MATERIAL PROCUREMENT PROCESS PRODUCTION PLAN. Month 1 Month 2 Month 3 Total Qtr 1

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1 MATERIAL PROCUREMENT PROCESS I. Finalise Production Plan. The format is as following: PRODUCTION PLAN Brand Name B1 B2 B3 Qtr 1 Month 1 Month 2 Month 3 Total Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total Quantity logic for production plan can be derived straight from the sales budget. If one refers to the MINIMUM INVENTORY PLAN (page 9 - template MONTHLY PRODUCTION REQUIREMENT), the production plan is worked out based on the actual inventory lying at various locations, required level of inventory & budgeted sales. This budgeted sale may undergo change depending on the market behaviour. Changing the master sales budget may not be desirable as it alters the corporate goals. Annual target achievement should still be kept constant. This means that the user / planner should have the flexibility of: Accepting Production Plan based on the Sales Budget, if the winds blow favourably, OR Manually override the Production Plan without affecting the Sales Budget (and still use or override the required level of inventory at C&F locations). When the user wants to manually define the new production and / or inventory levels due to changed scenario, he should be able to do it. The software should then take over other activities using the manually defined parameters. The above format remains valid only when the Production Plan is based entirely on Sales Budget (Prepared in the beginning of the year). When the user wants to switch over to manual mode the following format should be available: MONTHLY PRODUCTION REQUIREMENT (mmm, mmm, mmm, yyyy) FORMAT Report Date: system date Brand Name Month 1 Month 2 Month 3 Particulars Location: Factory Actual Inventory on Report Date Required Inventory Level B $$$ Balance to be Manufactured (B - A) C Location: C&F Actual Inventory on Report Date Required Inventory Level E $$$ Balance to be Manufactured (E - D) F Budgeted Sales G To be Manufactured in Month C + F Actual inventory will remain constant, as it is a factual data. $$$ The user may manually define Required Inventory Level. If he does not override the values defined previously, the previous values will be taken by the software. Budgeted Sales The user must redefine this field. REMEMBER: The above activity is done for one brand. In case the user wants to change the production plan for more than one brand Anar Material Procurement Process.doc 1 Purchase Module

2 then they have to do this exercise separately for each brand. If there are say 12 brands and the user has done overriding in only 2 brands, then the production plan for rest of the brands should be based on the Sales Budget. II (A). Based on Monthly Production Plan, prepare Material Consumption Plan. There are standard consumption norms for each product. Use these norms to find the total qty of raw materials required to achieve planned production level. The format of Raw Material Consumption Plan is as under: BRAND NAME: RM CONSUMPTION PLAN (Brandwise) RM RM 1. Consumption for Qtr 1 Measure Month 1 Month 2 Month 3 Total Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total II (B). The above format outlines brandwise consumption pattern of each material. You may query materialwise total consumption for all brands under one column. Please see the following format: RM CONSUMPTION PLAN (material-wise) MATERIAL NAME: UNIT OF MEASURE: Brand Name Consumption for Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total Brand 1 Brand 2 Brand 3. Total RM Consumption Month 1 Month 2 Month 3 Total Qtr 1 III. You may also get one consolidated consumption plan as given under: RM RM 1. RM CONSOLIDATED CONSUMPTION PLAN Consumption for Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total Measure Month 1 Month 2 Month 3 Total Qtr 1 The above consolidated plan will give overall consumption qty, encompassing all brands. This will represent macro-consumption figure. IV. Decide following parameters: Safety Stock (no. of days) say a Anar Material Procurement Process.doc 2 Purchase Module

3 Procurement Leadtime (from PO to delivery - no. of days) say b Total No. of days (a + b) Total consumption in Qtr 1 say x No. of days on Qtr 1 90 Average Consumption per day x/90 Reorder Point Inventory Level for (a + b) days (a + b) * x / 90 Important Ideally {(a + b) * x / 90} should equal following: PLUS PLUS QC Released Material (for which MRO already issued) Material in Primary Storage (Just received from transporter) Material under testing in lab (samples withdrawn by QCD) I strongly recommend that the reorder point be decided based on the no. of days of material consumption rather than absolute qty of materials. This will ensure that with increased activity in sales & production the qty at reorder point will automatically get adjusted. If absolute quantity is kept as a deciding factor for reorders then we may have to update this parameter every time activity level changes. Question of changing no. of days consumption as a parameter arises only when management wants to change it as a matter of policy. Pending Purchase Orders should not be included in above formula. V. View current macro RM Inventory Status (in the following format). RAW MATERIAL INVENTORY STATUS REPORT (all materials in stores get covered) Sr. No. Measure Modvat / Nonmodvat Qty Status Issuable Primary Under Net In- Storage Test house (i) (ii) (iii) (i+ii+iii) Pending Gross Decision to classify raw material as Modvatable or Nonmodvatable is taken at the time of receipt of the material. Therefore "Pending P.O." is separately classified. The column "Modvat / Nonmodvat" is related only to "Qty Status", & NOT TO "PENDING P.O.". What will happen when the software queries the Pending Order Status? The software will not (& can not) differentiate between two orders for the same material, as the orders are never placed with clear intention of taking MODVAT credit. The decision of claiming MODVAT is taken at the time of receipt of material. As against this the above status report will distinguish between "MODVATABLE" / "NONMODVATABLE" inventory on hand. It may happen that when material description is same but MODVAT char- Anar Material Procurement Process.doc 3 Purchase Module

4 acter is different (i.e. one material is modvatable & the other is not), the "DESCRIPTION" column will report both inventories as different. But there will be duplication in reporting QTY under column "PENDING P.O.". This can be avoided only when orders are placed separately for modvatable & nonmodvatable items. VI. (A) Find Net Qty to be Procured: Use the formula: Net Qty to be Procured = {(a + b) * x / 90} Reorder Point PLUS RM Consolidated Consumption Qty From Point (III) above LESS Gross Qty From Point (V) above - last column in the table IMPORTANT Raw Material Consumption Qty should be taken on monthly basis. There are MONTH 1, MONTH 2 & MONTH 3 columns in Point III. While MONTH 1 is in progress, if the REORDER POINT has reached, the above formula should take QTY for MONTH 2 and trigger issuance of Purchase Order keeping in mind expected consumption in MONTH 2. In case the level of production has to change depending upon revision in Sales Budget (& Production Plan), the RM Consolidated Qty will change on its own dynamically. This will also necessitate regular plan appraisals, budget revisions etc. Plan for QTR 2 should be initiated by say mid-march, so that Material Procurement starts by the end of third week of March for achieving April production levels. In the month of March itself, the management should plan for each month in QTR 2 (i.e. APR, MAY, JUN) so that software could be exploited for managerial decisions and actions. (B) Constraint of Minimum Qty to be Procured: At times the formula may give the result (i.e. the Qty to be procured) that may not work in real life situation. The constraint can be "MINIMUM ORDER SIZE". This will be true especially in case of empty tubes, menthol, imported vax etc. Looking to the nature of these products, their port of origin and manufacturer's conditions for order acceptance, the order size has to be certain minimum. Logistically, the database should contain the Minimum Order Size values for every material where it is applicable. The application software should work out the "Qty to be Procured" based on the formula. If the material to be purchased has a Minimum Order Size constraint, the constraint value should also be reproduced. The Purchase Manager should process the order based on the values that satisfy the constraints, meet with the production targets and avoid overstocking. The constraints could also be scaled; i.e. it can have a minimum order size as well as minimum multiples in excess of minimum order size. e.g. Minimum Order Size for empty tubes could be say 500,000 units & then in multiples of 100,000 tubes thereafter. In this case you may not be able to place an order for 550,000 tubes. Then the minimum order size should work out to 600,000 tubes. Anar Material Procurement Process.doc 4 Purchase Module

5 This is only an example. In case there are some materials where such constraints apply, the database should contain the information and suggest "Qty to be Procured" using them. VII. Internal Controls & Delegation: The inventory items should be classified into two broad categories: a). Where procurement is done by the management: List out the items that only management can query, initiate negotiations and conclude deals. This will be a function of value of material & its share in the total cost of material consumed. b). Where procurement is delegated to managers: The residual items i.e. MATERIALS MASTER less items procured by the management should fall in this category. While creating materials master, the software should specify the Purchase Privilege. Accordingly when the Reorder Point is reached the software should initiate communication to the pre-defined user stating that the fresh purchases are required in (a) category materials. Similarly, for the residual items a specific user should be pre-defined who will receive such communication for replenishment of stocks. (MODEL REMINDER FORMAT ON THE NEXT PAGE) Anar Material Procurement Process.doc 5 Purchase Module

6 MODEL REMINDER TO USER FOR FRESH PURCHASES To: User Name FORMAT COMMUNICATION FOR FRESH PURCHASES Date: 1 Material : 2 Modvatable / Nonmodvatable: 3 Inventory level on hand: Issuable Primary Storage Under Test Total: 4 Pending P.O. (Total Qty of all pending orders) View pending order status $$$ 5 (3 + 4) 6 Reorder Point Qty 7 Expected RM Consumption next month 8 Qty to be Procured 9 Minimum Order Size In Multiple of 10 List of Approved Parties 1. M/s 2. M/s 11 Last Three Purchase Order Details P.O. No. Date Party Name Qty Purchased Value of Order Expected Delivery Date (i) (ii) (iii) $$$ View Pending Orders: The software should provide a shortcut to review the status of pending orders for this material. The format is as under: FORMAT PENDING PURCHASE ORDER STATUS REPORT Material : Report Date: P.O. No. Date Party Name Qty Price Expected Delivery Date User Name (who placed order) Anar Material Procurement Process.doc 6 Purchase Module

7 REODERPOINT EXERCISE Step 1: Decide the Annual Qty Sales of Each Brand. Refer following format: ANAR PHARMACEUTICALS LIMITED CORPORATE SALES BUDGET (YYYY) Brandwise Quantity Targets Brand 1 Brand 2 Brand 3 Brand 4 Brand 5 Brand 6 Brand 7 Total p.a. Step 2: Decide Material Requirement for the whole year. This is quantitative information. CONSOLIDATED RM CONSUMPTION PLAN FOR (YYYY) RM RM 1. Measure Consumption for YYYY Step 3: Carry out grouping of materials based on Reorder Properties i.e. Safety & Leadtime Stock Levels related to NO. OF DAYS; or pre-defined minimum qty on hand as a specific numerical value, or regular scheduled purchases or one time annual purchases REORDER POINT ANALYSIS FOR RAW MATERIALS No. of Days of Safety & Leadtime Stocks RM RM 1. Measure Consumption for yyyy Safety Stock No. of Leadtime Total days Take 300 working days as base for annual consumption. Safety & Leadtime Stocks: Pre-defined Numbers Reorder Point Qty RM RM 1 Measure Consumption Numbers in Units for yyyy Safety Stock Leadtime Stock Reorder Point Qty Anar Material Procurement Process.doc 7 Purchase Module

8 Scheduled Purchases: Safety & Leadtime Stocks RM Consumption No. of Days Measure for yyyy Safety Stock Leadtime Stock Reorder Point Qty Frequency of Purchases RM 1 $$$ $$$ This needs to be defined how many times in a week purchase of materials should be scheduled. Alternatively we could define "MONDAY", "THURSDAY", "SATURDAY" as the scheduled purchase days. ONE TIME PURCHASE PER ANNUM RM RM 1 Measure Consumption Qty for yyyy Qty to be purchased Next Review / Purchase Month, YY ### ### The software should be able to remind to take a view on the fresh purchases at a specific time in future. On the first day of the Review Month, the user (Purchase Manager) should get the message to assess the situation. Once the user has taken a decision, he should be able to feed a new month manually for a fresh reminder in future. Anar Material Procurement Process.doc 8 Purchase Module

9 CREATION OF PURCHASE ORDER In the database there is Materials Master. For each material, there are a number of suppliers. The details of suppliers will be stored in the database so that any time a material reaches the reorder point, it should be possible for the "Privileged" Purchase Manager to place an order using information from the database. After inviting quotes (or having a firm rate contract), the manager should firm up the party. If there is a new party whose name is not existing in the supplier's database, it should be possible to update the suppliers' database by inserting his profile. The following is the format in which the profile should be created: Name of Party: Constitution (Proprietorship, Firm, Pvt. Ltd. Co; Public company): Contact Person: Permanent Address: SUPPLIER PROFILE Local Address: Pincode: Pincode: Communication details: Status: Manufacturer / Supplier / Trader Phones +( ) ( ) +( ) ( ) +( ) ( ) Fax +( ) ( ) +( ) ( ) Items supplied: CST No. STR No. Excise Registration No. (if any) Anar Material Procurement Process.doc 9 Purchase Module

10 P.O. Ref. No. To: Name & Address of Party PURCHASE ORDER TEMPLATE ANAR PHARMACEUTICALS LIMITED 1 / 7, G.I.D.C. ESTATE, LOCAL (N.G.) Date: Dear Sirs, We are pleased to confirm our order as per the following details: Sr. No. of Material Qty per Unit Quantity No. of Units Total Qty Measure Rate per Unit Rs. Total Amount Rs. Excise Duty - Rate _% Sales tax - Rate _% Total Amount before domestic & local taxes Terms & Conditions: 1 Freight Materials to be dispatched on "Freight To Pay" Basis OR Freight is included in the above amount. 2 Transporter To be selected from a drop down list of approved transporter for this materials & suppliers 3 Insurance to be arranged by Seller If you have a blanket Insurance policy please advise us the Policy No., Name & Address of the Insurance Company. 4 Insurance Expenses to be borne by Anar Pharmaceuticals Limited 5 Delivery Time TO BE FILLED IN BY THE PURCHASE MANAGER 6 Delivery At ANAR PHARMACEUTICALS LIMITED 1 / 7, G.I.D.C. ESTATE, LOCAL (N.G.) Original Invoice may be sent to To be selected by the Purchase Manager as to where original 8 Extra Copy of Invoice may be sent to invoice & extra copy of invoice should be sent 9 Payment Terms TO BE FILLED IN BY THE PURCHASE MANAGER or TO BE SELECTED FROM DROP DOWN LIST OF STANDARD PAYMENT TERMS FOR THIS PARTY 10 Octroi To be borne by Anar Pharmaceuticals Limited at actuals 11 Any Export Order Instruction Against FORM - H (Purchase Manager has to decide whether Anar Material Procurement Process.doc 10 Purchase Module

11 the order is for exports or otherwise) Our Sales Tax & Excise Registration Nos. are: State Sales Tax Registration No Dt: Central sales Tax No. GUJ / 5G Dt: Central Excise Registration no. Division KLL-II/RC /92(14) Rural, Paldi, Ahmedabad Please send us necessary Central Excise Documents along with the ordered materials to enable us to avail MODVAT Credit under the Excise Rules. Please quote Purchase Order Ref. No. & Date in invoice & delivery challan. This order is issued in duplicate. The copy may be signed and returned to us as a proof of your acceptance of the aforesaid terms and conditions. Sincerely, for Anar Pharmaceuticals Limited, Purchase Manager ===================================================================================== HOW TO CREATE PURCHASE ORDER DOCUMENT 1. Select the material for which purchase order is to be created. 2. Based on the material selected, define from a drop down list the name(s) of the supplier(s) to whom the order is to be given. Define the qty of order to be given. If there is MINIMUM ORDER QTY constraint then the software should point out what is the minimum qty. The software should not accept lower qty than stipulated. 3. If the order is to be split between more than one supplier, define each supplier separately. Define the split qty for each supplier. This should prepare separate Purchase Orders for each party. 4. In case where the Quantity can not be split in "Qty Per Unit" & "No. of Units" (especially when an item comes in lumpsum where units can't be broken up), these columns could be kept blank. Alternatively "No. of Units" could be treated as "1" and "Qty per Unit" could be the actual qty ordered. The multiplication will be still come to the total qty ordered. Again, "Rate per Unit" could also be defined as the total price, which remains constant when it is multiplied with "1". 5. Excise Duty and Sales Tax may be separately shown in the order, if possible. This will help especially when MODVAT credit is to be taken. If these are included in the price or are not applicable, then these two fields may not be shown even as text items. 6. While Purchase Order is being processed, the Manager should be clear about who will pay for the freight. If the freight is built in the price, he should select the option stating "FREIGHT IS INCLUDED IN THE ABOVE AMOUNT". If the freight is payable at destination he should select "FREIGHT TO PAY" option. 7. Since Anar is dealing with only fixed number of suppliers, the transporters are also known. For each supplier there is a preferred list of transporters. This list should be made a part of database. Any time the suppliers' name is selected for placing an order, his preferred list of transporters should be available. The Purchase Manager should select one from this list. 8. If the seller arranges the insurance, do the selection accordingly. If this is the condition, the insurance expenses are borne by Anar. 9. Delivery time has to be specified by the Purchase Manager. 10. Generally the raw materials have to b delivered at the plant (Local). 11. As regards the invoice, the Purchase Manager has to decide whether the original invoice should go to the factory or HO. Depending on the specific transaction, ha has to decide which copy should go where. 12. Payment terms could be one of the following: L Credit for a specified period - with no. of days to be defined; L Cash with Order; and Anar Material Procurement Process.doc 11 Purchase Module

12 L Documents through bank. 13. In case octroi is payable this has to be borne by Anar. Though this field is not mandatorily required ( as all duties and taxes are to be borne by the buyer - whether included in the price or mentioned separately), for the sake of clarity it should be mentioned. 14. If the material is to be used in manufacturing Export goods, FORM - H can be issued to the manufacturer. If end-use of material is not for exports, then this condition may not be required. 15. When the material purchased attracts central excise, Anar may claim MODVAT Credit to the extent of excise paid on these purchases. This will require Excise Copy of invoice (or supplier's Excise Gate Pass). Write this instructions clearly in the order if MODVAT is to be claimed. Anar Material Procurement Process.doc 12 Purchase Module