MATERIALS MANAGEMENT

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2 MATERIALS MANAGEMENT

3 MATERIALS MANAGEMENT A Supply Chain Perspective (Text and Cases) Third Edition A.K. CHITALE Academic Advisor Govindram Seksaria Institute of Management and Research Indore R.C. GUPTA Professor and Head Department of Industrial and Production Engineering Shri Govindram Seksaria Institute of Technology and Science Indore Delhi

4 MATERIALS MANAGEMENT: A Supply Chain Perspective (Text and Cases), Third Edition A.K. Chitale and R.C. Gupta 2014 by PHI Learning Private Limited, Delhi. All rights reserved. No part of this book may be reproduced in any form, by mimeograph or any other means, without permission in writing from the publisher. ISBN The export rights of this book are vested solely with the publisher. Sixth Printing (Third Edition) August, 2014 Published by Asoke K. Ghosh, PHI Learning Private Limited, Rimjhim House, 111, Patparganj Industrial Estate, Delhi and Printed by Mohan Makhijani at Rekha Printers Private Limited, New Delhi

5 CONTENTS Preface... xvii Preface to the Second Edition... xix Preface to the First Edition... xxi Chapter 1: MATERIALS MANAGEMENT Introduction Management in Relation to Materials Function Functions of Management as Applied to Materials Management of Material Resources Objectives of Material Management Primary Objectives Secondary Objectives Achieving Objectives Effects of Business Changes Balancing of Objectives Limitations to Meeting Objectives Review Questions Chapter 2: INTEGRATED MATERIALS MANAGEMENT Introduction Activities of Materials Management Importance of Materials Department Costs Involved in the Management of Materials Need for Integrated Concept Areas of Materials Management Materials Management and Production Control v

6 vi 2.8 Inspection of Purchased Items Relative Status of the Materials Manager Desirable Qualities of Purchasing and Materials Manager Interdepartmental Relationship Advantages of Integrated Materials Management Summary Review Questions Chapter 3: CLASSIFICATION AND CODIFICATION OF MATERIALS Need for Classification and Identification of Materials Classification of Materials General Classification Classification According to Condition of Materials Nature of Codification Process of Codification Merits of Codification Demerits of Codification Codification Systems Alphabetical System Numerical System Decimal System Combined Alphabetical and Numerical System Brisch System Kodak System Stores Vocabulary Marking of Stores Colour Marking Secret Marking Summary Review Questions Chapter 4: SPECIFICATIONS IN MATERIALS MANAGEMENT Objective of Specifications Collaborative Development Categories of Specifications Simple Specifications Complex Specifications Development of Specifications Organizational Approaches Purchase Management Research Writing Specifications Common Problems in Specifications Summary Review Questions... 58

7 vii Chapter 5: STANDARDIZATION AND VARIETY REDUCTION Definition of Standard Historical Review Three Dimensions of Standards Different Levels of Standards Various Foreign Standards in Use in India Procedure for Evolving Indian Standard Benefits of Standardization Standardization and Variety Reduction in Products Advantages of Variety Reduction Scope of Variety Reduction and Standardization Techniques of Variety Reduction Sales Contribution Analysis Consumption Analysis Renard Series (Preferred Numbers) The Three S s Standardization, Simplification and Specialization Standardization Simplification Review Questions Chapter 6: MATERIALS PLANNING Importance of Materials Planning Definition of Materials Planning Flowchart for Materials Planning Techniques of Materials Planning Past Consumption Analysis Material Requirements Planning Summary Review Questions Chapter 7: BUDGETING AND MATERIAL PLANNING Introduction Master Budget Sales Budget Production Budget Materials Budget Labour Budget Maintenance Budget Overheads Budget Administrative Budget Capital Expenditure Budget... 92

8 viii Research and Development Budget Cash Budget Flexible Budgeting Summary Review Questions Chapter 8: STORES AND STORE KEEPING Objectives of Store Keeping Functions of Storekeeper Features of Successful Store Keeping Relationship of Store Department with Other Departments Benefits of Store Keeping Stores Organization Location of Stores Layout of Stores Receipt Section Types of Stores Preservation of Stores Stock Taking Methods of Physical Stock Verification Summary Review Questions Chapter 9: STORAGE EQUIPMENT Types of Equipment Selection of Equipment Review Questions Chapter 10: PRINCIPLES OF MATERIALS HANDLING Introduction Planning Principles Operating Principles Principles Related with Equipment Principles of Cost Reduction General Principles Classification of Material Handling Equipment Material Handling Equipment Summary Review Questions Chapter 11: INVENTORY CONTROL Introduction Importance and Scope

9 ix 11.3 Cost Concepts Inventory Models Economic Order Quantity (EOQ) Model Economic Production Order (EPQ) Model Inventory Model Allowing for Shortages General Model Multi-Item Deterministic Model Inventory Model with Price Breaks Probabilistic Inventory Models Summary Problems Review Questions Chapter 12: INVENTORY MANAGEMENT MODELS Introduction Deterministic Models of Inventory Management The Q System (Deterministic Case) The P System (Deterministic Case) Probabilistic Models of Inventory Management Q System (Probabilistic Case) P System (Probabilistic Case) Using P and Q Systems in Practice Independent Versus Dependent Demand Review Questions Chapter 13: SELECTIVE INVENTORY CONTROL Introduction Selective Treatment ABC Categorization Conducting ABC Analysis Benefits of ABC Classification High-Medium and Low Price (HML) Analysis VED Analysis SDE Analysis GOLF Analysis SOS Analysis FSN Analysis XYZ Analysis Three-dimensional Approach for Selective Control of Inventory Summary Review Questions

10 x Chapter 14: THE PURCHASING CYCLE Introduction Purchasing Process Purchasing Terms and Conditions The Tender System Payment Terms Summary Review Questions Chapter 15: PRINCIPLES OF PURCHASING Introduction Definition of Purchasing Objectives of Purchasing Duties and Responsibilities of Purchase Department Principles of Purchasing Special Methods of Purchasing Centralized and Decentralized Purchasing Organizing for Purchase Review Questions Chapter 16: THE NATURE OF PURCHASING PROCESS AND VENDOR RATING Introduction Activities in Organizational Buying The Buygrid Analytic Framework Phases in the Purchasing Decision Process Buying Centres and Multiple Buying Influencers Primary Roles Secondary Roles Supplier Rating Evaluating Supplier Performance Summary Review Questions Chapter 17: VALUE ANALYSIS Introduction What is Value? Maximum Value Normal Degree of Value Importance of Value Value Analysis Applied to Purchase Organizing for Value Analysis

11 xi 17.8 Value Analysis Techniques Selling Value Analysis Cost Analysis and Value Analysis Aid Purchase Research The Value Analysis Job Plan Case Study on Value Analysis Job Plan Function Analysis System Technique (FAST) Material and Process Selection in Value Engineering Design, Material, Process and Supplier Decisions Product Parameters Process Selection Material Selection Material Selection Parameters Creativity Creative Techniques Review Questions Chapter 18: QUALITY CONTROL IN MATERIALS MANAGEMENT Introduction Evolution of Quality Concepts and Applications Quality and Design Spiral Theory of Sampling Inspection Single Sampling Plans The Operating Characteristic Curve The AQL (Acceptable Quality Level) and LTPD (Lot Tolerance Proportion Defective) The AOQ Curve and the AOQL Average Total Inspection (ATI) Double Sampling Plan Multiple Sample Plans Sequential Sampling Plans Practical Method of Selecting a Sampling Plan Sampling Plan for Variables Control Charts and In-Process Monitoring of Quality Introduction Control Charts Discussion on Variability in a Constant Cause System Procedure in Quality Control Theory of Control Charts Significance of X and R Charts Control Chart for Defective: np Chart: Comparison with X and R Charts Control Chart for Number of Defectives c Per Unit: Areas of Application Control Chart for p (a special case of np chart when n varies)

12 xii 18.6 Six Sigma Quality Concepts Statistical Background Six Sigma Relationships Procedure to Work Out Operating Sigma Level of a Process Rolled throughput Yield Advantage of Yield and Allied Calculations Normalized Yield and Z-Value for Benchmarking Design for Six Sigma (DFSS) Cost Benefits and Leveraging through Better Design Relationship between C P and C PK Values Implementation of Six Sigma The Twelve MAIC Objectives Future Avenues Review Questions Chapter 19: MAKE OR BUY DECISIONS Key Strategic Decisions Strategic Issues New Product Development and Outsourcing Lean Manufacturing Decisions at Tactical Level Factors of Make or Buy Decision Dangers of Outsourcing Summary Review Questions Chapter 20: BUYER SELLER RELATIONSHIP Introduction Evolution in Buyer Seller Relations Advantages and Limitation of Various Types of Buyer Seller Relations Choice of Type of Relationship Suppliers Point of View Review Questions Chapter 21: NEGOTIATION Introduction Purchasing Negotiation for Consumer Products and Industrial Products Factors Which May Weaken Negotiation Pre-Planning for Negotiations Planning of Negotiations Tactics in Purchasing Negotiations

13 xiii 21.7 Stages in Purchasing Negotiation Code of Conduct Review Questions Chapter 22: DISPOSAL OF SURPLUS, OBSOLETE AND SCRAP Introduction Reasons for Creation of Surplus Grouping of Items and Their Treatment Obsolete Items Scrap Salvage Review Questions Chapter 23: PERFORMANCE APPRAISAL OF MATERIALS DEPARTMENT Introduction Need for Performance Appraisal Features of Performance Appraisal Performance Appraisal Evaluation and Ratios Performance Appraisal Receiving Stores Evaluation of Purchasing Department Evaluation of Inventory Control Evaluation of Stores Department Reporting of Evaluation Indices Review Questions Chapter 24: SOME LEGAL ASPECTS OF PURCHASING Introduction Review Questions Chapter 25: PURCHASING OF CAPITAL EQUIPMENT Introduction Characteristic Differences between Capital Equipment and Consumable Materials Purchasing Procedure of Capital Equipment Ten Commandments of Buying Capital Equipment Economic Analysis of Capital Equipment Investment Payback Period Average Rate of Return Net Present Value Internal Rate of Return...382

14 xiv 25.6 Purchase of Old Equipment Sources of Old Equipment Disadvantages of Buying Old Equipment Purchasing vs Leasing of Capital Equipment Benefits of Leasing Disadvantages Review Questions Chapter 26: PUBLIC BUYING The Directorate General of Supplies and Disposals Domain of Working Organization Structure Registration of Suppliers with DGS&D Processing Indent Summary Review Questions Chapter 27: INTERNATIONAL PURCHASING Introduction Government and Other Enablers of Imports and Exports Director General of Foreign Trade (DGFT) Categories of Importers Import Application Criteria for Licensing Negative List of Imports Import Procedure Documents Used in International Trade Clearing and Forwarding Role of Government-owned Trading Organizations Benefits of India Becoming Member of World Trading Organization (WTO) Review Questions Chapter 28: IMPORT SUBSTITUTION Introduction Analysis of India s Foreign Trade Problems of Import Substitution Role of Management to Prepare for Import Substitution Summary Review Questions

15 xv Chapter 29: LOGISTICS, WAREHOUSING AND DISTRIBUTION MANAGEMENT Introduction Components of a Logistics System Role of Warehouses Consolidation Product Mixing Cost Analysis in Logistics Warehousing Management Activities of Warehousing Utilize Space, Including Height Effectively Layout of Warehouse Inventory Record Accuracy Distribution Requirements Planning Summary Review Questions Chapter 30: SUPPLY CHAIN MANAGEMENT Need for Supply Chain Management Customer Focus in Today s Scenario Conceptual Model of Supply Chain Management Definition of Supply Chain SCM in the Modern Form as an Integration of Logistics and Manufacturing Developing Integrated Supply Chains Conflicting Objectives Integration Resulting in the Development of a Supply Chain Supply Chain Strategy Collaboration Demand Management Customer Service Technology Integration Strategy Three Steps of Supply Chain Implementation Purchasing Involving In-Bound-Logistics Manufacturing Planning and Implementation within the Factory Distribution Involving Outbound Logistics Transportation Scheduling, Routing and Carrier Selection Design of Efficient and Responsive Supply Chains Designing Efficient Supply Chains Designing Responsive Supply Chains Efficient Versus Responsive Supply Chains Bullwhip Effect in Supply Chains Causes of Bullwhip Effect

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