Training onPurchase management and inventory control Facilitator: M/s ICWAI, Bengaluru Conducted on: 20 – 21 March, 2009. An overview In modern industrial world competition has been very stiff and many industries turn sick now and then. Some industries face huge while even those which were flourishing slowly deteriorate in their earnings. An analysis of such happenings would indicate that ineffective control is the root cause. Controls are therefore absolutely necessary for survival of industries. A control is the process of ensuring performance of various levels of organization, in line with the plans courses of action for the plan period. It involves: • Preparation of action plan for the period. • Communication of the plan to various levels. • Monitoring actual V/s Projections. Among the various controls exercised in industries, inventory control occupies one of the prime places since material constitute one of the important factors of productions in an organization. Materials refer to commodities supplied to an undertaking for consumption in manufacture or in rendering service or conversion into products. Cost of such materials enters into product cost or cost of services. Often the term stores is used synonymously with materials, though stores has wider meaning covering not only raw materials for consumption or utilization but also other sundry items like sundry supplies, maintenance stores, fabricated parts, components, tools & other equipments, further there are finished and semi finished products. To cover all such items of stores the commonly used term is “INVENTORY”, which includes raw materials, components, WIP & semi finished stocks. In any organization materials are procured, stored till they are actually required & finally issued. In order to prevent deterioration, waste, theft etc. proper physical control on such materials is necessary to avoid extra expenditures on purchases(in excess of needs), Stock outs(Affecting production), improper use(Internal or other wise). Any system of inventory control starting from the point of request for purchase of materials up to point of consumption. Thus inventory control is divided into Purchase control, Storage control & Issue control. Purchase control: ◊ ◊ ◊ ◊ ◊ ◊ ◊ Effective purchase department/Organization. Qualifications of purchaser. Purchase routine. Purchase requisition. Specification & quality of materials. Time of purchase & quantity to be purchased. Stock levels of material holding determining purchase. Provisioning and purchase procedure. spares etc. Rato analysis. o Pricing of issues. Inventory TO( material consumed to average inventory).Storage control: Role of store keeper.e. inventory which comprises stocks of stores. raw materials. Perpetual inventory system. Classification and codification of materials. EOQ etc. • It includes all activities & processes that required supplying the final product to customer. ABC/VED methods of control. Produce: Production of end products. components. Review of SM/NM items. Characteristic SCM: Characteristic of SCM: er • Any number of companies may form part of SCM.e. Location & organization of stores department. . Setting levels. The techniques applied for inventory controls are ABC/VED Analysis. Sources: Includes collection of system requirements i. WIP. (SCM) SCM): Supply chain management (SCM): Definition: the physical. consumables. raw materials. Establishment of system of budgets. spare parts. Perpetual inventory system. SM/NM to total inventory Total inventory to cost of production. Deliver: Deliver to the customer. Thus to sum up.. finished goods is subjected to controls with a view to achieve maximum efficiency in production and sales with least investment in inventory. financial & information network for the logistic movement of material funds & related information in an organization. Issue control: o Bill of materials(Specification Cum quantity) o Materials requisition/return note. Return: Rejection or in other words source of improvements. • Customer can be supplies to other customer creating customer – customer relationship. Process of SCM: Plan: Includes planning of requirements i. consumables etc. machine hall. It is an investment in the nature of long term. finished goods and account receivables. improvements. control room etc. raw materials. A change may be affected by seasonal or cyclical factors. transportation is also very important while exporting the product.e. Seasonal fluctuating working capital: Additional inventory or other current assets are held due to the seasonal nature of the industry. SCM Systems: ⇒ ⇒ ⇒ ⇒ Supply chain planning software Supply chain execution software Application service provider Entrepreneurs resource planning Advantage of SCM: ◊ Business integration/development ◊ Cost saving ◊ Quality control Work capital management (WCM): Work capital management is concerned with decision involving current assets and current liabilities. SCM involves layout planning i. Seasonal industries like wooden goods or sugar carry an additional stock of inventory. .Decision areas under SCM: Location decision: Planning of layouts in an organization has a vital role in a company. classifying. working capital can be categorized as Permanent working capital: It represents that minimum amount of investment in current assets that is deemed necessary for carrying out operations for a period. changing the process etc. maintaining(stock levels) of inventories. like that of fixed assets. warehouse. Product decision: Decision on type of product to be manufacturing i. Fluctuating working capital: It represents additional assets required at different times during the operating year to cover any change or variably from the normal operations. Inventory decision: Decision on purchasing. For example a firm keeps a large stock of inventories and carries larger receivables during peak selling periods like festival seasons. Current assets are acquired with an intension of sale or conversion into finished goods for sale and include cash and bank balances. Types of work capital: Depending on nature of funds blocked. WIP.e. it is directly proportional to the cost. Net working capital which concerns current assets less current liabilities. The term work capital normally denotes investment in current concern assets and also used with different connotations like Gross working capital which deals with total investment in current assets. modification in design. Transportation or distribution decision: Decision on supply of product and optimistic means of supply i. Supportive assets are primarily intended to feed fixed assets and to carry funds required for carrying out the day to day operations.e. An increasing sophistication in cash management has resulted in reduction in cash balance held by an enterprise due to various reasons like o Rising interest rate on securities o Innovations in the area of cash management o Economies of scale in cash management with the growth of corporate size. these items may not subjected to rigorous control. The need of working capital arises as cash expenditures and cash receipts are non-synchronous. With a geographical dispersal of business enterprises cash management has acquired added significance as cash balances in regional offices are to be optimized.Special fluctuating working capital: Extra funds needed to meet contingencies during inflationary situations. Inventory management: ABC and VED analysis of inventories: In ABC analysis materials are categorized into three groups namely A. Working capital components and management: 1. administrative and distribution functions. area of concentration for items in B category are reviewed less frequently. Large number of items says 89% involving low investment say 5% are categorized as C. In VED analysis materials are categorized as Vital. Centralized banking system: In a multi division company bank balances are centrally controlled and the balances in regional offices are transferred to the central office. Firm controls on vital and essential items are required and are viewed frequently and stored so that inventories should not be damage/ Spoil in any case. Lock box system: An arrangement sometimes is made with the local post office where in the customers are requested to deposit the cheques. 2. Vital and essential items are always kept stock in safe level so that production may not be stop due to lack . Cash management: Cash is most liquid asset is necessary to honor obligations and commitments. Another 10% of items having 15% of the value are categorized as B. that is these do not occur at the same time are a sizeable part of the total assets and normally account for approximately 50-60% total assets. Techniques of cash management: Concentration banking: While an objective of speeding up the collection of cheques from customers. Vital items very important items for production/maintenance and required less frequently. Strategic collection centers are established in different regions. recession or strike or to take advantage of bulk discount are the examples. Importance of work capital: Work capital to iterate is needed to carryout manufacturing. Cash balance here includes cash in banks. An adequate level of working capital is essential for the profitable operations of every enterprise. Essential and Desirable. area of concentration in item A category is to avoid heavy stocking but at the same time keeping in mind the possibility of stock out. B and C. Small number of items say 1% having heavy investment (80%) is categorized as A. Essential items are less important than the vital items for production/maintenance and possibility of requirement little bit higher than vital items. Storage costs. damage or theft. At the operational level of inventory management. This process is repeated at each stage. cost of placing an order like typing the order. Economic order quantity(EOQ): Various cost involved with the inventories are:. This is similar to conventional job shop or makes to order procedures. Cost of running out of stock and loosing an order. Desirable materials are not so important like vital & essential items in view of production and maintenance and it doesn’t require firm control. the production activity is planned upon the actual demand.of these items. this is known as Zero inventory concept or ZIN system. obsolescence and spoilage. 3. is not only applicable to the various components of inventories but also in most of the day to day activities. This system enables the market place to pull the necessary items from the plant as against the conventional system of pushing the product to the market. Costs of funds tied up in the inventory. In just in time system. 2. right down to raw materials or up to sub contracted items. .e. with the customers specifying their requirements. cost Costs EOQ Quantity Ordering cost Economic ordering quantity = √ (2xAxC/I) Here A – Annual consumption of materials C – Ordering cost or cost per order I – Inventory carrying cost. Total cost Inv. Insurance.e. Carrying cost: Various costs are incurred for having an inventory stock i. rather than the predetermined schedule. The production stages are interlinked in the form of a tree and each production order generates pull throughout the system. 1. since the cycle time for production of various models is given only to the final assembly point of mixed production line. inspection of goods receipt. as competition develops. Just in time inventory: Just in time is a Japanese method of integrated philosophy by team approach. 5. In this process. 4. Hence this system is likely to be operated by most companies in future. Carr. Material cost. Ordering cost: i. the advance stage of production draws the right amount of inventory from the preceding stage to sustain the activity. The conveyance Kanban is attached to the container when it is transported from one stage to the next operation stage. which is attached to a standard bin of inventory. • Up to 25% reduction in indirect and direct labor cost. The production Kanban authorizes the preceding stage to produce the required quantity of components or subassemblies that are listed. supportive manager and dynamic leadership. currency fluctuation. Information: The true interests of other side The true needs of other side The true priorities of the other side . funding strategy. It has to cover wider areas like specification. • Raw material reduction about 35% to 70%. quantity. commissioning. Use of two Kanban’s will expose the production bottlenecks and encourage finding out solutions. • JIT integrates the thinking of worker. ◊ Power to go to other supplies ◊ The power of legitimacy ◊ The power of commitment of the entire team ◊ The power of expenditure ◊ The power of rewarding and punishing 2. free along side. political stability in supplier countries. Inventory turnover ratios = Annual sales/year end inventory As per norms inventory turn over ratio is 8±1 Three crucial variables of negotiation: 1. • 40% to 80% decrease in space requirements. waiting time in assembly process. excess inventories. • Quality Cost reduction about 25% to 60%. corporate governance etc. • KABAN control: This is a Japanese word for a small card or tag. generation of scrap and network. Time: Do not reveal our dead lines Patience The other side may have a dead line Do not precipitate the matter till it is guaranteed to be in your advantage 3. increased process timings. • Up to 80% reduction in finished goods inventories. • Consumerism is the main philosophy of JIT so that it satisfies all the needs of customer. delivery schedule. • 10% reduction in process lead time. Power: ◊ Power of awarding more contracts – Huge potentials. Negotiation skills: Negotiation must be object oriented and flexible. listening supervisor. • Redesigning and set up time reduction.Advantage of JIT: • The system eliminates the waste arising from areas like over production. annual report analysis. company structure. transportation bottlenecks. low labor utilization. R&D budget. INCO terms. All the above stages of evaluation should be carried out objectively using scientific methods without personal biases and prejudices. price. It is desirable to compare one vendor’s performance with others in order to improve overall reliability. 07 . Just as the buyer tries to rate the supplier. In survey stage. delivery. Purchase department has sole responsibility for the choice of the supplier and placing orders.2758 ------------. professionalism and commitment to promises. in process conversion stage and the out going final stage. The enquiry stage consists of detailed analysis of the vendors’ performance with other consumers. Stages of evaluation: There are four stages of evaluation of suppliers. In the negotiation and selection stage. Date: Sathyanarayana Sharma HR AE (M). technical knowledge. who pass the enquiry stage. are called in for negotiation on all aspects and the list of approved vendors is drawn up. Hence it is necessary to access the vendors performance on an objective basis. based on price. These three stages are considered as a part of source development and source registration process. quality & service aspects. the seller also rates the buyer with regard to his authority.Vendor rating: Objective: Purchasing aims at having two suppliers for most of the items. Hence identifying potential and reliable vendors as well as maintaining up to date records on their performance is vital for purchasing operations. For this process the parameters are quality. based on preliminary information. schedule and service. In deciding the market share between suppliers. all possible sources are explored for their capabilities. In this process quality controls’ department assistance is needed to get information on rejection at incoming a materials stage.* ------------- . only those vendors. It is also necessary to educate the supplier with a view to improve his performance. The consequences of choosing the wrong type of suppliers are serious both financially and operationally. it is necessary to assess the performance of the suppliers. delivery. Vendor rating refers to the experience stage when the supplier has started sending the material after trial orders.