material reaches the minimum level.

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Right price: It is very difficult to determine the right price. Right price is that price
which brings the best ultimate value invested in purchasing the materials. It is, therefore,
a combination of varying factors which determine the right price of an item to be
purchased. The quantity, quality, delivery time, demand and supply curve, competitive
trend, business relationship, distance, government restrictions, after sales services,
discount, terms of purchase are the important factors which govern the determination of
right price of an item. The question of rice determination demands not only market
knowledge but also a clear understanding of the pricing process.
Prices are determined by preparing a comparative statement and analysis of the price
lists, catalogues, quotation, tenders, etc, of the various supplies. The prevailing market
prices may also be the basis of price determination. There may be negotiations between
the purchase department and supplies for the determination of price. The buyer should
make use of learning curve effect to negotiate for a lower price in labour-intensive
products.

Right Place: Right place means that place of supply which is appropriate, keeping in
view the place/location of the store. The selection of right place affects the transportation
and material handling costs. Therefore, the right place will be that place where these costs
are the lowest. If a local supplier agrees to supply on the same conditions as an outside
supplier, he should be given priority.

Right Source:
The source from which the material is procured should be dependable and capable of
supplying items of uniform quality. The buyers have to decide which item should be
directly obtained from the manufacturer. In emergencies, open market purchases and
bazar purchases are resorted to.

Techniques such as value-analysis will enable the buyer to locate the right material. Right
modes of transportation have to be identified as this forms critical segment in the cost
profile of an item. It is an established fact that the cost of the shipping of ore, gravel, sand
etc., is normally more than the cost of the item itself.

Specifying the right place of delivery, say, head office or works, would often minimise
the handling and transportation costs. Similarly, packaging forms an important aspect in
the cost of an item; for instance, in toothpaste, the tube is costlier than the paste it holds.

Right Terms:
The terms and conditions governing the contract must be notified at the time of tendering.
The terms and conditions governing the contract, as finally accepted by the purchaser,
must be incorporated in the contract. They should be practical and unambiguous.

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 Sometimes, the terms stipulated by a buyer are too rigid. Usually, good suppliers will try
to avoid such buyers. In the bargain the company loses because business then has to be
transacted with such parties who accept the company’s terms.

Their prices, obviously, will not be quite competitive nor will their service be so
satisfactory. The company should, therefore, ensure that the terms stipulated are not one
sided and are not unreasonable. Otherwise good suppliers may move away.

It would be a good idea if the terms and conditions are reviewed periodically with
reference to the stipulations may by the vendors in their tenders to see whether it is
essential in the company’s interest to revise a few conditions to the mutual advantage of
both the company and the vendors.

Purchasing Function in Materials Management

Purchasing function, in a business environment, is one of the most critical functions as it

provides the input for the organisation to convert into output. Materials today are lifeblood of
industry. They must be available at the proper time, in the proper quantity, at the proper place,
and the proper price. Company costs and company profits are greatly affected by them as
normally, a manufacturing organisation spends nearly 50% of its revenue in purchasing.
Purchasing function is a function commonly seen in all those organizations that undertake
purchasing activities. The purchasing function is usually performed by a specialized and
centralized purchasing department, directed by an efficient manager to achieve the performance
in an economical manner. Purchase department is a unit of an organisation that performs
purchasing function.
Purchasing is responsible for spending nearly half of a company's income for buying the input
materials. Obviously, any saving achieved by it results into direct saving for the company and all
such savings are a company's profit. Going by a thumb rule "even 1% saving achieved in
Purchasing results in 5% profit for any organisation".

Procurement vs. Purchasing

It is used to define one of several supply functions involved in logistics activities. In the broadest
sense procurement includes the entire process by which all classes of resources (people,
materials, facilities and services) for a particular project are obtained. Since purchasing is a
unique function, it differs a bit from procurement in the sense that while procurement, with the
same objective has a wider domain, purchasing with the same objective is included in it.

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Objectives of Purchasing:

The classical definition of objectives of purchasing is to buy materials and services of the right
quality, in the right quantity, at the right place, from the right source and at the right time.
However, in general management parlance the objectives of purchasing are:
• To support company operations with an uninterrupted flow of materials & services. • To buy
competitively and wisely
• To help keep a minimum Inventory
• To develop reliable alternate sources of supply
• To develop good vendor relationship and a good continuing supplier relationship
• To achieve maximum integration with the other departments of the firm
• To train & develop highly competent personnel who work for the success of firm/ department.
• To develop policies and procedures which permit accomplishment of the preceding seven
objectives at the lowest reasonable operating cost.
The basic objective is to derive the maximum value for each unit of currency spent in buying.
Purchasing is no doubt a vast subject and as the competition among the firms grows this function
of business is expected to see a lot of evolution

Types of Purchasing:
Considering the nature of business an organisation has there could be different approaches and
hence Purchasing can be any of these types:
Forward Buying
Tender Buying
Speculative Buying
Systems Contracting
Rate Contract
Reciprocity
Zero Stock buying
Blanket Order

Forward Buying
Forward Buying as the name suggests is the system under which buying is done with longer term
in perspective. It is not meant for meeting the present consumption requirement. It is rather a
commitment on part of both the buyer and the seller, normally for a period of one year.
Depending upon the availability of the item, the financial policies, the economic order quantity,
the quantitative discounts, and the staggered delivery, the future commitment is decided. A few
organizations do “hedge”, particularly in the commodity market by selling or buying contracts.

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Forward buying helps a firm in booking capacity of a supplier and thus often results into a
safeguard against a competitor acquiring his capacity. It is usually done for Raw materials but is
not limited to it. With competition becoming globalised these days, such an arrangement is a
win-win situation for both, the buyer and the supplier.

Tender Buying
Tender buying is selecting a supply source (supplier) out of many sources available. That is,
many tenders are invited to participate in the tendering process and then one or more than one
tender is selected for order placement. Such tenders are also called the Accepted tender/s (A/Ts).

The main focus through tender buying is on competition of price and quality. Usually, the best
quality (T1 or Q1) is selected after assessment of the technical offers and then the lowest offered
price (L1) tender is selected for order placement.

Process of tender buying:

A typical purchase function starts with the raising of a requisition (Indent / Material Procurement
Requisition) for an item which is required for a stated purpose. This requisition is then converted
into an enquiry form which is issued to the probable vendors who are asked to respond within a
given date and time (called Tender opening date) as mentioned in the enquiry issued to them.
The interested vendors respond to the tender enquiry by giving their tenders. Tenders thus
received are opened on the Tender opening date at the fixed time.
The tenders are then subjected to evaluation with respect to a tenderer's capability, Financial as
well as Technical and other criteria as laid down in the tender enquiry. This step also witnesses
series of discussions, clarifications and negotiation with the tenderers. Some tenders can be
rejected at this stage as they might not meet the requirement of the purchaser. Finally, the tenders
found suitable are subjected to price comparison and usually the tenderer offering the lowest
price (L1) is selected for placement of order.
The process explained above shows a great deal of variations depending upon a company's
procurement policy. In some places, the best quality offering tenders are accepted for subsequent
price comparison whereas in some other place all the tenderers who meet the minimum
requirement are considered accepted for price comparison and order placement. Similarly, in
some places the order is placed only on L1 (lowest offered price) whereas in some other places it
may not be rigidly followed so.

Types of Tenders:
Since the tenders are sent to the probable vendors , knowledge of vendors for the item in
question is a necessity. It's based on this concept that the types or mode of tendering is decided
against a particular purchase requisition. Most commonly used Types of tendering / tender
buying are as below:

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1) Global Tender :
As the name suggests a global tender is floated with a view to elicit offers / response from any
vendor situated anywhere in the world. The need for a global tender arises when the purchaser
either does not know about the vendors for a particular item in question or when he thinks that a
wider choice of vendor is possible through it, irrespective of his nation's boundaries. A few
reasons are :
• Lack of information on vendors
• Only a few vendors known
• When there are chances of cartel formation among known vendors
• Anticipation that more response may come
What is of importance in this popular mode is the way a global tender is floated. With internet
becoming the most powerful tool transcending the national boundaries, a wide range of
applications are now possible. There are tender portals (www.tendertiger.com,
www.indiatenders.com, etc.) on which one can upload the whole tender enquiry and then ask the
interested vendors to make offers. Besides, this increasingly popular way of inviting tenders ,
listing the tender in international trade journals, leading world newspapers etc. are other ways of
putting up a global tender enquiry. The idea is to give wide publicity of the tender, worldwide
and circumstances permitting ,to place the order on a foreign supplier too.

2) Open Tender :
An Open tender too like a Global tender tends to invite tender from any interested vendor. The
basic difference assumed between an open tender and a global tender enquiry is essentially the
range of its applicability. While a global tender gets the worldwide publicity, an open tender is
limited only within a country. Otherwise, the concept remains the same as it also seeks to elicit
better or wider response.
Since the Open tender enquiry is limited within the country itself , besides the internet mode , the
enquiry is also printed in the national dailies, internal trade bulletins etc for ensuring its wide
publicity, within the country. Any vendor who meets the tender requirements can make an offer.

3) Limited Tender :
When the issue of tender enquiry is limited only to a selected few vendors ,it is called Limited
Tender Enquiry (LTE). LTE is issued when the capabilities of the vendors is well known to the
purchaser. It is considered better than Global and Open tender modes as there is always an
element of uncertainty in those two modes with respect to the capabilities of the vendors.
For issuing LTE , a purchaser maintains a list of approved / registered vendors whose capabilities
are checked periodically.

4) Single Tender :
An STE is issued only when either the item is proprietary in nature, that is only one supplier
produces that item or where there may be more vendors but due to certain exigencies it is not

25
possible to devote time on evaluating the vendors' offers / one supplier can ,for sure , fulfill the
needs.
Which mode to use and when depends on many factors including company's procurement policy.
For example, for a small value purchase, if the policy does not prohibit, Single tender enquiry or
Limited tender enquiry is considered ideal. These are also ideal for high value and frequently
bought items.
On the other hand, for high value and non frequently bought items / systems , Open / Global
tenders are suited. In many government organizations, whose procurements are also called public
procurements for the reason that they spend public money for the public cause ,all the tenders are
to be invited only through Open / Global tenders.

Speculative Buying
When purchasing is done purely from the point of view of taking advantage of a speculated rise
in price of the commodity it is called Speculative buying. The intent is not to buy for the internal
consumption but to resell the commodity at a later date when the prices have gone up and to
make a profit by selling. The items may be those that are needed for internal consumption but the
quantity shall be much more than the requirement so as to take advantage of the coming price
rise.

Systems Contracting
Systems contract ,as the term suggests, is a contract of system of buyer with that of the seller.
It is a release system in which items, usually, commonly available off-the-shelf, are identified
and pre-priced in anticipation of certain usage.
Delivery releases are made against existing orders placed by purchase. This is a procedure
intended to help the buyer and the seller to reduce administrative expenses and at the same time
to ensure proper controls.
The system authorizes the designated persons of the buyer to place orders directly to the supplier
with the specific materials during a given contract period. The contract is thus finalized only
after it is ensured that an attempt has been made to integrate as many buyer-seller materials
management functions as possible. In this system the original indent, duly approved by
competent authorities, is shipped back with the items and avoiding the usual documents like
purchase orders, materials requisitions, expediting letters and acknowledgements, goods in
transit report, etc. The contract is simple, covering only delivery period, price and invoicing
procedure.
Systems contracting is particularly useful for items with low unit price and high consumption
profile as it relieves the buyers from the routine work. While Systems contract has certain
features in common with other purchasing agreements , it is this integration of buyer-seller
operations that clearly distinguishes it from other types of contracts.

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Rate Contracts
Rate contracts are mutual agreements between the buyer and the seller to operate a set of chosen
items, during a given period of time, for a fixed price or price variation. Under this system the
rates are fixed and at times even the quantity of the selected items. As and when the need arises
the buyer issues a Purchase order directly on the basis of the rate chart available on the supplier
who in turn supplies the items.
The system of rate contract is prevalent in public sector organizations and government
departments. It is common for the suppliers to advertise that they are on “rate contract” with the
DGS&D (Directorate General of Supply & Disposal), for the specific period for the given items.
After negotiation, the seller and the buyer agree to the rates of items. Application of rate contract
helps organizations cut down the internal administrative lead time as individual firms need not
go through the central purchasing departments and can place orders directly with the suppliers.
However, suppliers always demand higher prices for prompt delivery, as rate contracts normally
stipulate only the rate and not the schedule on which the item is needed. This difficulty has been
avoided by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of
fixing a minimum quantity is called the running contract and is being practiced by the railways
and the DGS&D.
As mentioned above, this system of buying helps an organisation reduce its internal as well as
the external lead time, reduces administrative work load as the files don't need to go up and
down, helps in building Buyer-supplier relationship as the contract period id usually one year
and then there is always a chance of the same players doing the next contract.
The system works well normally in a situation where the selected items are routinely consumed.
However, there is no compulsion that the demand be uniform over the period of time.

Reciprocity in Buying
In certain business situations a buyer may give preference to a supplier who also happens to be
his customer. This relationship is known as reciprocity. It is something like "I buy from you if
you buy from me"
One of the main questions for which this, otherwise simple way of buying, is always under the
scanner of purchasing ethics is its undue ability to restrict competition and fair play. One of the
major roles that any purchaser plays for his firm is in cost reduction arena which is attempted by
generating competition among the suppliers.
This principle gets a jolt through reciprocity in buying. However, when factors such as quality,
after sales service, price etc are equal normally a buyer would like to buy from his customer , if
for nothing then at least for having a good working relationship. However, the distinct
disadvantages of reciprocal buying outweigh the limited and narrow advantage that a firm may
derive out of it. Some of the main disadvantages of reciprocity are not being able to follow the
well laid criteria of quality, price and service.
A purchasing executive should not indulge in reciprocity on his initiative when the terms and
conditions are not equal with other suppliers. It is often found that less efficient manufacturers

27
and distributors gain by reciprocity what they are unable to gain by price and quality. Since this
tends to discourage competition and might lead to higher prices and fewer suppliers, reciprocity
should be practiced on a selective basis.

Zero Stock Buying

Zero stock buying refers to buying in a manner that the system ensures that the material is
delivered by the seller only when it is required and that no prior inventory of the item is
maintained by the buyer.
As the competition becomes more intense the need for a lean manufacturing system becomes
more focused. Keeping inventory thus is blocking huge money that is idle for the firm. Thus
Zero stock buying is more of an inventory safeguard rather than the normal buying. Normally,
under this system the firms try to operate on the basis of zero stock and the supplier holds the
stock for these firms.
Usually, the firms of the buyer and seller are close to each other so that the raw material of one is
the finished product of another. Alternatively, the system could work well if the seller holds the
inventory and if the two parties work in close coordination. However the price per item in this
system is slightly higher as the supplier may include the inventory carrying cost in the price. In
this system, the buyer need not lock up the capital and so the purchasing routine is reduced.
This also significantly reduces obsolescence of inventory, lead time and clerical efforts in paper
work. Thus, the seller can devote his marketing efforts to other customers and production
scheduling becomes easy.
In practice, the buyer is called upon to pay to the supplier only when the material is delivered as
per the need. For example, in India , say the Indian Oil Limited maintains its petrol and diesel
refilling stations inside the manufacturing premises of many companies. As and when petrol or
diesel is required ,say in a lorry, IOL fills that and a coupon is signed by the driver of the lorry.
Buyer makes the payment to IOL against that coupon.

Zero stock is becoming popular with the concepts such as Just-in-time approach that is similar to
it. However, in situations where the supplier has to transport material from one place to the other
with a fair distance in between, this system needs careful handling as one never knows the road
or weather conditions. Normally, the system caters to those items that are not very critical to
manufacturing. It best suits the situations where the output of one firm is the input of the other
firm with both the firms located nearby.

Blanket Orders
Under the Blanket Order system an agreement is done between the buyer and the supplier to
provide a required quantity of specified items, over a period of time, usually for one year, at an
agreed price. This system minimizes the administrative expenses and is useful for 'C' class items
for which rigid controls are not required.

28
Deliveries are made depending upon the buyer’s needs. The system relieves the buyer from
routine work, giving him more time for focusing attention on high value items such as 'A' and
part of 'B' class.
Blanket Order system requires fewer purchase orders and thus reduces clerical work. It often
achieves lower prices through quantity discounts by grouping the requirements. The supplier,
under the system, maintains adequate inventory to meet the blanket orders, but he does not incur
selling costs, once the negotiations are finalised.

Purchase Procedure
A typical purchase department is usually engaged in purchasing a number of materials and
services falling in different categories. The activities are performed regularly by purchase
professionals with the objective of fulfilling organisation's materials and services needs.
Naturally, depending upon the nature of procurement, environmental practices etc the purchasing
systems and procedures may also vary substantially. However, purchase procedure can be seen
to have a bit of standardisation across the globe. A professional purchasing system includes the
following steps eventually in a purchasing cycle.:
Recognition and description of need
Transmission of need
Selection of Source to satisfy the need
Contracting with the accepted source
Following up with the source
Receiving and inspecting material
Payment and closure of the case

Recognition and description of need

Procurement activities in an organisation start right since the stage a need is felt for any material
or service. An organisation categorises it's material requirements into two broad ways , viz.
Inventory Control item or Non inventory item.
A department within the organisation may require an item which is non inventory and thus the
department concerned shall have to describe the need. It implies writing down the specification
of the item , the volume (quantity) etc of the item and some other related information to process
it further.
For an Inventory item ,usually, there is a forecasting method by which the need for an item is
addressed. The need for an item may be at regular interval , one time or even be sporadic in
nature. This could be an item needed for running a machine , certain raw material needed for
production, a service in terms of maintenance of a machine or for doing certain job needing the
employment of labour, materials, machines etc.
The need, also called materials requirement, must be defined clearly as this is the stage where the
right need description shall ultimately lead to getting the right material / service.

29
Once the need is made available to the purchaser, through a requisition , he has to check the
requisition for its correctness and completeness and then to ensure that appropriate method has
been used to satisfy the user and also to select the supplier.

Transmission of Need (Indent Raising)

Once need for a specific item or service has been established the next step shall be to transmit the
need to the purchasing people for processing at their end. It may require certain paper work or
electronic media to do this job. The whole system of purchasing, in terms of phases or grouping
of related activities, can be classified as follows :
(1) Pre-purchase (Ordering) system;
(2) Ordering system;
(3) Post-purchase (Ordering) system
The salient features in each of the systems mentioned are as follows :

(1) Pre-purchase system : Activities such as initiating the purchase through raising requisitions,
requirement programs, selection of suppliers, obtaining quotations and evaluating them, are
broadly the pre-purchase activities.

(A) Requisitions : The department concerned (within the orgnisation), in need of a material,
usually presents a completed requisition form. Different types of requisitions used are:
1) Standard Purchase Requisition
A Purchase requisition is a document that is used to list down the requirement and is sent to
Purchase department for further processing. In some organizations , especially bigger ones, the
cost estimates also form part of the indent and as such are to be done by the indentor. Estimated
values provide a basis for examining the reasonableness of the prices offered by the parties.
2) Bill of Materials
In brief, all the parts / components needed to make a product ,when listed along with the
individual quantity, are called Bill of materials.
This is basically a list ,structured in the same way a product can be thought of. For example,
when a design personal produces design of a new product then he may be needing a number of
parts that ultimately when assembled shall produce the item concerned.
List of such parts is called Bill of Materials (BOM).All other things remain the same as in case
of other forms of transmission of need of an item
Selection of Source (Supplier)
'Sourcing' or 'Selection of source/s' is a major challenge for any Purchasing manager. Source of
supply of required materials is basically selection of a suitable supplier. The Purchasing manager
has to ensure , getting the material / service from the right source (one of 5 R).
Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is received
in the Purchase department ,the concerned dealing person scrutinizes it , in respect of :
• The complete specifications including drawings, if required

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• Consumption pattern
• Stock in hand and dues in
• Budget availability
• Availability of all prescribed enclosures and certificates,
• Estimates
• Inspection guidelines, if any
On being fully satisfied that the next stage activities i.e. sourcing is now called for, the mode of
selection of source , often called mode of tendering is decided.

Contracting with the accepted source

In many firms , if the number of items is not large then the sources are known and on the basis of
suppliers record the Purchase order can be placed. Tendering is a process by which a potential
source is contacted through a notice called Notice Inviting Tender (NIT). The NIT contains the
details of material / service required , the terms and conditions applicable for entering into an
agreement with the seller, offers made in response to NIT by the probable seller (Bidder) , for
finally reaching the point of agreement between the selected bidder and the buyer.
NIT is issued by the buyer and Tender is submitted by the interested bidders/tenderers.
Depending upon various reasons, mainly emanating from the extent of knowledge about the
existence of a source (supplier), the mode of tendering is decided.
A tendering process addresses itself by clearly describing the need i.e. materials or service with
complete specification (tender specification) so that there is no ambiguity left between the
purchaser and the seller, identifying the sources (vendors / suppliers )from whom the need can be
satisfied and spelling out the terms and conditions for agreement between the seller and the
buyer. It's basically the urge to get the right price that the concept of competitive buying
emerged. It implies generating competition among the sellers in respect to the price for their
acceptable materials / service, on the basis of other terms and conditions, by the buyer. It is based
on the tendering process that ultimately the seller is selected for placement of order.
Besides the above , other dimension of the modes of tendering is the tendering steps that is to be
followed while scrutinizing the tenders. The following are popularly used methods :
• Single Bid
• Two stage Bid
• three stage Bid etc.

Following up with the source

Once the order is placed, the purchase department will follow up the process, to ensure proper
supply of material at the right time. Communication will be made through letters, emails, phone
calls and a record will be maintained about the follow up actions taken.

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Receiving and inspecting material
On receipt of materials, the count, quality and price are compared with those quoted in the
purchase order. Any discrepancy found will be addressed immediately to the supplier and
necessary actions have been taken. Defective items are separated and communicated to the
supplier. Also, clear details were sent to the finance department to stop payment for the defective
ones.
Payment and closure of the case
Once the Procurement process is over and all records updated, the purchase department will give
clearance for the payment to be made for the purchase.

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 II UNIT

Vendor development is one of the popular techniques of strategic sourcing, which improves the
value we receive from suppliers. Vendor Development can be defined as any activity that a
Buying Firm undertakes to improve a Supplier's performance and capabilities to meet the Buying
Firms' supply needs.
Prerequisite to a successful Materials Management is the availability of a sound vendor base
which is now rightly acknowledged as an extended arm of the business. One of main reasons of
failure of many Supply Chains , in recent years, has been the inability to hold trusted vendors
together.
Vendor management, therefore, requires careful planning and execution , over a fairly long
period of time. Management of Vendors is attempted through the following ways :

Vendor Registration -Vendor Development - Vendor Rating - Vendor Exploration

Vendor Registration :

For ensuring continuous supply of right quality materials required , at the optimum cost, it is
essential to have a dependable, competent & competitive vendor base.

The Limited Tender Enquiry (LTE) is issued only when reliable manufacturers/ suppliers/
traders/ contractors are known and for this purpose, there is a need to maintain a list of registered
vendors. So, Vendors are empanelled for the supply of various category/ subcategory of items.

For this purpose, the vendors interested to supply the specific category/sub-category of items are
asked to submit the application along with all the documents required to establish their financial
& technical capability. The application forms so received are scrutinized and the vendor capacity
assessment is carried out through inspection department / technical experts to establish the
technical capability of the vendors. These vendors are listed as registered after following up
certain processes.

Vendor Development :

Many process industries like to search the alternative and less costly material as substitution of
the currently used costlier materials. The less the procurement cost the more is the profit.

Also, there may be situations where the existing suppliers may not be willing to supply the items
on various grounds, thus, necessitating ,looking into different alternatives.

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An efficient Materials Manager would devote enough time to develop substitutes & sources of
supply with a view to reduce cost of input materials and also to have reliable alternative source
for foreign sources.

Normally, in large manufacturing organisations, a Vendor Development cell (VDC) remains

engaged all through for the purpose. When the need to develop a Vendor for an item is felt the
requisition for such items is made by concerned department indicating the trial quantity and the
potential vendors . Trial Orders are placed on potential vendors and also necessary help is
rendered to them to come up to the desired level.

Vendor Rating

The vendors also like to be given priority be the purchaser if it constantly improves its selling
performance which from a purchaser point of view is mainly its offered price, quality and
punctuality in delivery.

For Purchaser ,there shall always be a need to continuously monitor and update its registered
vendor base so that the organisation continues to have the most competent & competitive
vendors in its list of vendors. For this purpose the efforts are made to monitor supply
performance of the vendors and rate them objectively.

The major factors usually considered for such vendor rating are competitiveness of vendor
(price), quality of supply and delivery adherence.
Vendor rating may also be used for removing a vendor from registered vendor list and also in the
selection of vendors while issuing Limited Tender Enquiry.

Vendor Exploration :
To have competitive & competent sources of supply, efforts are made to explore suitable vendors
from various sources like internet websites, international bulletins,vendors list of other similar
manufacturing organisations etc. This is known as vendor exploration and in the competitive
environment it is taken as a serious activity.

Stages in source selection

The Successive Stages are: 1. Searching 2. Selection 3. Negotiations 4. Trial order 5. Rating.
1. Searching:

The need for a material is the starting point. The search is on to find out the most suitable
supplier. This process begins with the finalization of specifications in consultation with technical
departments. The identification of the sources of supply needs I exhaustive initial survey.

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Trade Journals, newspaper advertisements and other sources of information such as the
governmental departments for eliciting trade information are consulted. The routine sales-calls
by suppliers’ representations are a very important source of information.

These representations usually present the products in which the firm is interested. The entire
product line of the supplier company is made known to the buyers. While in the process of
source selection, the buyer is placed in such a position through various information provided by
various aqueous, trade shows, technical exhibitions, samples etc. that the source selection can be
more effective. The search process thus ends.

2. Selection:
The buyer is now provided with adequate information as to the sources of suppliers. The more
intimate knowledge of the supplier is necessary for right selection. So, specific information on
the supplier’s financial strength, quality, facilities, efficiency, industrial relations, technical
excellence and position in industry have to be collected.

This is to say the identification of the possible sources that will enable the buyer to select such
suppliers who will be just suitable to meet his requirements at present and in future at
competitive price levels. The buyer makes enquiries about the possible sources. Requests also
come from certain progressive suppliers for their inclusion in the approved list of the suppliers.
The buyer’s enquiry and the suppliers request can only terminate when the supplier’s
representatives visit organization.

This meeting between the buyers and the supplier’s representative brings the aeries closer and
enables them to know each other more intimately. Various technical matters are thrashed out in
consultation with the vendor’s technical personnel and thus a clear picture of agreement emerges.

The buyer consolidates the information gathered through his meeting with the vendor. He may
also write to some of the organisation which may be using the materials supplied by the vendor
to assess vendor’s rating with his clients. Now, after negotiations, trial orders are placed.

3. Negotiations:
The process of negotiations starts after the completion of screening and selection of the
suppliers. The negotiations or regular basis and personal contacts and sometimes conferences
with the suppliers ensure correct and cordial relations between the buyer and the supplier and his
is very essential for mutual cooperation.

4. Trial Orders:
Through negotiations when both the parties — the buyer and the vendor — come to mutual
understanding, trial orders are placed, formally the trial orders do not exceed more than a

35
month’s requirements. This is done with a view to test the vendor’s capability in meeting the
buyer’s needs.

5. Rating:
Since there are a number of vendors usually, the question of rating irises. On the basis of various
considerations, the buyers has to apportion his requirements among the because on the correct
rating of the vendors depends there retention or rejection. So, continuous rating an important
function of the materials management. There are different rating systems. Computed on a
periodic basis, vendor rating enables the buyers to compare the vendors. Thus proceeds the
process of source selection.

Vendor rating

A vendor is any person or company that sells goods or services to someone else in the economic
production chain.

Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given
standing, status, or title according to their attainment of some level of performance, such as
delivery, lead time, quality, price, or some combination of variables.

There are eight common supplier selection criteria, in no formal order:

Cost.
Quality & Safety.
Delivery.
Service.
Social Responsibility.
Convenience/Simplicity.
Risk.
Agility.
cultural Fit – including values.
Value – value for money and value generation opportunities.
Experience in the market and current references.
Flexibility.

Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given
standing, status, or title according to their attainment of some level of performance, such as
delivery, lead time, quality, price, or some combination of variables. The motivation for the
establishment of such a rating system is part of the effort of manufacturers and service firms to
ensure that the desired characteristics of a purchased product or service is built in and not
determined later by some after-the-fact indicator. The vendor rating may take the form of a
hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in
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between the two. For some firms, the vendor rating may come in the form of some sort of award
system or as some variation of certification. Much of this attention to vender rating is a direct
result of the widespread implementation of the just-in-time concept in the United States and its
focus on the critical role of the buyer-supplier relationship.

Most firms want vendors that will produce all of the products and services defect-free and
deliver them just in time (or as close to this ideal as reasonably possible). Some type of vehicle is
needed to determine which supplying firms are capable of coming satisfactorily close to this and
thus to be retained as current suppliers. One such vehicle is the vendor rating.

In order to accomplish the rating of vendors, some sort of review process must take place. The
process begins with the identification of vendors who not only can supply the needed product or
service but is a strategic match for the buying firm. Then important factors to be used as criteria
for vendor evaluation are determined. These are usually variables that add value to the process
through increased service or decreased cost. After determining which factors are critical, a
method is devised that allows the vendor to be judged or rated on each individual factor.

It could be numeric rating or a Likert-scale ranking. The individual ratings can then be weighted
according to importance, and pooled to arrive at an overall vendor rating. The process can be
somewhat complex in that many factors can be complementary or conflicting. The process is
further complicated by fact that some factors are quantitatively measured and others subjectively.

Once established, the rating system must be introduced to the supplying firm through some sort
of formal education process. Once the buying firm is assured that the vendor understands what is
expected and is able and willing to participate, the evaluation process can begin. The evaluation
could be an ongoing process or it could occur within a predetermined time frame, such as
quarterly. Of course the rating must be conveyed to the participating vendor with some firms
actually publishing overall vendor standings. If problems are exposed, the vendor should
formally present an action plan designed to overcome any problems that may have surfaced.
Many buying firms require the vendor to show continuing improvement in predetermined critical
areas.

CRITERIA FOR VENDOR SELECTION

1. Full Price

Your goal should always be to get the maximum value for the lowest possible cost. To
accomplish that, you need to receive more than one bid.
Be wary of vendors who submit estimates far lower than others. You may receive less than
acceptable products or services, or you may end up paying more than the estimated cost in fees
that weren’t part of the quote.

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Communicate to prospects the full extent of your needs so you receive an accurate bid. Stick to
your original goals and needs, otherwise you may end up buying a Ferrari when a Mustang
would suffice.
Make sure each bid includes every line-item cost. You should understand if the vendor intends to
add travel surcharges, administrative expenses or maintenance fees.

2. Quality of Product or Service

Price doesn’t matter if the product or service is poor quality.In many ways, hiring a vendor is
like hiring an employee. Most people would not employ a worker without checking references,
and you should not make that mistake when selecting a vendor, either You should ask each
bidder for at least three references. If a vendor hesitates, that should raise a red flag.
Then make sure you call those references and ask questions such as: Was the vendor on time?
Were they professional? If something went wrong, did they make it right? Would you use them
again?
Where applicable, ask to see samples of the vendor’s previous work.

3. Customer Service
Companies with a reputation for exemplary customer service will more than likely take good
care of you. As mentioned above, references are invaluable. Ask for referrals from people whose
opinion you trust. Ask those customers specifically about customer service, especially service
after the sale.Also, take advantage of the digital age in which we live. People who have poor
experiences with companies often vent their frustrations on websites and message boards. An
Internet search can uncover this kind of feedback.

4. Ethics and Integrity of Company

Your business integrity is often tied to the integrity of the vendors you use.
A valuable resource is the Better Business Bureau. The organization’s website has a search
function that allows you to search businesses by industry or company name. You can see how
many complaints the BBB has on file for a particular firm, and if it has been the subject of any
recent government action.
An Internet search can also yield a lot of company information, both positive (e.g.–charitable
involvements) and negative (e.g.–newspaper articles about lawsuits).

5. Professionalism of Employees

When a vendor represents your organization their employees do the same. I used a vendor once
that sent a technician who made inappropriate advances toward our administrative assistant.

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This is perhaps the most difficult factor to check. One suggestion is to read the company’s
employment ads. Job postings contain the important qualities a company looks for in a
prospective employee and can provide clues as to how their workers conduct themselves on the
job.

For example, I recall seeing a television ad from a heating and cooling company looking for new
technicians. The ad specifically stated it would only hire polite individuals. This told me they
were interested in more than just technical skills, but wanted employees with people skills as
well.

6. Recommendations from Others

Word of mouth is always a great way to find a vendor if everything else is equal. This is an area
where you should leverage any networking groups to which you belong. Ask the people in your
Chamber of Commerce directory, your LinkedIn connections, the members of your professional
organizations and the people who you attend church with who they used in similar situations.

7. Existing Relationships

By the same token, leverage the experience you already have. I still recommend soliciting other
bids to ensure that a previously used contractor still provides the best value for your money.

Also look at your customers as potential vendors. If they score well on the other six factors,
hiring one of your current clients is an excellent way to enhance your existing relationship. It
also provides the opportunity to barter your services in return for theirs.

Asking the right questions and conducting thorough research will improve the chances of having
a positive vendor experience instead of over-paying for a half-finished job.

Pricing factors include the following:

 Competitive pricing. The prices paid should be comparable to those of vendors providing
similar product and services. Quote requests should compare favorably to other vendors.
 Price stability. Prices should be reasonably stable over time.
 Price accuracy. There should be a low number of variances from purchase-order prices on
invoiced received.
 Advance notice of price changes. The vendor should provide adequate advance notice of
price changes.
 Sensitive to costs. The vendor should demonstrate respect for the customer firm's bottom
line and show an understanding of its needs. Possible cost savings could be suggested.

39
 The vendor should also exhibit knowledge of the market and share this insight with the
buying firm.
 Billing. Are vendor invoices are accurate? The average length of time to receive credit
memos should be reasonable. Estimates should not vary significantly from the final
invoice. Effective vendor bills are timely and easy to read and understand.

Quality factors include:

 Compliance with purchase order. The vendor should comply with terms and conditions as
stated in the purchase order. Does the vendor show an understanding of the customer
firm's expectations?
 Conformity to specifications. The product or service must conform to the specifications
identified in the request for proposal and purchase order. Does the product perform as
expected?
 Reliability. Is the rate of product failure within reasonable limits?
 Reliability of repairs. Is all repair and rework acceptable?
 Durability. Is the time until replacement is necessary reasonable?
 Support. Is quality support available from the vendor? Immediate response to and
resolution of the problem is desirable.
 Warranty. The length and provisions of warranty protection offered should be reasonable.
Are warranty problems resolved in a timely manner?
 State-of-the-art product/service. Does the vendor offer products and services that are
consistent with the industry state-of-the-art? The vendor should consistently refresh
product life by adding enhancements. It should also work with the buying firm in new
product development.

Delivery factors include the following:

 Time. Does the vendor deliver products and services on time; is the actual receipt date on
or close to the promised date? Does the promised date correspond to the vendor's
published lead times? Also, are requests for information, proposals, and quotes swiftly
answered?
 Quantity. Does the vendor deliver the correct items or services in the contracted quantity?
 Lead time. Is the average time for delivery comparable to that of other vendors for similar
products and services?
 Packaging. Packaging should be sturdy, suitable, properly marked, and undamaged.
Pallets should be the proper size with no overhang.
 Documentation. Does the vendor furnish proper documents (packing slips, invoices,
technical manual, etc.) with correct material codes and proper purchase order numbers?
 Emergency delivery. Does the vendor demonstrate extra effort to meet requirements
when an emergency delivery is requested?

40
Finally, these are service factors to consider:

 Good vendor representatives have sincere desire to serve. Vendor reps display courteous
and professional approach, and handle complaints effectively. The vendor should also
provide up-to-date catalogs, price information, and technical information. Does the
vendor act as the buying firm's advocate within the supplying firm?
 Inside sales. Inside sales should display knowledge of buying firms needs. It should also
be helpful with customer inquiries involving order confirmation, shipping schedules,
shipping discrepancies, and invoice errors.
 Technical support. Does the vendor provide technical support for maintenance, repair,
and installation situations? Does it provide technical instructions, documentation, general
information? Are support personnel courteous, professional, and knowledgeable? The
vendor should provide training on the effective use of its products or services.
 Emergency support. Does the vendor provide emergency support for repair or
replacement of a failed product.
 Problem resolution. The vendor should respond in a timely manner to resolve problems.
An excellent vendor provides follow-up on status of problem correction.

Benefits of vendor rating systems include:

 Helping minimize subjectivity in judgment and make it possible to consider all relevant
criteria in assessing suppliers.
 Providing feedback from all areas in one package.
 Facilitating better communication with vendors.
 Providing overall control of the vendor base.
 Requiring specific action to correct identified performance weaknesses.
 Establishing continuous review standards for vendors, thus ensuring continuous
improvement of vendor performance.
 Building vendor partnerships, especially with suppliers having strategic links.
 Developing a performance-based culture.

Vendor rating methods are as follows :

1. Weighted Point Plan (factors considered are quality, price and delivery schedule) the
buyer decides on1. Factor important form evaluation. Weightages for each factor . The
vendor performance in respect of each factor.
2. Cost Ratio Method (factors considered are identifiable purchasing and receiving costs to
the value of shipment received from supplier) - Under this method, the vendor rating is
done on the basis of various costs incurred for procuring the materials from various
suppliers. The cost ratios are ascertained for the different rating variables such as

41
 quality, price, timely delivery etc. The cost ratio is calculated in percentage on the basis
of total individual cost and total value of purchase.
3. Heston's Vendor Selection Method (selecting the ideal standards and diluting them till
one or two vendors qualify)
4. Forced Dec Lion Matrix Method (using relative weight ages attributable to various
factors like price, quality, lead time, service etc.)
5. Dowser's Key Questions Method (answering key questions regarding need for a vendor
like why, who, how etc. and thus, building a vendor profile)
6. Spear Supplier Evaluation Method (mostly, some macro level factors used to analyse
are management, engineering, finance, material, manufacturing, quality and reliability
etc.)
7. IBM Quality Rating (uses factors like desired inspection costs to actual inspection
costs)
8. Bell Quality Rating System (uses factors like acceptable and rejected material)

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 III UNIT

Spare parts management

Spare parts management is a balance between making sure that you don't stock out of a critical
part while at the same time keeping your inventory value as low as possible.

Spare part means a part or sub-unit or a major assembly which is available in stock for
substitution when needed.

Need for Scientific Management of Spare Parts

Factors which necessitate scientific spare parts management are:„
 Random and unpredictable pattern of failure of machines and equipments„
 Long lead time required for procurement of spare parts from original equipment
manufacturers„
 Difficulty in manufacturing of spare parts because of non-availability of special
materials„
 High tendency for obsolescence of machines and equipments

Classification of Spare Parts

 Regularly used spare parts„
 Irregularly used spare parts
Classification of spare parts based on movement analysis
 Fast moving„
 Slow moving„
 Non-moving

Classification of spare parts based on functional characteristics

 Capital spares
Capital spares are spare parts which, although acknowledged to have a long life or a
small chance of failure, would cause a long shutdown of equipment because it would take
a long time to get a replacement for them.
 Rotable spares or Repairable spares
Repairable parts are parts that are deemed worthy of repair, usually by virtue of economic
consideration of their repair cost. Rather than bear the cost of completely replacing a
finished product, repairables typically are designed to enable more affordable
maintenance by being more modular. This allows components to be more easily removed,
repaired, and replaced, enabling cheaper replacement. Spare parts that are needed to
support condemnation of repairable parts are known as replenishment spares .

43
 A rotable pool is a pool of repairable spare parts inventory set aside to allow for multiple
repairs to be accomplished simultaneously. This can be used to minimize stockout
conditions for repairable items.
 Consumable parts
Parts that are not repairable, are considered consumable parts. Consumable parts are
usually scrapped, or "condemned", when they are found to have failed. Since no attempt
at repair is made, for a fixed mean time between failures (MTBF), replacement rates for
consumption of consumables are higher than an equivalent item treated as a repairable
part. Because of this, consumables tend to be lower cost items.
Because consumables are lower cost and higher volume, economies of scale can be found
by ordering in large lot sizes, a so-called Economic order quantity. These are regularly
used items such as fasteners, seals, gaskets, and fuse etc. These are usually low value
items.
 Overhauling spares– These spares are those spare parts which must be replaced every
time the equipment is dissembled and re-assembled.
 Wear and tear spares- These spare are those spare parts which have regular wear and
tear in the course of operation of the equipment and need to be replaced after definite
number of hours of equipment operation.
 Insurance spares – An insurance spare is a spare part whose impact of not holding the
spare part in stores can be massive. Downtime costs of the equipment for such spares
often far outweigh all the other costs. Hence, by definition, it is an insurance against
such failures for which the down time costs are very high. They do not become obsolete
until the parent equipment remains under use. These spare parts may lie in the stores for
many years. These spares need conservation activities at regular intervals. These spares
block the working capital.

Analysis of spares parts inventory

For the successful spare parts management, it is essential to analyze the spare parts inventory
based on various characteristics such as the frequency of issues, the annual consumption value,
the criticality, the lead time and the unit price. This is essential since it is not be possible to
exercise the same type of control for all items of spare parts and also the same type of control
may not be really effective for all the items. Commonly used analyses of the spare parts
inventory are described below.

FSN analysis – This type of classification is based on the frequency of issues and use of the
spare parts. Under this classification F stands for fast moving spare parts, S stands for slow
moving spare parts and N for stands for non moving spare part items. This form of classification
identifies the items frequently issued, less frequently issued for use and the items which are not
issued for a very long period. This classification helps spare parts management in establishing

44
most suitable stores layout. It also helps management of the organization where to allocate
resources for purchase of spare parts. It further helps the management to take decision
strategically whether the non moving spare parts inventory is continued to be stored or disposed
of to release the working capital locked in these spare parts.
ABC analysis – This method of classification for the spare parts is on the basis of the
annualconsumption value and is based on the Pareto’s principle. Under this classification system
type ‘A’ are those 10 % spare parts which contributes towards 70 % of the total consumption
value. Type ‘B’ are another 20 % of total spares which account for about 20 % of total
consumption value and type ‘C’ are the balance 70 % of total spares which account for only 10
% of total consumption value. This type of analysis helps management of the organization where
to provide maximum control and where there need to have more than one supplier for the spare
parts. Fig 1 shows ABC analysi
ABC classification

VED analysis – This type of classification is based on the criticality of the spare parts.
Criticality of a spare part can be determined from the production downtime loss, due to spare
being not available when required. Based on criticality, spare parts are conventionally classified
into three classes, viz. vital (V), essential (E), and desirable (D). The VED analysis helps in
focusing the attention of the management on vital items and ensuring their availability by
frequent review and reporting.
SDE analysis – This classification is carried out based on the lead time needed to procure the
spare part. As per this classification scarce (S) items are those items which require a very long
lead time. Difficult (D) items needs moderate lead time and easily available (E) Items have very
short delivery and often these items are available off the shelf. This classification helps in
reducing the lead time and ultimately it helps in the reduction of the stock out costs in case of
stock outs. This also results in streamlining the purchase and receiving systems and procedures.
HML analysis – This classification is based on the unit price of the spare parts. Under this
classification ‘H’ items are those items whose unit cost is very high. ‘M’ items are medium cost
spare parts while ‘L’ items are those spare parts whose unit value is low. This type of analysis
helps in exercising control at the shop floor level i.e. at the user point. High value spare parts are
to be replaced after proper authorization. Efforts are necessary to find out the means for
prolonging the life of high value spare parts through reconditioning and repair. Also, it may be

45
worthwhile to apply the techniques of value analysis to find out a less expensive substitute for H
items.

Problems and issues in spare parts management

The major problem in the supply of spare parts, is planning, executing, the required spares
planning.
Spare parts requirement requires articulate planning procedural lead time, and the correct
required spares.
Drawing/specification should be confirm to standards.
The Purchase order should given correct description, code no: drawings and amendments if any
in due course.
The supplier should be a class supplier.

The major problem in spares part management is identification and procurement of exact match.
Normally in India, the technicians on the road are not aware of exact specifications and try to fit
the materials available with them to make quick money. Standard workshops are the best
solution. They procure and manage spares parts from genuine source and exact match.

Identification of spare parts is not a problem, but keeping inventory of the spares is the biggest
problem. How do you identify the correct spares, and do allow to keep excess inventory. A good
planning for spares, with proper drawing/identification/requirement of spares is required.
Forecast the required quantity and keep minimum stock.

The identification of parts are not a problem. now a days most of the international manufacturers
have their own EPC. With the correct VIN in automobiles and the so called Serial and Model nos
in Industrial or, Marine applications along with a bit of technical knowledge about the product
the identification factor is no problem. On the contrary the intelligent stock control by setting the
correct re-order levels, interchangeability, procurement span, back to back orders to sustain the
required stock status are the basic things to be observed in parts management. Forecasting ability
to a great extent is a boon

Do not depend upon the principals only for all your parts. You should have contacts with your
fellow dealers, distributors and even with the fleet owners.
You can count on them on an emergency to save time and though reduce the down time.

Major problem is human error. If you do not have a controller meticulous with scrutinizing said
assets/inventory, then no m

46
UNIQUE PROBLEMS OF SPARE PARTSMANAGEMENT

Raw materials and consumables are primary materials, which are related to continuous
functioning of the machines. Spare parts are ‘secondary’ items and are related non-functioning of
the machines. These characteristics create most of the problems of managing spare parts
inventory.

These are summarized below:

1)Requirements are unpredictable in time and quantity.

2)In relation to consumption rate the safety stock is very high, resulting in idle inventory.
3)Separate inventory control system needed for different types of spare parts
4)Detailed inspection of purchased parts is not possible. This gives rise to spurious spares
market.
5)Data is not available for estimating consumption rates for most spares. Engineering assessment
can go wrong for new type of machines.
6)Prices of spare parts are not related to cost of this production, but to other commercial
interests.
7)Changes in models, modifications create difficulties in procurement of older parts.
8)The range of spare parts that needed is too large for effective control by manual methods.
9)The large variety makes identification and preservation difficult and error prone.
10)Obsolescence is common. Even serviceable parts have practically no resale value

Spare parts refer to the part requirements for keeping equipment in good operating situations and
are decisive from an operational standpoint. Managing spare parts is the biggest challenge in
materials and maintenance management. With the scientific tools available now, much
improvement can be achieved, provided those tools are used.

The spare parts go through six stages in their life cycle: Design and specifications; Determination
of initial requirements; Procurement; Storage and preservation; Issue and replenishment;
Disposal and damaged, surplus and obsolete spares. Like inventory management, ABC and VED
analysis play important role in spare parts management. For low consumption and slow moving
spares, the re-order level has been computed.MIS of spare parts management can be effectively
used for preparation of reports for stock and consumption, pending indents, purchase orders,
stock-out etc. There are certain misconceptions, which interpret spare parts management as
blockage, cost driver and restricts the introduction of new parts. However effective design
decisions and reviewing new parts procedure can change these myths. Comparison of spare parts
management with numerous business processes such as ERP systems, MES systems, SCM
systems and MIS systems can give a clear picture of diverse classes of applications. At last spare

47
parts management is a constructive way for implementing a robust in-house parts management,
which is increasingly giving an edge to the organizations.

STORE KEEPING

Store keeping is a specialized and important function of materials control that is especially
concerned with the physical storage of goods. The storekeeper is responsible for safeguarding
and keeping the materials and suppliers in proper place unit required in production. .

A storehouse is a building provided for preserving materials, stores and finished goods. The in-
charge of store is called storekeeper or stores manager. The organisation of the stores department
depends upon the size and layout of the factory, nature of the materials stored and frequency of
purchases and issue of materials.

According to Alford and Beatty “storekeeping is that aspect of material control concerned with
the physical storage of goods.” In other words, storekeeping relates to art of preserving raw
materials, work-in-progress and finished goods in the stores.

Objectives of storekeeping:

Following are the main objectives of an efficient system of storekeeping:

1. To ensure uninterrupted supply of materials and stores without delay to various production
and service departments of the organisation.

2. To prevent overstocking and understocking of materials,

3. To protect materials from pilferage, theft fire and other risks.

4. To minimise the storage costs.

5. To ensure proper and continuous control over materials.

6. To ensure most effective utilisation of available storage space and workers engaged in the
process of storekeeping.

Functions of Storekeeping:

In the light of above objects, the functions performed by the stores department are outlined
below:

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1. Issuing purchase requisitions to Purchase Department as and when necessity for materials in
stores arises.

2. Receiving purchased materials from the purchase department and to confirm their quality and
quantity with the purchase order.

3. Storing and preserving materials at proper and convenient places so that items could be easily
located.

4. Storing the materials in such a manner so as to minimise the occurrence of risks and to prevent
losses due to defective storage handling.

5. Issuing materials to various departments against material requisition slips duly authorized by
the respective departmental heads.

6. Undertaking a proper system of inventory control, taking up physical inventory of all stores at
periodical intervals and also to maintain proper records of inventory.

7. Providing full information about the availability of materials and goods etc., whenever so
necessary by maintaining proper stores records with the help of bin cards and stores ledger etc.

Advantages of Stores:

(a) It is economical because there is economy in floor space, office overheads, stationery etc.

(b) It ensures better control and supervision because of availability of specialised knowledge and
experience of stores staff.

(c) Better lay-out is possible.

(d) It facilitates inventory checks.

(e) The amount of capital invested in stock is minimised.

(f) Since all stores are located in one place, it becomes convenient to control the physical stock
balances more effectively.

(g) Concise reports on scrap, obsolete stocks can be prepared regularly.

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(h) Better security arrangement can be made.

But centralised stores have some disadvantages.

Disadvantages:

(a) It takes time to deliver materials to production departments if store is situated at some
distance from many departments. So it causes inconvenience and delay.

(b) There is a greater risk of loss by fire because of concentration of all types of materials in one
place.

(c) There is increased transportation cost.

(d) Breakdowns in transport in central store may cause production stoppage leading to increased
cost.

(e) Administration becomes too complicated in a very large store.

TYPES OF STORES

Stores may be centralised or decentralised.

Centralised storage means a single store for the whole organisation, whereas decentralised
storage means independent small stores attached to various departments. Centralised
storekeeping ensures better layout and control of stores, economical use of storage space, lesser
staff, saving in storage costs and appointment of experts for handling storage problems. It further
ensures continuous stock checking.

It suffers from certain drawbacks also. It leads to higher cost of materials handling, delay in issue
of materials to respective departments, exposure of materials to risks of fire and accident losses
are practical difficulties in managing big stores.

On the other hand, decentralised stores involve lesser costs and time in moving bulky materials
to distant departments and are helpful in avoiding overcrowding in central store. However, it too
suffers from certain drawbacks viz., uniformity in storage policy of goods cannot be achieved
under decentralised storekeeping, more staff is needed and experts may not be appointed.

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Advantages of a Centralised Store:

i. Purchase order can be placed for the total requirements of the firm and the larger order results
in cost savings.

ii. As there are many small stocks, the total buffer stock is much higher which leads to:

(a) Less capital investment in Stocks;

(b) Less space taken up;

(c) Less danger of obsolescence and deterioration; and

(d) Less time taken for checking stock balances.

iii. Better supervision is possible for using specialised skills and equipment.

iv. Administration cost relating to stock recording is less.

v. Better layout of Stores is possible which results in efficiency in stock control.

vi. Absence of any worker does not affect the work since staff become acquainted with different
types of stores.

vii. Better security arrangements can be made.

Disadvantages of Centralised Stores:

The centralised storage of materials suffers from the following disadvantages:

i. It involves increased transportation costs.

ii. It causes inconvenience and delay in supply of materials as the production depart-ments have
to obtain supply from the store situated at a distance.

iii. More frequent movements of small quantities of materials may increase costs and cause
production control problems.

iv. Greater risks of loss by fire.

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STORE LAYOUT

The stores department should conveniently be located so that it can receive materials from the
suppliers and issue materials to production department without making much delay. It must have
easy access to any part of the factory to minimise expense. So, it is desirable that store should be
located centrally to discharge its responsibilities efficiently.

In large factories having many departments the store cannot be situated in a place from where
materials can conveniently be delivered and at the same time its location shall be near the
receiving department. So, it is necessary to set up sub-stores situated conveniently to serve a
particular part of the organisation.

The layout of the stores department requires thoughtful considerations. Racks, bins, shelves etc.
must be arranged for easy access. There must be enough provision for open space for the passage
of trucks. Special arrangement should be made for the storage of materials which are affected by
atmospheric conditions.

Heavy and bulky goods which cannot be kept in racks or bins are to be kept on floor. In that
case, the area of the floor where these materials are to be kept should be marked with white lines
indicating the area kept reserved for storing those materials.

Store Design and Layout - Different Floor Plans and Layouts

Opening a retail store is no joke and requires meticulous planning and detailed knowledge.

Location

Make sure your store is in a prime location and is easily accessible to the end-users. Do not open
a store at a secluded place.

Floor Plan

The retailer must plan out each and everything well, the location of the shelves or racks to
display the merchandise, the position of the mannequins or the cash counter and so on.

1. Straight Floor Plan

The straight floor plan makes optimum use of the walls, and utilizes the space in the most
judicious manner. The straight floor plan creates spaces within the retail store for the
customers to move and shop freely. It is one of the commonly implemented store designs.

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2. Diagonal Floor Plan

According to the diagonal floor plan, the shelves or racks are kept diagonal to each other
for the owner or the store manager to have a watch on the customers. Diagonal floor plan
works well in stores where customers have the liberty to walk in and pick up merchandise
on their own.

3. Angular Floor Plan

The fixtures and walls are given a curved look to add to the style of the store. Angular
floor plan gives a more sophisticated look to the store. Such layouts are often seen in high
end stores.

4. Geometric Floor Plan

The racks and fixtures are given a geometric shape in such a floor plan. The geometric
floor plan gives a trendy and unique look to the store.

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 5. Mixed Floor Plan

The mixed floor plan takes into consideration angular, diagonal and straight layout to
give rise to the most functional store lay out.

Tips for Store Design and Layout

 The signage displaying the name and logo of the store must be installed at a place where
it is visible to all, even from a distance. Don’t add too much information.
 The store must offer a positive ambience to the customers. The customers must leave the
store with a smile.
 Make sure the mannequins are according to the target market and display the latest
trends. The clothes should look fitted on the dummies without using unnecessary pins.
The position of the dummies must be changed from time to time to avoid monotony.
 The trial rooms should have mirrors and must be kept clean. Do not dump unnecessary
boxes or hangers in the dressing room.
 The retailer must choose the right colour for the walls to set the mood of the customers.
Prefer light and subtle shades.
 The fixtures or furniture should not act as an object of obstacle. Don’t unnecessary add
too many types of furniture at your store.
 The merchandise should be well arranged and organized on the racks assigned for them.
The shelves must carry necessary labels for the customers to easily locate the products
they need. Make sure the products do not fall off the shelves.
 Never play loud music at the store.
 The store should be adequately lit so that the products are easily visible to the customers.
Replace burned out lights immediately.
 The floor tiles, ceilings, carpet and the racks should be kept clean and stain free.
 There should be no bad odour at the store as it irritates the customers.
 Do not stock anything at the entrance or exit of the store to block the way of the
customers. The customers should be able to move freely in the store.
 The retailer must plan his store in a way which minimizes theft or shop lifting.

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 i. Merchandise should never be displayed at the entrance or exit of the store.
ii. Expensive products like watches, jewellery, precious stones, mobile handsets and
so on must be kept in locked cabinets.
iii. Install cameras, CCTVs to have a closed look on the customers.
iv. Instruct the store manager or the sales representatives to try and assist all the
customers who come for shopping.
v. Ask the customers to deposit their carry bags at the entrance itself.
vi. Do not allow the customers to carry more than three dresses at one time to the
trial room.

FACTORS TO CONSIDERED IN DECIDING A STORE LOCATION

Where you choose to locate your retail business will have a major impact on your public
presence, walk-in traffic, potential for future income, and other elements. Choosing a location
that does not account for such factors may limit the business's ability to succeed and grow.

Before choosing a retail store location, define how you see your business now and in the future.

 What are the demographics of your core customers?

 Can you visualize your building?
 Do you know what you want to sell and what you want your business to be known for?
 Have you determined how much retail space, storage area, or the size of the office you
need?

If you do not answer these basic questions, it will be hard to find the perfect location for
generating the maximum amount of profit for your retail store.

Type of Goods Sold

Examine what kind of products you sell, as some goods will require certain types of locations.
Would your store be considered a convenience store, a specialty shop or a shopping store?

Convenience goods require easy access to let the customer quickly make a purchase. These
products are also of general interest among consumers. A mall might not be a good location for
convenience goods because this product type may be priced on a different scale compared with
other retailers on the property. Consumers might be inclined to patronize convenience stores
located on the path of their daily commutes. This can mean occupying space situated in or near a
transit hub or along heavily trafficked routes.

Specialty goods fulfill more unique needs than general purpose products. Customers generally
won't mind traveling out of their way to purchase this type of product because they cannot

55
procure them through convenience or general goods retailers. This type of store may perform
well near other shopping locations because their offerings may complement each other.

A big-ticket shopping store usually sells items at a higher price that are bought infrequently by
the customer. Furniture, cars, and upscale clothing are examples of goods found at a big-ticket
shopping store. Because the prices of these items are higher, this type of customer will want to
compare prices before making a purchase. Retailers in this segment will do well to locate their
stores far away from their rivals.

Population and Your Customer

When choosing a city or state to locate your retail store, research the area thoroughly before
making a final decision. Read local papers and speak to other small businesses in the area.
Obtain location demographics from the local library, chamber of commerce or the Census
Bureau. Specialty research firms that cater to retailers could also provide demographic
information. Any of these sources should have information on the area's population, income
brackets, and median age. You know who your customers are, so make sure you find a location
near where your customers live, work and shop.

Accessibility, Visibility, and Traffic

Don't confuse a lot of traffic for a lot of customers. Retailers want to be located where there are
many shoppers but only if those shoppers meet the definition of their target market. Small retail
stores may benefit from the traffic generated by nearby larger stores. There are several aspects
retailers should consider along these lines.

 How many people walk or drive past the location?

 How well is the area served by public transportation?
 Can customers and delivery trucks easily get in and out of the parking lot?
 Is there adequate parking?

Depending on the type of business, it would be wise to have somewhere between 5 to 8 parking
spaces per 1,000 square feet of retail space.

When considering visibility, look at the location from the customer's viewpoint. In many cases,
the better visibility your retail store has, the less advertising is needed. A specialty retail store
located six miles out of town in a free-standing building will need more marketing than a
shopping store located in a mall.

Signage, Zoning, and Planning

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Before signing a lease, be sure you understand all the rules, policies and procedures related to
your retail store location. Contact the local city hall and zoning commission for information on
regulations regarding signage. There may be limits on the size and imagery used in signs that
advertise your business. Ask about any restrictions that may affect your retail operation and any
future planning that could change traffic, such as highway construction.

Competition and Neighbors

Other area businesses in your prospective location can actually help or hurt your retail shop.
Determine if the types of businesses nearby are compatible with your store. For example, a high-
end fashion boutique may not be successful next door to a discount variety store. Position it next
to a nail or hair salon, which tend to draw the same demographic of customers, to more optimal
results.

Location Costs

Along with the base rent, consider all location-based costs involved when choosing a retail store
location.

 Who pays for lawn care and security?

 Who pays for the upkeep and repair of the heating/air units?
 Will you need to do any painting or remodeling to have the location fit your needs?
 Will the retailer be responsible for property taxes?

The location you can afford now and what you can afford in the future may vary. It is difficult to
create sales projections for a new business. One way to determine how much rent you can pay is
to find out how much sales similar retail businesses generate and how much rent they pay.

Personal Factors

If you plan to work in your store, think about work-life balance issues such as the distance from
the shop to home and other personal considerations. If you spend much of your time traveling to
and from work, the commute may overshadow the benefits of being your own boss. Also, many
restrictions placed on a tenant by a landlord, management company, or community can hamper a
retailer's independence.

Final Considerations

Your retail shop may require additional handling when it comes to choosing a location. Make a
list of any special characteristic of your business that may need to be addressed.

 Will the store require distinct lighting, fixtures or other hardware installed?

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  Are restrooms for staff and customers available?
 Is there adequate fire and police protection for the area?
 Is there a sanitation service available?
 Does the building have a canopy that provides shelter if raining?
 Are there (blue laws) restrictions on Sunday sales?

Don't feel rushed into making a decision on where to put your retail store. Take your time and
research the area. If you have to change your schedule and push back the date of the store's
opening, then do so. Waiting to find the perfect store location is better than just settling for the
first place that comes along.

PRINCIPLES IN STORES MANAGEMENT

There five key principles of inventory management:

1. demand forecasting,
2. warehouse flow,
3. inventory turns/stock rotation,
4. cycle counting and
5. process auditing.

Focusing on these five fundamentals can yield significant bottom-line savings.

1. Demand Forecasting

Depending on the industry, inventory ranks in the top five business costs. Accurate demand
forecasting has the highest potential savings for any of the principles of inventory management.
Both over supply and under supply of inventory can have critical business costs. Whether it is
end-item stocking or raw component sourcing, the more accurate the forecast can be.

Establishing appropriate max-min management at the unique inventory line level, based on lead
times and safety stock level help ensure that you have what you needs when you need it. This
also avoids costly overstocks. Idle inventory increases incremental costs due to handling and lost
storage space for fast-movers.

2. Warehouse Flow

The old concept of warehouses being dirty and unorganized is out dated and costly. Lean
manufacturing concepts, including 5S have found a place in warehousing. Sorting, setting order,
systemic cleaning, standardizing, and sustaining the discipline ensure that no dollars are lost to
poor processes.

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The principles of inventory management are not any different from other industrial processes.
Disorganization costs money. Each process, from housekeeping to inventory transactions needs a
formal, standardized process to ensure consistently outstanding results.

3. Inventory Turns/Stock Rotation

In certain industries, such as pharmaceuticals, foodstuffs and even in chemical warehousing,

managing inventory down to lot numbers can be critical to minimizing business costs. Inventory
turns is one of the key metrics used in evaluating how effective your execution is of the
principles of inventory management.

Defining the success level for stock rotation is critical to analyzing your demand forecasting and
warehouse flow.

4. Cycle Counting

One of the key methods of maintaining accurate inventory is cycle counting. This helps measures
the success of your existing processes and maintain accountability of potential error sources.
There are financial implications to cycle counting. Some industries require periodic 100%
counts. These are done through perpetual inventory count maintenance or though full-building
counts.

5. Process Auditing

Proactive error source identification starts with process audits. One of the cornerstone principles
of inventory management is to audit early and often. Process audits should occur at each
transactional step, from receiving to shipping and all inventory transactions in between.

By careful attention to each of these critical core principles, your business can increase
efficiency and reduce costs.

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 IV UNIT
MATERIAL HANDLING

Haynes defines “Material handling embraces the basic operations in connection with the
movement of bulk, packaged and individual products in a semi-solid or solid state by means of
gravity manually or power-actuated equipment and within the limits of individual producing,
fabricating, processing or service establishment”. Material handling does not add any value to
the product but adds to the cost of the product and hence it will cost the customer more. So the
handling should be kept at minimum. Material handling in Indian industries accounts for nearly
40% of the cost of production. Out of the total time spent for manufacturing a product, 20% of
the time is utilized for actual processing on them while the remaining 80% of the time is spent in
moving from one place to another, waiting for the processing. Poor material handling may result
in delays leading to idling of equipment.

Materials handling can be also defined as ‘the function dealing with the preparation, placing and
positioning of materials to facilitate their movement or storage’. Material handling is the art and
science involving the movement, handling and storage of materials during different stages of
manufacturing. Thus the function includes every consideration of the product except the actual
processing operation. In many cases, the handling is also included as an integral part of the
process. Through scientific material handling considerable reduction in the cost as well as in the
production cycle time can be achieved.

OBJECTIVES OF MATERIAL HANDLING

Following are the objectives of material handling:

1. Minimise cost of material handling.

2. Minimise delays and interruptions by making available the materials at the point of use
at right quantity and at right time.
3. Increase the productive capacity of the production facilities by effective utilisation of
capacity and enhancing productivity.
4. Safety in material handling through improvement in working condition.
5. Maximum utilisation of material handling equipment.
6. Prevention of damages to materials.
7. Lower investment in process inventory

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PRINCIPLES OF MATERIAL HANDLING

Following are the principles of material handling:

1. Planning principle: All handling activities should be planned.

2. Systems principle: Plan a system integrating as many handling activities as possible and
co-ordinating the full scope of operations (receiving, storage, production, inspection, packing,
warehousing, supply and transportation).
3. Space utilisation principle: Make optimum use of cubic space.
4. Unit load principle: Increase quantity, size, weight of load handled.
5. Gravity principle: Utilise gravity to move a material wherever practicable.
6. Material flow principle: Plan an operation sequence and equipment arrangement to optimise
material flow.
7. Simplification principle: Reduce combine or eliminate unnecessary movement and/or
equipment.
8. Safety principle: Provide for safe handling methods and equipment.
9. Mechanization principle: Use mechanical or automated material handling equipment.
10. Standardisation principle: Standardize method, types, size of material handling equipment.
11. Flexibility principle: Use methods and equipment that can perform a variety of task and
applications.
12. Equipment selection principle: Consider all aspect of material, move and method to
be utilised.
13. Dead weight principle: Reduce the ratio of dead weight to pay load in mobile equipment.
14. Motion principle: Equipment designed to transport material should be kept in motion.
15. Idle time principle: Reduce idle time/unproductive time of both MH equipment and
man power.
16. Maintenance principle: Plan for preventive maintenance or scheduled repair of all
handling equipment.
17. Obsolescence principle: Replace obsolete handling methods/equipment when more
efficient method/equipment will improve operation.
18. Capacity principle: Use handling equipment to help achieve its full capacity.
19. Control principle: Use material handling equipment to improve production control,
inventory control and other handling.
20. Performance principle: Determine efficiency of handling performance in terms of cost
per unit handled which is the primary criterion.

MATERIAL HANDING EQUIPMENTS

Broadly material handling equipment’s can be classified into two categories, namely:
(a) Fixed path equipments, and (b) Variable path equipments.

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(a) Fixed path equipments which move in a fixed path. Conveyors, monorail devices, chutes and
pulley drive equipments belong to this category. A slight variation in this category is provided by
the overhead crane, which though restricted, can move materials in any manner within a
restricted area by virtue of its design. Overhead cranes have a very good range in terms of
hauling tonnage and are used for handling bulky raw materials, stacking and at times palletizing.

(b) Variable path equipments have no restrictions in the direction of movement although their
size is a factor to be given due consideration trucks, forklifts mobile cranes and industrial tractors
belong to this category. Forklifts are available in many ranges, they are manoeuvrable and
various attachments are provided to increase their versatility.

Material Handing Equipments may be classified in five major categories.

1.CONVEYORS - Conveyors are useful for moving material between two fixed workstations,
either continuously or intermittently. They are mainly used for continuous or mass production
operations—indeed, they are suitable for most operations where the flow is more or less steady.
Conveyors may be of various types, with rollers, wheels or belts to help move the material along:
these may be power-driven or may roll freely. The decision to provide conveyors must be taken
with care, since they are usually costly to install; moreover, they are less flexible and, where two
or more converge, it is necessary to coordinate the speeds at which the two conveyors move.

2. INDUSTRIAL TRUCKS Industrial trucks are more flexible in use than conveyors since they
can move between various points and are not permanently fixed in one place. They are,
therefore, most suitable for intermittent production and for handling various sizes and shapes of
material. There are many types of truck petrol-driven, electric, hand-powered, and so on. Their
greatest advantage lies in the wide range of attachments available; these increase the trucks
ability to handle various types and shapes of material.

3. CRANES AND HOISTS The major advantage of cranes and hoists is that they can move
heavy materials through overhead space. However, they can usually serve only a limited area.
Here again, there are several types of crane and hoist, and within each type there are various
loading capacities. Cranes and hoists may be used both for intermittent and for continuous
production.

4. CONTAINERS These are either ‘dead’ containers (e.g. Cartons, barrels, skids, pallets) which
hold the material to be transported but do not move themselves, or ‘live’ containers (e.g. wagons,
wheelbarrows or computer self-driven containers). Handling equipments of this kind can both
contain and move the material, and is usually operated manually.

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5. ROBOTS Many types of robot exist. They vary in size, and in function and manoeuvrability.
While many robots are used for handling and transporting material, others are used to perform
operations such as welding or spray painting. An advantage of robots is that they can perform in
a hostile environment such as unhealthy conditions or carry on arduous tasks such as the
repetitive movement of heavy materials. The choice of material-handling equipment among the
various possibilities that exist is not easy. In several cases the same material may be handled by
various types of equipments, and the great diversity of equipment and attachments available does
not make the problem any easier. In several cases, however, the nature of the material to be
handled narrows the choice.

SELECTION OF MATERIAL HANDLING EQUIPMENTS

Selection of Material Handling equipment is an important decision as it affects both cost and
efficiency of handling system. The following factors are to be taken into account while selecting
material handling equipment.

1. PROPERTIES OF THE MATERIAL

Whether it is solid, liquid or gas, and in what size, shape and weight it is to be moved, are
important considerations and can already lead to a preliminary elimination from the range of
available equipment under review. Similarly, if a material is fragile, corrosive or toxic this will
imply that certain handling methods and containers will be preferable to others.

2. LAYOUT AND CHARACTERISTICS OF THE BUILDING

Another restricting factor is the availability of space for handling. Low-level ceiling may
preclude the use of hoists or cranes, and the presence of supporting columns in awkward places
can limit the size of the material-handling equipment. If the building is multi-storeyed, chutes or
ramps for industrial trucks may be used. Layout itself will indicate the type of production
operation (continuous, intermittent, fixed position or group) and can indicate some items of
equipment that will be more suitable than others. Floor capacity also helps in selecting the best
material handling equipment.
3. PRODUCTION FLOW
If the flow is fairly constant between two fixed positions that are not likely to change, fixed
equipment such as conveyors or chutes can be successfully used. If, on the other hand, the flow
is not constant and the direction changes occasionally from one point to another because several
products are being produced simultaneously, moving equipment such as trucks would be
preferable.

4. COST CONSIDERATIONS
This is one of the most important considerations. The above factors can help to narrow the range

63
of suitable equipment, while costing can help in taking a final decision. Several cost elements
need to be taken into consideration when comparisons are made between various items of
equipment that are all capable of handling the same load. Initial investment and operating and
maintenance costs are the major cost to be considered. By calculating and comparing the total
cost for each of the items of equipment under consideration, a more rational decision can be
reached on the most appropriate choice.

5. NATURE OF OPERATIONS
Selection of equipment also depends on nature of operations like whether handling is temporary
or permanent, whether the flow is continuous or intermittent and material flow pattern-vertical
or horizontal.

6. ENGINEERING FACTORS
Selection of equipment also depends on engineering factors like door and ceiling dimensions,
floor space, floor conditions and structural strength.

7. EQUIPMENT RELIABILITY
Reliability of the equipment and supplier reputation and the after sale service also plays an
important role in selecting material handling equipments.

GUIDELINES FOR EFFECTIVE UTILISATION OF MATERIAL HANDLING

EQUIPMENTS

The following guidelines are invaluable in the design and cost reduction of the materials
handling system:

1. As material handling adds no value but increases the production cycle time, eliminate
handling wherever possible. Ideally there should not be any handling at all!
2. Sequence the operations in logical manner so that handling is unidirectional and smooth.

3. Use gravity wherever possible as it results in conservation of power and fuel.

4. Standardize the handling equipments to the extent possible as it means interchangeable usage,
better utilisation of handling equipments, and lesser spares holding.

5. Install a regular preventive maintenance programme for material handling equipments so that
downtime is minimum.

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 6. In selection of handling equipments, criteria of versatility and adaptability must be the
governing factor. This will ensure that investments in special purpose handling
equipments are kept at a minimum.
7. Weight of unit load must be maximum so that each ‘handling trip’ is productive.
8. Work study aspects, such a elimination of unnecessary movements and combination of
processes should be considered while installing a material handling system.
9. Non-productive operations in handling, such as slinging, loading, etc., should be kept at a
minimum through appropriate design of handling equipment. Magnetic cranes for scrap
movement and loading in furnaces combination of excavators and tippers for ores loading
and unloading in mines are examples in this respect.
10. Location of stores should be as close as possible to the plant which uses the materials.
This avoids handling and minimizing investment in material handling system.
11. Application of OR techniques such as queueing can be very effective in optimal
utilisation of materials handling equipments.
12. A very important aspect in the design of a material handling system is the safety aspect.
The system designed should be simple and safe to operate.
13. Avoid any wasteful movements-method study can be conducted for this purpose.
14. Ensure proper coordination through judicious selection of equipments and training of
workmen.

MATERIAL HANDLING COSTS

Material handling costs are constantly adding up. Many business leaders don't realize that this is
a daily expense coming from many activities, and must be kept under control. To contain these
costs, you should know the problem areas where inefficiency is often found. Here are the five
areas of material handling that are likely to cost you the most.

1. Over-Handling Material
Each time an item is touched, it's taking employee time and therefore your money. Attention to
detail is important, but for each time that materials are moved, sorted, counted, stocked, or
prepared for storage or shipment, it's wasting a little more profit. Handling of any item is no
more than the minimum necessary.

You should work with your vendor to see that sorting, inspection, and counting is done on their
end. It makes receiving so much easier if you can rely on this. In production environments, as
much material as possible should be put straight onto the floor when and where it's needed.

2. Workflow Bottlenecks
With a poor material handling system, machines may sit idle waiting on raw material, which is
impacting productivity. It's important that the correct materials in sufficient quantities be on hand
before production starts. Material handling should follow the shortest path possible.

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Inefficient operations can cost companies up to 30% of their revenue. Processing that involves
moving materials from one point to another, or worse, back to the same point twice, is a waste of
time and resources.

3. Damaged Materials
Accidents or rough handling leading to breakage of goods is costly over time. Incorrect
techniques, outdated materials, and inadequate equipment are usually to blame. Everything that
gets damaged, whether it's product loss, equipment wear, or torn packaging, is a needless
expense. It's estimated that reusable packaging in the food industry alone could save over $2.5
million per year on costs.

Storage techniques must be in place to ensure shelf life is tracked, as well as moisture or
temperature levels where applicable. Every time an item is moved there's a chance of damage;
conveyor systems can help reduce the risk.

4. Poor Space Management

Having adequate storage space is essential, but maximizing existing space should be a priority
before you consider buying or leasing more. There are a variety of flexible steel construction
options, such as taller racks, overhead ceiling racks, and raised platforms in open areas that can
create multiple levels of storage area.

Every inch of storage space should be examined for ways that it can be safely and efficiently
utilized. However, over-use of space can create traffic bottlenecks. Generally speaking, using
more than 27% of your total cubic space is probably inadvisable. The most efficient use of space
will bring the greatest value in storage costs.

5. Inefficient Equipment
Equipment like forklifts can be very useful, but also bulky and expensive. Lift trucks cost money
to maintain. The equipment you buy should be chosen for efficiency and economy as well as
functionality. Having the right equipment for the job, such as scissor lifts or smaller electric
forklifts, can reduce your need for bulkier equipment.

Gravity-fed systems are cheaper and lighter than power-driven conveyors. If materials can be
moved in sufficient quantity on pallet jacks, it could reduce the dependence on forklifts. All the
equipment you buy should be weighed in long-term benefits and returns. Look for alternatives
that can get the job done cheaply, but without reducing productivity - even if it means a little
rethinking of your methods.

The single most important solution to reducing material handling costs is to store materials
where they are needed, rather than having to fetch them with a forklift on demand. The more
equipment, time, and personnel that are needed for moving materials, the greater your costs.
Proper material handling is the most efficient balance of all three.

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How to Reduce Material Handling Costs

Reducing material-handling time boosts production time.

The key to reducing material-handling costs in any business is to put the right material where it's
needed, when it's needed and how it's needed. Such costs can be cut by decreasing the number of
times employees must touch the material, reducing the time and distance it travels, paring
equipment costs, avoiding damage and boosting storage capacity. Ultimately, controlling
material-handling costs increases productivity and brings a company more profit.

Reduce Touch Labor

The best way to increase employee productivity and profit is to reduce the number of times a
worker is required to handle material. Material handling doesn't create value – production does.
Every minute spent moving, sorting, preparing or storing material equates to lost productivity.
Material handling can be greatly reduced by delivering as many materials as possible directly to
the production floor. For example, vendor-managed inventory can eliminate the need for
receiving, inspection, sorting or storing materials.

Optimize Material Flow

When materials move through production, it's important for this path to be as short as possible.
Time spent transporting materials to and from different operations on the assembly floor is time
not spent in production. Set up a straight line for materials to travel from inventory receipt
through kitting, assembly, test and shipping – with little or no backtracking. This can greatly
reduce manufacturing time and increase earnings.

Prevent Damage

Damaged material equals lost profit. Proper storage procedures – including monitoring shelf life,
temperature and moisture levels – can ensure products will be usable. Documenting appropriate
handling procedures to avoid breakage, providing adequate tools and equipment for handling,
and continuous employee training also help reduce damage.

Increase Storage Capacity

Because real estate is expensive to buy and maintain, every inch of storage space should be used
to capacity. Packing a warehouse with supplies should resemble filling a cube from side-to-side
and top-to-bottom. All available horizontal and vertical space should be filled and organized
before adding more space. This will bring the greatest value per square inch to every dollar spent
in warehouse costs.

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Deploy Equipment

Material-handling costs can be reduced by deploying the right equipment in the right places.
Take advantage of gravity-fed movement before adding power-driven equipment, by installing
gravity conveyors, chutes and slide lines. Using capital equipment like a forklift should be
reviewed in combination with alternatives such as pallet jacks to determine if less expensive
equipment can perform the required tasks. Each piece of machinery should be evaluated to
calculate its return on investment before purchase. This will help a company determine the point
when the machine will pay for itself by decreasing material-handling costs.

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 UNIT V

OUTSOURCING

What is Outsourcing?

Outsourcing is the business practice of hiring a party outside a company to perform services and
create goods that traditionally were performed in-house by the company's own employees and
staff. Usually done as a cost-cutting measure, it can affect jobs ranging from customer support to
manufacturing to the back office.

Outsourcing was first recognized as a business strategy in 1989 and became an integral part of
business economics throughout the 1990s. The practice of outsourcing is subject to considerable
controversy in many countries. Those opposed argue it has caused the loss of domestic jobs,
particularly in the manufacturing sector. Supporters say it creates an incentive for businesses and
companies to allocate resources where they are most effective, and that outsourcing helps
maintain the nature of free market economies on a global scale.

Reasons to outsource business functions

Businesses nowadays consider outsourcing as a strategic step to gaining competitive advantage.

Business process outsourcing providers are considered as partners rather than just a contractual
business that carries out major functions that aren't necessarily considered as core business.

Before, cost reduction was one of the main reasons why companies outsource - it still is, but
today, there are several critical areas that businesses carefully consider when choosing an
outsourcing partner that ensure their core competencies are fully utilized.

Here are the top 10 reasons to outsource some of your business processes:

1. Reduce and control costs. Outsourcing allows you to lower expenditures on fixed costs
and control variable costs that can result in significant savings.
2. Improve and maintain business focus. Most outsourced tasks are time-consuming. By
turning over these, you can fully attend to your core business processes.
3. Tap world-class talent. Offshore companies offer a global knowledge base that delivers
the same level of output, but with great quality.
4. Share risks. Your partner company helps mitigating risk factors for your company by
dividing and delegating operations.
5. Free up internal resources. These resources can be allocated to other functions, or
better yet, to your reserves.
6. Gain access to resources. This is incredibly helpful especially when your company is
experiencing internal resource crunches.

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 7. Streamline time-consuming tasks. With efficient delegation, you can increase accuracy
by streamlining time-drive and time-sensitive tasks.
8. Maximize external resources. Outsourcing provides you with flexibility and control,
especially when it comes to unforeseen scenarios that may affect your position in the
market.
9. Access to new market areas. You will be able to gain access new markets and establish
local presence ahead of your competitors.
10. Realize the benefits of re-engineering. Outsourcing can help your business achieve
dramatic enhancements in your core and critical operations by redesigning your business
process.
Advantages and disadvantages of outsourcing
Outsourcing is a common practice of contracting out business functions and processes to third-
party providers. The benefits of outsourcing can be substantial - from cost savings and efficiency
gains to greater competitive advantage.
On the other hand, loss of control over the outsourced function is often a potential business risk.
You should consider carefully the advantages and disadvantages of outsourcing before deciding
to contract out any activities or business operations.

Advantages of outsourcing
There are many reasons why a business may choose to outsource a particular task, job or a
process. For example, some of the recognized benefits of outsourcing include:
 improved focus on core business activities - outsourcing can free up your business to focus on
its strengths, allowing your staff to concentrate on their main tasks and on the future strategy
 increased efficiency - choosing an outsourcing company that specializes in the process or
service you want them to carry out for you can help you achieve a more productive, efficient
service, often of greater quality
 controlled costs - cost-savings achieved by outsourcing can help you release capital for
investment in other areas of your business
 increased reach - outsourcing can give you access to capabilities and facilities otherwise not
accessible or affordable
 greater competitive advantage - outsourcing can help you leverage knowledge and skills along
with your complete supply chain
Outsourcing can also help to make your business more flexible and agile, able to adapt to
changing market conditions and challenges, while providing cost savings and service level
improvements.

Disadvantages of outsourcing
Outsourcing involves handing over direct control over a business function or process to a third
party. As such, it comes with certain risks. For example, when outsourcing, you may experience
problems with:

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 service delivery - which may fall behind time or below expectation
 confidentiality and security - which may be at risk
 lack of flexibility - contract could prove too rigid to accommodate change
 management difficulties - changes at the outsourcing company could lead to friction
 instability - the outsourcing company could go out of business
Offshore outsourcing, although potentially more cost-effective, may present additional
challenges such as hidden costs of provider selection or handover, severance and costs related to
layoffs of local employees who will not be relocated internationally, etc. Even simply managing
the offshore relationship can prove challenging due to time zones, different languages or cultural
preferences.

You should examine carefully all the pros and cons of outsourcing to make sure that the
benefits outweigh the risks. Before deciding on your strategy, it may be worth looking at some
common outsourcing considerations.
TYPES OF OUTSOURCING SERVICES
Many businesses now outsource many of their non-strategic activities or more complex tasks in
order to access industry best practice and cutting-edge technology.
This enables the business to benefit from the outsourcing company's economies of scale and
investment in highly trained staff while it concentrates on core business activities.

1. Professional Services Outsourcing

2. Manufacturing Outsourcing
3. Process-Specific Outsourcing
4. Operational Outsourcing Service
5. Online Outsourcing

1.PROFESSIONAL SERVICES OUTSOURCING

Processes you could consider outsourcing include:

 IT functions - you can outsource most IT functions, from network management to project work,
website development and data warehousing. You may benefit from the latest technology and
software upgrades without having to invest in expensive systems or keep up with industry trends.
 Business processes and HR - outsourcing activities such as recruitment, payroll and secretarial
services gives you access to specialist skills, but you only pay when you need to use them.
 Finance - you already outsource auditing, so why not do the same with your entire accounting
function, including bookkeeping, tax management and invoicing?
 Sales and marketing - many organisations use a consultant or an agency to handle marketing
communications. Smaller businesses, or those in specialized markets, can also outsource sales to
specialist agencies.

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 Health and safety - there are consultants who specialise in health and safety compliance tasks.
They may be able to ensure you meet all the requirements, including those for complex risks,
more cost-effectively than you can.

2.MANUFACTURING OUTSOURCING

This is the most pushed towards type. The cost of making your own products locally is
significantly high. Paying the factory workers and raw material cost is massive. However if you
outsource your manufacturing to china for example you’ll get Much lower cost per product. This
has been a growing trend for a while now.

Companies are leaning towards reducing blue collar jobs. Like any car company utilising this
process to cut down on their product assembly time and cost. Tedious processes such as
installing windows in all their models.

3. PROCESS-SPECIFIC OUTSOURCING

Other models include very niche processes. Internal procedures and such vital processes for the
continuity of the system. Many companies outsource processes revolving around their main
product. An example of a bakery would normally outsource their delivery of their baked goods to
a courier company such as UPS or FedEx.

Normally these procedures would include a very detailed contract that’s detailing the nitty-gritty
stuff such as delivery timelines, customer contacts and costs. This type of outsourcing enables
the company to focus on their core strength and improve their over-all customer service. All that
while reducing the costs and time it would normally take for them to fulfill all their orders
personally.

4.OPERATIONAL OUTSOURCING
You could also outsource tasks such as:

 cleaning
 catering
 facilities management
 deliveries
 installation
 after-sales service
 repairs

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 6. ONLINE OUTSOURCING
Online outsourcing refers to services that are delivered over the internet. These range from
conventional business functions, such as bookkeeping, to technical and IT services, such as
website hosting.

The benefits of online outsourcing

Online outsourcing delivers a range of benefits, including:

 Reduced costs - you pay for services only when you use them, with little or no investment in
new equipment, staff or training.
 Greater efficiency - you don't need a complex IT network or a specialist IT department.
 Commercial advantage - you can work closely with business partners and customers. It also
enables staff to work remotely and have access to high-performance software at affordable rates.
 Better use of people - staff can concentrate on business-critical and value-added operations.

Implementing an online outsourcing solution

Choosing and using an online outsourcing solution needs careful consideration:
 Do the research - does it make sense for your business? Will it give you access to new markets
or technologies? Do your competitors outsource any of their processes - if so, what?
 Identify the advantages - will you save time and money, improve your e-commerce capabilities
or gain a competitive advantage?
 Perform a cost/benefit analysis - what will it cost and how long will it take to pay for itself?
 Assess the suppliers - draw up a supplier shortlist and ask them questions about cost,
deliverables, security, ownership of data, and termination clauses.
 Try before you buy - if you take advantage of low cost/no cost trials, make sure you are
protected against damage to your data.
 Assess the impact across your business - how will e-outsourcing affect other areas of your
business? What processes will you need to modify?
 Create an implementation schedule - think about running your conventional system alongside
the online outsourcing solution until you are happy with it - keep staff, customers, suppliers and
business partners fully informed.
 Regularly review your arrangements - ensure that online outsourcing delivers what was
promised.

MAKE OR BUY DECISIONS

The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the
decision also is referred to as outsourcing.

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Make-or-buy decisions usually arise when a firm that has developed a product or part—or
significantly modified a product or part—is having trouble with current suppliers, or has
diminishing capacity or changing demand.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic
level is the more long-range of the two. Variables considered at the strategic level include
analysis of the future, as well as the current environment. Issues like government regulation,
competing firms, and market trends all have a strategic impact on the make-or-buy decision. Of
course, firms should make items that reinforce or are in-line with their core competencies. These
are areas in which the firm is strongest and which give the firm a competitive advantage.

Make-or-buy decisions also occur at the operational level. These considerations that favor
making a part in-house:

 Cost considerations (less expensive to make the part)

 Desire to integrate plant operations
 Productive use of excess plant capacity to help absorb fixed overhead (using existing idle
capacity)
 Need to exert direct control over production and/or quality
 Better quality control
 Design secrecy is required to protect proprietary technology
 Unreliable suppliers
 No competent suppliers
 Desire to maintain a stable workforce (in periods of declining sales)
 Quantity too small to interest a supplier
 Control of lead time, transportation, and warehousing costs
 Greater assurance of continual supply
 Provision of a second source
 Political, social or environmental reasons (union pressure)
 Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

 Lack of expertise
 Suppliers' research and specialized know-how exceeds that of the buyer
 cost considerations (less expensive to buy the item)
 Small-volume requirements
 Limited production facilities or insufficient capacity
 Desire to maintain a multiple-source policy
 Indirect managerial control considerations
 Procurement and inventory considerations

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  Brand preference
 Item not essential to the firm's strategy

The two most important factors to consider in a make-or-buy decision are cost and the
availability of production capacity. Burt, Dobler, and Starling warn that "no other factor is
subject to more varied interpretation and to greater misunderstanding" Cost considerations
should include all relevant costs and be long-term in nature. Obviously, the buying firm will
compare production and purchase costs. Burt, Dobler, and Starling provide the major elements
included in this comparison. Elements of the "make" analysis include:

 Incremental inventory-carrying costs

 Direct labor costs
 Incremental factory overhead costs
 Delivered purchased material costs
 Incremental managerial costs
 Any follow-on costs stemming from quality and related problems
 Incremental purchasing costs
 Incremental capital costs

Cost considerations for the "buy" analysis include:

 Purchase price of the part

 Transportation costs
 Receiving and inspection costs
 Incremental purchasing costs
 Any follow-on costs related to quality or service

One will note that six of the costs to consider are incremental. By definition, incremental costs
would not be incurred if the part were purchased from an outside source. If a firm does not
currently have the capacity to make the part, incremental costs will include variable costs plus
the full portion of fixed overhead allocable to the part's manufacture. If the firm has excess
capacity that can be used to produce the part in question, only the variable overhead caused by
production of the parts are considered incremental. That is, fixed costs, under conditions of
sufficient idle capacity, are not incremental and should not be considered as part of the cost to
make the part.
While cost is seldom the only criterion used in a make-or-buy decision, simple break-even
analysis can be an effective way to quickly surmise the cost implications within a decision.

Make or Buy Decision When?

The following situations demand for the evaluation of make or buy decisions:

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1. When the organization introduces new products.
2. The fluctuating demand for the company’s products.
3. When the organization carries out value analysis or cost reduction programs.
4. Deteriorating quality and delivery commitment of the supplier if presently the item is bought.
5. The scarcity of funds for investment in additional plant and equipment.

Factors Influencing Make or Buy Decision:

1. Volume of Production:
The quantity or volume of production affects the make or buy decision to the greater extent. If
the volume of production is high, it favors the make decision and low volume favors buy
decisions.

2. Cost Analysis:
The cost analysis refers to the determination of costs to make an item as well as the cost to buy
it. The cost to make include – the material cost, direct lab our cost, set up and tooling up costs,
depreciation, administrative overheads, interest, insurance, taxes and inventory carrying costs of
raw materials and work in process. The cost to make also includes the appropriate allowances,
spoilage of work or scrap, and the risk associated with doing business.

The cost to buy an item should include -purchase price of the item or component, transportation
cost, sales tax and octopi, procurement cost, carrying cost, receiving and incoming inspection
costs. The analysis of these two costs helps take decision whether to make or buy.

3. Utilization of Production Capacity:

The organization, which has created large production capacity, favors the decision to make

4. Integration of Production System:

The vertical integration favors the make decision where as horizontal integration favors buy
decision.

5. Availability of Manpower:
Availability of skilled and competent manpower favors makes decision where as scarce
manpower prefers buy decision.

6. Secrecy or Protection of Patent Right:

This condition favors the make decision.

7. Fixed Cost:
A lower fixed cost favors the decision to make and higher fixed cost the make decision.

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8. Availability of competent suppliers or vendors
9. Quality and reliability of vendors

Functional Aspects of Make or Buy Decision:

Make or buy decision should be viewed with both long term and short term perspectives in mind.
Some of the effects are tangible and others are intangible.
These are classified as follows:
1. Financial aspects
2. Technological Aspects
3. Marketing Aspects
4. Purchasing Aspects
5. Strategic Aspects

1. Financial Aspects:
The make decision is always demands an investment in plant, machineries and equipment. The
investments can be categorized in to fixed cost and variable cost. The buy decision is associated
with only variable cost. Expressing all factors in to money terms carries out a thorough and
comparative analysis. Then the decision is to be taken based on which one is more economical,
to make or to buy.

2. Technological Aspects:
The make or buy decision is influenced by:
(a) The access to the latest technology to the organization.

(b) Feasibility and terms and conditions of technology transfer

(c) Outdating of technology

(d) Product life cycle.

3. Marketing Aspects:
The marketing aspects have the influence on make or buy decision. When there is a fierce
competition, an organization tries to enhance the quality and cut down the costs. The make
decision assures the quality and reliability of the parts. Under the situation of increasing market
share and a good future sales potential company can have an additional investment potential and
hence can opt for make decision.

When there is a doubt about the market potential, the company should opt for buy decision. The
large organizations pay greater attention to quality which favors the make decision to maintain
quality and reliability of items.

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4. Purchasing Aspects:
The decision is influenced by:
a. The availability of items or components in sufficient quantities
b. The delivery commitments must be reliably met.
c. The acceptable quality and price level of the product
d. Economy in transportation from the source to the organization
e. Competence and reliability of vendors.
5. Strategic Aspects:
Any decision that is to be taken including make or buy decision should be taken with due
consideration to overall objective of the organization. Due importance should be given to the
economy, secrecy and flexibility in taking decision regarding make or buy.

6. Intangible Aspects:
Intangible aspects like environmental factors, labour union acceptance, goodwill, support to
ancilliariasation and growth of SSI units, technical assistance to vendors also influences the
make or buy decision.

Economic and no Economic Factors Influencing Make or Buy Decisions:

Decisions regarding whether to make or buy the components involve both economic and non
economic factors. Economically, an item or component is a candidate for in house production, if
the company has sufficient capacity and if the components value is high enough to cover the
variable costs of production and make some contribution towards the fixed cost. Low volumes
favor buying, which incurs very little or no fixed costs.

The non-economic factors are:

a. Availability of infrastructure and skilled personnel
b. Desire for alternate sources of supply
c. Employee preferences and stability concerns
d. Need to maintain trade secrets
e. Desire to expand in to new product line
f. Forward or backward integration
g. Long lasting and mutually rewarding relationships with vendors

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 VALUE ENGINEERING
Value engineering (VE) is a systematic method to improve the "value" of goods or products and
services by using an examination of function. Value, as defined, is the ratio of function to cost.
Value can therefore be manipulated by either improving the function or reducing the cost. It is a
primary tenet of value engineering that basic functions be preserved and not be reduced as a
consequence of pursuing value improvements.
The reasoning behind value engineering is as follows: if marketers expect a product to become
practically or stylistically obsolete within a specific length of time, they can design it to only last
for that specific lifetime. The products could be built with higher-grade components, but with
value engineering they are not because this would impose an unnecessary cost on the
manufacturer, and to a limited extent also an increased cost on the purchaser. Value engineering
will reduce these costs. A company will typically use the least expensive components that satisfy
the product's lifetime projections.
Meaning of Value Engineering:
The society of American Value Engineers define Value Engineering as—the systematic
application of recognised techniques which identify the function of a product or service, establish
a monetary value for that function, and provides the necessary function reliably at the lowest
overall cost.
The value engineering can be defined simply as: It is a systematic, step-by-step approach, to
achieve the desired functions of a system, service, process or product at an overall minimum
cost, without deteriorating the quality, performance, reliability, safety or environment.

Effectiveness of Value Engineering:

It assures cost effectiveness:
i. It is cost avoidance instead of cost reduction.
ii. It locates all frills and gold plating’s.
iii. It segregates the necessary from unnecessary.
iv. It is an organised study of functions and cost.
v. It is hot a crash cost reduction method.
vi. It is a combined effort of several departments.
vii. It provides necessary functions and avoids unnecessary functions.
viii. It is not a sacrifice of quality.
ix. It is not a mere criticism of existing system, method, design or process but an appraisal of
practical alternatives.
Value Engineering is engineering for Value.
In Value Engineering Challenge Everything.
In Value Engineering Nothing is taken for Granted.
Value Engineering recognises a Chinese proverb:
Tell me, I forget.
Show me, I remember.

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Involve me, I understand.

Qualitative Advantages of Value Engineering

(i) Better understanding between department and individuals and so better co-operation.
(ii) Continuous updating of data base management.
(iii) For techno-economic excellence, introspection by individuals and departments possible.
(iv) Tendency to think functions rather than parts i.e. the hardware,
(v) Improved capability and preparedness to cope with changes in demand and quality.
(vi) Since value management involves individual’s participation in decision making, there is
improvement in morale and commitment of the individuals.
(vii) Atmosphere of creativity in the organisation. Individuals are encouraged to put forward
suggestion which lead to ultimate cost reduction and better functioning.
(viii) It leads to job satisfaction as there is professional autonomy to face technical challenges.
(ix) It gives opportunities to individuals to prove their skill, ingenuity and creativity.
(x) It acts as a motivator towards higher productivity of the organisation.
(xi) It encourages joint decision making so shouldering of responsibility by all.
(xii) Improved system, procedures and communications.
Qualitative Advantages of Value Engineering
(i) Higher productivity.
(ii) Simplified manufacturing process.
(iii) Overall cost reduction.
(iv) Better performance,
(v) Higher reliability.
(vi) Reduction in lead time.
(vii) Better quality.
(viii) Easy maintainability.
(ix) Improved appearance.
(x) Simplified design.
(xi) Reduced rejections.
(xii) Less close and rigid tolerance.
(xiii) Higher market share.
(xiv) Higher profit.
(xv) Less after-sales service requirements.
(xvi) Reduced down time of machine or process.
(xvii) Decision on to-make-or-to-buy, easy and correct.
(xviii) Better packaging.
(xix) Improved logistics.
(xx) Application of group technology possible.
(xxi) Accommodating customer’s various requirements possible, hence greater customer’s
satisfaction.

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(xxii) Export probability enhances.
(xxiii) Enhanced value of product/service.
(xxiv) Optimum utilisation of resources, materials, machines, facilities manpower and money.

Value engineering process calls for a deep study of a product and the purpose for which it is
used, such as, the raw materials used; the processes of transformation; the equipment needed,
and many others. It also questions whether what is being used is the most appropriate and
economical. This applies to all aspects of the product.

Simplification of processes reduces the cost of manufacturing. Every piece of material and the
process should add value to the product so as to render the best performance. Thus, there is an
opportunity at every stage of the manufacturing and delivery process to find alternatives which
will increase the functionality or reduce cost in terms of material, process, and time.

The different aspects of value engineering can be encapsulated into a sequence of steps known as
a ‘Job Plan’. Value Engineering in organizations helps to identify:

The problem or situation that needs to be changed/improved

All that is good about the existing situation
The improvements required in the situation
The functions to be performed
The ways of performing each function
The best ways among the selected functions
The steps to be followed to implement the function
The person who executes the function
It should be remembered that we are not seeking a cost reduction sacrificing quality. It has been
found that there will be an improvement in quality when systematic value analysis principles are
employed.

Examples of Value Engineering

Russian liquid-fuel rocket motors are intentionally designed to permit ugly (though leak-free)
welding. This reduces costs by eliminating grinding and finishing operations that do not help the
motor function better.

Some Japanese disk brakes have parts toleranced to three millimeters, an easy-to-meet precision.
When combined with crude statistical process controls, this assures that less than one in a million
parts will fail to fit.

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Many vehicle manufacturers have active programs to reduce the numbers and types of fasteners
in their product, to reduce inventory, tooling and assembly costs.

Often a premium forming process (like “near net shape” forming) can eliminate hundreds of low-
precision machining or drilling steps. Precision transfer stamping can quickly produce hundreds
of high quality parts from generic rolls of steel and aluminum. Die casting is used to produce
metal parts from aluminum or sturdy tin alloys (they’re often about as strong as mild steels).
Plastic injection molding is a powerful technique, especially if the part’s special properties are
supplemented with inserts of brass or steel.

When a product incorporates a computer, it replaces many parts with software that fits into a
single light-weight, low-power memory part or microcontroller. As computers grow faster,
digital signal processing software is beginning to replace many analog electronic circuits for
audio and sometimes radio frequency processing.

On some printed circuit boards (itself a producible technique), the conductors are intentionally
sized to act as delay lines, resistors and inductors to reduce the parts count. An important recent
innovation was to eliminate the leads of “surface mounted” components. At one stroke, this
eliminated the need to drill most holes in a printed circuit board, as well as clip off the leads after
soldering.

In Japan (the land where manufacturing engineers are most valued), it is a standard process to
design printed circuit boards of inexpensive phenolic resin and paper, and reduce the number of
copper layers to one or two to lower costs without harming specifications.

STORES MATERIAL ACCOUNTING

Stores accounting is the process of recording details of stock movements and balance in value.
The stores account should give sufficient information regarding the different types of materials
stocked, quantity and value of each material, their receiving time and quantity as well as cost of
maintenance of stores.

BIN CARD

A document that records the status of a good held in a stock room. A typical retailing business
with a large stock room will use a bin card to record a running balance of stock on hand, in
addition to information about stock received and notes about problems associated with that stock
item.

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Bin Card implies a document which records the quantity of material received by, issued to and
remained in stores. Conversely, Stores Ledger is a ledger account (accounting record), that
maintains the record of the transit of goods in and out, the stores, both in quantitative and
monetary terms.

Stores ledger is a manual or computer record of the raw materials and production supplies
stored in a production facility. It is maintained by the person responsible for these assets, such as
the warehouse manager. A stores ledger is particularly useful for maintaining a perpetual
inventory system, since it tracks the current quantity of items on hand. A stores ledger can be
used for the following purposes:

By auditors, to see how well the company's inventory records compare to its on-hand quantities.
By the purchasing staff, to determine when and in what quantities to purchase additional
inventory items.
By the accounting staff, to use as the basis for calculating the ending cost of inventory on hand.
The information listed on a stores ledger can follow one of two formats:

Unit quantities only. The ledger shows the beginning unit quantity of an inventory or supplies
item, plus or minus any subsequent additions to or subtractions from stock. When used for this
purpose, the stores ledger may instead be referred to as a bin card.
Costed quantities. The same as the first format, except that the cost of the items is also listed in
the ledger.
The stores ledger may sometimes also contain a "min max" field, in which is recorded the
minimum quantity level, below which an order must be placed for additional units. When the on-
hand balance drops below the designated minimum level, the purchasing staff is notified to order
more goods.

The stores ledger concept is most applicable to record keeping systems that are entirely manual.
The term is rarely used when a business has converted to computerized record keeping systems.

A stores ledger is also known as a stock ledger.

The materials accounting system must be integrated with the general ledger.
Purchases are recorded as debits to materials in the general ledger.
Materials account is supported by a subsidiary stores or materials ledger in
which there is an individual account for each item.

The purpose of materials accounting is to provide a summary from the general ledger of the total
cost of materials purchased and used in manufacturing.
All materials issued during the month and materials returned to stock are recorded on a
summary of materials issued and returned form.

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Comparison Chart

BASIS FOR
BIN CARD STORES LEDGER
COMPARISON

Meaning Bin Card implies a Stores ledger alludes to a

quantity record of the subsidiary ledger, that keeps
receipts, issue and track of each and every
balance of materials in transaction relating to
stores. materials in the stores.

What is it? It is a recording It is an accounting record.

document.

Responsibility Storekeeper Cost accounting department

Location Kept inside the stock Kept outside the stock room.
room.

Details Contains quantitative Contains both quantitative

details only. and monetary details.

Interdepartmental Are not shown in bin Indicated in stores ledger.

transfer card.

Entries Entries are posted when Entries are posted after

transaction takes place. transaction took place.

Recording Transactions are Summarized transactions are

recorded individually. recorded.

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 RECENT DEVELOPMENT IN MATERIAL HANDLING

The following sections explore the seven technology trends that may have the biggest impact on
the future of warehouse management.

1."Big data" and analytics

One of the most common definitions of "big data" is data that exceeds the processing capacity of
conventional database systems. Increasingly this definition is being broadened to describe efforts
to capture data that is not currently being captured, consolidate it with other data, and analyze
and use it to achieve specific objectives. In the context of warehouse management, big data
includes the processes required to aggregate, inspect, clean, transform, and model data with the
goal of discovering useful information, suggesting conclusions, and supporting decision making.

With the continuing digitization of information and processes, the application of big data and the
analytics and modeling it enables has become such a powerful trend that Harvard Business
Review called it a "management revolution" in its October 2012 "Big Data" issue.1 This is a
revolution that metrics-driven supply chain executives should embrace. Yet, according to
Deloitte's 2014 MHI Annual Industry Report, "at many companies the supply chain side of the
house is a step or two behind the commercial side when it comes to tapping the full power of
analytics."2

In our experience, one reason for that lag in the warehouse is that managers are concerned about
the complexity of collecting and analyzing data from disparate sources. Data security, privacy,
integrity, and integration into existing business systems are major barriers to the rapid
advancement of big data analysis in warehousing and distribution. Another issue is that data is
only useful when it is integrated into daily management processes. This often requires special
training to ensure employees are maximizing the data-driven decision-making opportunities.

These obstacles must be overcome because there is little doubt that the organizations that can
collect and use data effectively will be the ones that are most successful in achieving consistent
improvements in supply chain reliability and efficiency. Overcoming these obstacles requires a
commitment by senior management to strategically implement proven, high-value analytical
tools that can both deliver short-term results and serve as building blocks for the future. Once an
organization begins to see success in using data to support decision making its appetite for more
ambitious projects will grow.

One example of how that is already occurring is the application of forklift fleet management
software, which is increasingly being used to track vehicle impacts, operator productivity, and
equipment utilization across fleets of lift trucks. Until this technology was developed, there was
no way for warehouse managers to track impact events by operator or location. That often

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prevented managers from taking corrective measures in the form of additional training or tweaks
to the warehouse layout. In addition, when warehouses don't track the number of impacts or react
to events in any meaningful way, it encourages a culture in which operators don't recognize
impacts as a problem.

When warehouse managers start to track these events and react to them, they are often surprised
at the number of impacts that are occurring and the reductions that can be achieved by using data
to change behavior. Food services provider The Clemens Group provides an example of how
powerful this can be: Managers at that company used forklift fleet management technology to
achieve an 80 percent reduction in impacts simply by monitoring and investigating impact
events. Similar improvements are possible when data collection is used to track equipment
utilization and operator productivity.

In addition to sustainable improvements in forklift utilization, warehouse safety, and operator

productivity, systems such as forklift fleet management can introduce an organization to other
uses of data-based management. One particularly interesting use of big data to drive
improvements in material handling is the move to aggregate supply chain data across businesses.
Bringing together metrics from similar organizations that are operating similar types of facilities
makes it possible to produce baseline metrics that warehouse managers can use to benchmark
their operations and help them identify best practices that maximize efficiency and compress
shipping times.

3.The Internet of Thing

The Internet of Things describes the sensors and data-communication technology built into
physical objects that enable them to be tracked, coordinated, or controlled across a data network
or via the Internet. While a contributor to the big data trend, the Internet of Things is distinct in
that it represents direct machine-to-machine communication and coordination, while big data
generally encompasses data from a variety of sources that are consolidated for human analysis.

In the warehouse, the Internet of Things will support communication and coordination across
conveyors, automated storage and retrieval systems, forklifts, and other systems to enable new
levels of visibility and automation.

One easy-to-understand example of how the Internet of Things might evolve is the connected
home or office, which senses your presence and automatically controls the lighting, temperature,
and entertainment options based on your preferences. Imagine what this kind of connectivity and
intelligence could accomplish in the warehouse. It would take all the disparate systems and
equipment—conveyors, robots, automated storage and retrieval systems, automatic guided
vehicles (AGVs), forklifts, battery charging stations, dock equipment, pick carts, voice picking
systems, lighting, and heating, ventilation, and air conditioning (HVAC) systems—and tightly

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couple them to warehouse control, labor, transportation, order, and customer management
systems. Such a connected warehouse would allow supply chain and warehouse managers to
reach new levels of workflow optimization, operational efficiency, and predictability, all while
providing real-time visibility into operations and predictive analytics.

Having devices that can communicate is the first step in realizing the potential of the Internet of
Things. The next and more challenging step is being able to capture data from devices across the
facility, aggregate that data for analysis, and enable machines to act on it. It is this aggregation,
processing, and decision making that transforms the Internet of Things from a collection of
isolated devices sending out data into a powerful network that can work in concert to support
objectives.

In the case of the warehouse, forklifts are already doing much of the data collection. Forklifts
today are equipped with wireless connectivity, data storage, and sensors that allow them to
collect information from their own internal systems as well as from their environment, and then
transmit this data to management systems.

With the cost of sensors going down and the amount of processing power embedded in forklifts
continuing to increase, the forklift, which is the only device in the warehouse that travels to
every location in the facility, will be in a position to expand on its current functionality. In
addition to moving product, it will become a mobile information technology hub that collects
and processes data from products, operators, the environment, and other material handling
systems to support unparalleled visibility into warehouse operations as well as increased
automation.

4.Mobile technology

Mobile technology refers to the use of tablets, smart phones, and other handheld or wearable
devices for communication and information.

Across all aspects of society, mobile devices are proving to be a disruptive technology that is
moving fast and has widespread implications. Mobile technology is quickly penetrating the
business realm. The global market research firm Forrester predicts that within the next two years,
one-third of all tablets will be sold to businesses. Tablets are already replacing fixed-mounted
terminals in law enforcement, agriculture, and aviation; they are just starting to be used in
warehouses and distribution centers by managers and other personnel who don't want to be
deskbound but still need to deliver reports and information. Technicians who service forklifts
and automated material handling equipment are also using them for fast, convenient access to
information on troubleshooting, repairs, and work orders.

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As material handling operations increase their use of analytics and automation, mobile
technology will emerge as the primary platform for displaying data. Developers of process and
workflow management systems have already adopted a "mobile first" approach to developing
applications. Experts believe this will quickly move to a "mobile only" development philosophy
as traditional, full-screen desktop displays are no longer considered useful.

With mobile technology, warehouse managers will have access to a wealth of data, including
equipment status and performance reports, wherever they may be. With more warehouses
operating 24 hours a day, seven days a week, this will allow managers to track performance and
respond to problems around the clock.

Other warehouse personnel will encounter mobile technology through their interface with
equipment such as forklifts and automated storage and retrieval systems. Wearable technology,
such as "smart glasses," is being integrated with warehouse management systems to enable
hands-free mobility for workers using visualization and voice recognition to receive instructions
for completing tasks.

5.The tech-savvy workforce

The prevalence of mobile technology in everyday life is making the workforce in warehouses
and distribution centers comfortable and familiar with technology. The generation entering the
workforce now will expect the equipment they operate to provide an experience that is similar to
their engagement with technology in their cars or with their smartphones. While not a
"technology trend" in the true sense of that phrase, the changes that will occur in the material
handling workforce in the next 10 years qualify as a disruptive trend because this generation of
workers has been so deeply influenced by technology.

The generation of people born during the 1980s and early 1990s has been called "millennials,"
"echo boomers," "the Internet generation," and "iGen." Whatever label you apply to them, they
will bring into the workforce traits that will shape their use of technology, including confidence,
tech-saviness, the ability to multitask, and the expectation of immediate gratification. These traits
all influence the factors that motivate this group and the way information needs to be presented
to them.

Currently, 93 percent of American teenagers have access to a computer in their homes, 78

percent have a mobile phone,4 and 76 percent are on social networks.5 Much of this time on
computers and phones is spent playing computer games. American teens will spend on average
10,000 hours gaming by the time they are 21.6 Teenagers in other countries are similarly invested
in technology.

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This development presents both challenges and opportunities for material handling managers.
Both management techniques and material handling equipment must adapt to this new generation
of workers. In general, information needs to be presented in a more graphical format, and
organizations should look for opportunities to use social sharing and gamification to keep
workers engaged and motivated. Gamification is the application of typical elements of game
playing to other areas of activity to encourage engagement or modify behavior. The research
firm Gartner predicts that by 2015, 40 percent of Fortune 1000 companies will use gamification
as the primary mechanism for transforming business operations.7

One example of how gamification is being used is Keas, an employee wellness platform used by
enterprises to maintain lower group health-insurance costs and reduce expenses such as
unnecessary sick days. Keas employs gamification within its platform to enable employees from
client companies to log in to a personal dashboard to view statistics, earn awards for completing
certain tasks, and support co-workers for making progress toward their goals.

These types of applications could find their way into warehouses and distribution centers. Order
picking solutions are already moving from text-based information delivery to more graphical
displays of product identity and location, which can improve productivity. Adding gamification
and social sharing to these platforms may drive even greater improvements in the future.

7.Advanced robotics

The technologies discussed to this point have been focused primarily on making the warehouse
workforce—from senior managers to forklift operators to order pickers—more productive. The
next two trends, advanced robotics and autonomous vehicles, automate manual tasks.

Robotic equipment has been used in material handling for some time. But a new generation of
advanced robots incorporates enhanced levels of sensing capabilities and algorithms that allow
them to better sense their environment and make decisions based on changes in that
environment.

This is an important development in the use of robotics in material handling. Material handling
tasks typically have been too variable to make them good candidates for robotics. Unlike
manufacturing, where products move down an assembly line and can be precisely positioned for
each operation, products in a warehouse typically are different sizes and shapes and may not be
positioned in exactly the same way or location each time they are handled. New vision-sensing
technologies are enabling robots to adjust to these variations, allowing, for example, mixed-case
palletizing and depalletizing to become commonplace. As robots get smarter, more refined, and
safer, they will increasingly be used to handle some of the routine yet variable tasks being
performed by humans today in warehouses.

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In addition, the recent harmonization of U.S. and European standards for collaborative robots,
which work in shared spaces with humans, will accelerate technological advancements and bring
forward new applications for robots in warehousing and distribution, including working
alongside humans picking and boxing items. This is not science fiction; Amazon, in fact, is
currently sponsoring a robotics competition through the Institute of Electrical and Electronics
Engineers (IEEE) that is focused on order picking.

As in manufacturing, the use of robots in material handling will free humans from performing
routine tasks and bring greater speed and accuracy to repetitive tasks, supporting the ultimate
goal of reducing material handling costs.

8.Autonomous vehicles

While sometimes used synonymously, there is an important distinction between driverless and
autonomous vehicles in the warehouse. Autonomous vehicles are driverless, but not all driverless
vehicles are autonomous. Autonomous vehicles are capable of making decisions in response to
their environment. Driverless vehicles, such as automatic guided vehicles (AGVs), are controlled
from outside the vehicle or are limited to a programmed path.

The AGVs used in warehouses today typically follow preplanned routes and can't navigate
around obstacles. When obstacles are encountered, an AGV simply stops in its tracks. Human
intervention is required to remove the obstacle and restart the AGV. These situations are
commonplace in warehouses and distribution centers, and they cause congestion and disruption.
This shortcoming has limited the use of AGVs in material handling. They currently account for
less than 1 percent of forklift sales in the United States, according to sales numbers released by
the Automatic Guided Vehicle Systems Industry Group of the material handling industry
association MHI.

To be truly autonomous, AGVs need decision-making capability that allows them to perform
tasks with a high degree of freedom from external control. When encountering obstacles, for
example, they should be able to reroute themselves to complete the task at hand without human
assistance. Enabling AGVs to do that will require advances in current technology. Of the
disruptive technologies discussed in this article, autonomous vehicles may be the furthest from
playing a significant role in warehouse operations because of the challenges that still exist in
terms of sensor capability and vehicle intelligence.

Yet much is happening outside of the material handling industry that is driving the technology
forward. In the automotive industry, General Motors, Audi, Mercedes-Benz, and Nissan are
testing autonomous concept cars, and Google's driverless car has logged more than 700,000 road
miles. Not too long ago driverless automobiles were thought to be in the distant future;
manufacturers now expect commercialization by 2020.

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With autonomous vehicles potentially on the road within the next six years, autonomous forklifts
can't be too far behind. In the meantime, just as auto manufacturers have tapped into their
research on driverless vehicles to bring new collision-avoidance systems to market, forklift
manufacturers have introduced semi-autonomous capabilities that work with operators to
increase productivity. As technology develops and matures, these semi-autonomous vehicles will
evolve into fully autonomous vehicles that will create additional opportunities for productivity
improvements and cost reduction.

9.New energy sources

Opportunities to reduce warehouse energy costs will emerge in at least three areas.

On the facility level, lighting can represent a significant amount of the total electricity cost for
warehouses and distribution centers. Skylights and occupancy-sensing "smart" lighting solutions,
including low-energy lighting, are becoming more commonplace in warehouses and distribution
centers. The large, flat rooftop surfaces typical of warehouses and distribution centers are ideal
locations for solar panels that can be used to supplement power requirements.

Within the warehouse, improvements in the energy efficiency of forklifts and automated storage
and retrieval systems continue, thanks to new forms of power regeneration and new approaches
to monitoring and balancing performance and energy usage.

The third opportunity is in the fuel source for warehouse vehicles. The lead-acid batteries that
power forklifts have served the industry fairly well. They are emissions-free, relatively
inexpensive, and provide adequate run times in many applications. But they do have their
limitations.

Lead-acid batteries must be changed every six to eight hours, which can be disruptive in multi-
shift operations, particularly during busy periods. In addition, they require charge times of up to
eight hours followed by eight hours of cool-down time. This requires companies to have extra
batteries and dedicated space for battery storage that must be ventilated. Finally, lead-acid
batteries require periodic maintenance to maximize their useful life. That may require full-time
staffing of the charging station.

Two energy sources have emerged as potential alternatives to lead-acid batteries: hydrogen fuel
cells and lithium-ion batteries.

Hydrogen fuel cells have been piloted in a number of large warehouses, and some of those early
adopters are now transitioning from government-sponsored trials to full site conversions. The
technology as applied to forklifts is still relatively immature but has shown some promise in
addressing the issues with lead-acid batteries. Fuel cells can be refueled in as little as three or

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four minutes and do not require a dedicated battery room. However, the anticipated expiration in
2016 of the U.S. government's 30 percent fuel-cell investment tax credit, together with the
currently limited supplier ecosystem, could stunt further development and growth of this
technology and keep costs of fuel cells high compared to lead-acid batteries.

Lithium-ion batteries are generally more efficient than lead-acid batteries, can be very quickly
"opportunity charged" during lift truck operators' breaks without adversely affecting battery life,
and have longer run times. Additionally, lithium-ion batteries don't emit gas during charging and
therefore do not require special battery rooms.

The lighter weight of lithium-ion batteries when compared with lead-acid batteries is touted as an
advantage in automobiles and airplanes; however, this is actually a disadvantage in many
forklifts, where the battery's weight is needed to provide stability during lifting, turning, braking,
and other operations. To meet battery weight requirements, lift truck fleets often must add extra
weight to vehicles that are equipped with lithium-ion batteries. That extra weight can take away
energy-storage volume from the battery and, in some cases, may eliminate lithium-ion's
advantage of higher energy-storage capability. This technology is still expensive relative to lead-
acid batteries, but early adopters are conducting pilot studies to better understand the benefits of
the technology for their specific applications and whether those benefits could outweigh the cost
differential.

Ultimately, the technology that emerges as the primary alternative fuel source for automobiles
will attract the investments in research and production capacity required to make that technology
affordable for material handling, creating new opportunities to increase productivity and drive
costs out of the supply chain. In the interim, better monitoring of battery health and better
management of battery charging can minimize the negative characteristics of lead-acid batteries.
In addition, "quick charge" technologies are offsetting some of the disadvantages of lead-acid
batteries in terms of the time required to fully charge them.

A connected, automated future

Each of the seven disruptive technology trends discussed in this article will ultimately work with
and complement the other six to offer greater visibility and control over material handling
operations. In the next 10 years, the intelligence designed into material handling equipment will
grow exponentially, as will connectivity between systems and their environment. Tech-savvy
workers will operate intelligent machines, working alongside robots and autonomous forklifts in
highly automated operations. Every activity will leave a digital footprint that will be
consolidated, aggregated, and analyzed to drive continuous improvement. The result will be
supply chains that are more efficient, more reliable, and allow product to be moved at lower cost.

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