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INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/01

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. IMPORTANCE OF MATERIALS a. Introduction An organization, in the public sector or in the private sector , cannot function without supplies, materials and equipment. For an organization to operate effectively and efficiently there must be a proper mix of what management authority call the six Ms namely Men, Money, Materials, Machinery, Markets, and Management . The relative importance of the materials component in this mix has changed considerably over the years. Before the 20th century , materials were readily available and cheap. Spectacular technological advances made after the turn of the century and the rapid growth of mass production, Materials Management assumed importance. So much so that in most industries today, the materials component amounts to more than 50% of the total cost of production. In this regard Lee and Dobler state : “ The introduction of better machines, coupled with scientific management to develop and utilize more sophisticated man-made systems, made possible the factory system turbine, the electric motor, automatic controls, changed the entire complex of manufacturing. Gradually materials became more complex, labour become more specialized, and mechanization increased . These changes inevitably led to specialization in manufacturing and to longer production runs. As the volume of production increased, unit labour costs decreased. The reduction of, unit labour costs increased the relative cost and importance of materials in the production process . Percentage - wise labour costs went down and materials cost went up. This change in the value of materials relative to total production costs continues today” The critical importance of materials increased still further after the energy crisis of 1973. 1

In this millennium , the function of purchasing and material's management has assumed greater importance than ever before .The function is crucial as it involves managing resources in a more systematic manner. Market research and forecasting for supply markets and purchasing departments being more involved in product planning for raw materials and components, to manage more consciously the materials flow. b.

Materials in the Public Sector All governments buy and use a very vast and varied range of supplies , materials and equipment. The proportion of their budget spent on materials has been steadily increasing year after year, both , in developed and developing countries. In developing countries, with colossal sums spent on welfare in varied fields viz. medical and social services , agriculture, transport , education, irrigation, etc. the proportion is around 20 to 25 percent of the annual budget expenditure , for its various operations . The Government of Sri Lanka spends over 35 percent of its annual expenditure budget for the procurement of recurrent and special requirements of materials and equipment . State manufacturing Corporations spend about 50 percent of their respective master budgets for the purchase of raw materials, fuels, spare parts and components etc. required for production works.

c.

Materials in the Private Sector In private industry, generally over 50 percent of its sales revenue is spent on materials, supplies etc. In industry in Britain for example , on an average 53 percent of every sterling pound worth of goods sold is accounted for by goods and services purchased. In Sri Lanka the large corporate industrial undertakings too allocate 50 percent of their master budget to their materials budget.

2.

PURCHASING AND MATERIALS MANAGEMENT a. Definition Purchasing and Materials Management can be defined as an integrated management approach operation involved in planning and forecasting of material requirements, purchasing, issuing and distribution , from the initial stage when the need arises up to the stage when the need is satisfied. In other words , it is concerned with the total material flow in an organization . In the certain manufacturing organizations in the west, production control is also included in the materials management function. All the activities connected with the materials flow have to be effectively coordinated and integrated so as to afford the optimum service at the minimum cost. b. Purchasing and Material Management a dynamic function Purchasing and Materials Management is both a practical and dynamic science. The knowledge and techniques embodied in this discipline is the product of the policies and practices 2

developed by practical and progressive supply men who have successfully operated in the materials field. It is a dynamic function because there is constant development of new techniques of purchasing and materials management based on technological advances. The increasing use of network analysis , operational research , information technology , value analysis/value engineering techniques , etc. in material operation point to the dynamism of the profession. 3.

THE SCOPE OF PURCHASING AND MATERIALS MANAGEMENT a. Related functions The scope of purchasing and materials management fall broadly into main areas of Purchasing, Storage, and Inventory (Stock) control. In addition to these basic activities of a purchasing and material management organization , there are related functions which have to be carried out by materials managers to achieve optimum results and there by contribute effectively towards the attainment of the corporate goal of the enterprise. These functions include short term , medium term and long term planning of materials, supplier selection and evaluation, resource development , value analysis and learning curve techniques, make or buy concepts , sub-contract strategy, production control (in some organization), purchasing research and market intelligence, operations research, traffic and distribution. These will be dealt with in the lectures to follow. b. Purchasing The purchasing function concerned with the process of buying materials efficiently and economically .There are seven (rights) responsibilities in purchasing which can be briefly stated as follows. To buy the RIGHT ITEMS of the RIGHT QUALITY, in the RIGHT QUANTITY, from the RIGHT SOURCE , at the RIGHT TIME , delivered at the RIGHT PLACE , and the RIGHT PRICE. The Right Price is stated last , not because it is least important. Indeed, it is of much importance. It is influenced by the first six rights mentioned. Explanations of these RIGHTS will be dealt with at a later stage. What is important to remember now is the that achievement of these RIGHTS in practice is no easy task. It may be necessary to give weightage to a particular “Right” to obtain the optimum benefit in the purchase of the items required. The attainment of the objectives in practice calls for a high level of proficiency and professionalism on the part of the supplies manager. Purchasing is no longer regarded as just a Cost Centre; more importantly it is considered as a Profit Centre. The profit-making potential of efficient purchasing is brought out clearly in the example: Saving 10% on labour

following

3

Saving 5% on materials Labour Materials O/Heads Profit Total Rs.

10,000,000 50,000,000 30,000,000 10,000,000 100,000,000

9,000,000 50,000,000 30,000,000 11,000,000 100,000,000

10,000,000 47,500,000 30,000,000 12,500,000 100,000,000

It will be seen from the above figures that 5% saving on the materials component has produced an additional profit of Rs.2,500,000 while 10% saving on the labour component (double the percentage saving on materials) has produced only Rs.1,000,000 profit , The profit making potential of efficient purchasing is very clear. On the other hand if buying is inefficient, losses will arise. In this connection David Farmer states: “ What should be stressed is the potential inroad that can be made in a company‟s profit if supplies work is carried out inefficiently. Quite apart from making either a direct saving or a direct loss, the supplies function can have a major effect on a company‟ s profit performance by its job efficiency”. In recent years the purchasing and materials function has undergone complete reevaluation by business management . Materials Management is something described as „the last gold mine‟ by business managers. It is among the few of the specialized business functions to be centralized and given the responsibility and the authority for making major contributions to management. c. Inventory (Stock) Control Inventory (Stock) Control is considered the nerve center of the activity. For effective inventory control of stocks, the materials or supplies manager should determine: (i) What items to Stock. (ii) How much to purchase for stock. (iii) When to purchase. The aforesaid are basic considerations . There are so many dimensions, in the inventory control exercise. Several systems of inventory control have been tried and applied in progressive organizations in recent decades. The type of inventory control system/s to be adopted in an organization depends on several factors and situations, which will be discussed when this function is dealt with. In recent years, many governments have taken serious notice of the colossal inventories held in private enterprises and in the government / public sector. The problem of inventories assumed great importance in India in 1974 consequent on the finding of the Tender Committee which revealed that inventories were stock piled for speculative purposes. According to the Census and Statistics Department of the Sri Lanka Government the aggregate national inventory in 1994 amounted to Rs.1.9 billion. In the government sector excessive inventories have been built up over the years particularly on the Stores Advance Accounts operated by large departments. 4

d. Storage The ideal situation would be not to carry stocks at all, but to ensure that supply is available without interruption direct from the supplier to the user, in practice this cannot be achieved to a large extent. The Just-in-time (JIT) and other techniques such as the Materials Requirement Planning System (MRP) Which minimize stock holding of raw material components, work-inprogress etc. to a considerable extent are used in developed countries like Japan, USA and Europe. However, generally no organization can function without stocks. They stand between input (receipt) and outputs (issues) de-coupling the two processes, and absorbing the fluctuations in demand and supply, maintaining in the process a smooth flow of supplies and materials for uninterrupted operations. Stocks tie up a good portion working capital which could otherwise have been used to obtain profits or dividends (opportunity cost). Company Directors and government authorities nowadays are very much concerned with the size of stock holdings which tie up considerable proportion of working capital, reducing thereby liquidity and the cash flow. Storage involves such functions as protection and preservation of stock, stores layout, stock location systems, classifications, stock accounts and records , materials handing etc. It has been estimated that the cost of stock holding can be as high as 35 percent of the annual value of stock held in countries like USA, Japan and in Europe. In Sri Lanka and India stockholding costs are about 25% of the annual value of stock held 4.

PURCHASING AND STRATEGIC PLANNING a. A Strategic function Despite the growing awareness on the part of top management of the crucial importance of purchasing and materials management , in corporate operations and profitability, the traditional view that purchasing is an administrative and not a strategic function still persists particularly in the public sector. The reason for this is the reluctance of purchasing managers to get themselves involved, unlike production and marketing managers, in strategic planning which is considered nowadays so vital for the survival and profitability of an enterprise. Igor Ansoff, Peter Ducker and other management theorists regarded Purchasing as an administrative function up to recent times. The reason generally advanced to support this view are several . The chief of them being Purchasing failure to present management with planning data; its failure to collect analysis and interpret important data on supply markets; its lack of professionalism, skill and knowledge required for the collection of data , their analysis and projection. Igor Ansoff, in his classic book „Corporate Planning‟ is quite: emphatic when he stated that purchasing was administrative rather than` strategic . However, when he was challenged on this statement at a later date , Ansoff had stated he had since changed his views. He had remarked that “this typified what happens in management ; we tend to focus on what we believe to be important , and it took the crisis of 1973 to emphasize the potential impact of supply”

5

b.

Purchasing and materials management interfaces The inter – relationship between materials management, production, marketing and finance is shown in the diagram below: -

Marketing Dept.

Sales Forecast

Output

Production Dept.

M M Dept.

Finance Dept.

Production Schedule

Materials Budget

Finance Budget

Transformation

Input

Finance

As will be observed in figure above, Purchasing and Materials Management have to interface closely with the other main functions of Production ,Marketing and Finance. The success of a corporate enterprise depends on effective coordination and liaison that subsist between all these functions. Planning strategy, which is a part of the other three functions , cannot exclude purchasing strategy.

**************

Recommended reading:1. 2. 3. 4.

Purchasing and Materials Management - Text & Cases. - Lamar Lee Jr & Donald. W. Dobler. (Whole of part I) Purchasing and Supply Management -Text & Cases. - Donald. W. Dobler & David .N. Burt. ISBN- 0-07-114144-8. (Whole of Part I) Purchasing Management. - Westing , Fine & Zenz. ISBN - 0-85226 - 911- 0. Purchasing Principles & Management. - Peter Baily, David Farmer, David Jessop and David Jones. ISBN-0-273-62381-8. (Part I - Chapter - I)

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INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/02

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. INTRODUCTION

Here we are to discuss the role of Purchasing and Materials Management (P&MM), as an activity, as distinct from the roles as the Purchaser and the Materials Manager. Here we are concerned with the collective effort of the purchase & materials management personnel and others contributing towards its success rather than the performance of individuals. What we will talk about will be the totality of the contribution individuals make in achieving the results, and goals reached in making a success of an enterprise as a whole. 2. IMPORTANCE OF P&MM TO AN ENTERPRISE Every enterprise, be it private or public, needs materials and services and such enterprise has to procure them and carry some of them in store. The importance of this work to the enterprise depends on several factors, namely the size and type of organization and the state of the market. Quite apart from organizations specific variations , we are in the midst of a revolutionary change in the importance of purchasing in the world economy and particularly so in Sri Lanka right now. This is mainly due to the progressive erosion of artificial restrictions on trade. After decades of intensive research and comparative study of the P&MM function in several large and medium scale enterprises, it has been established that 50% to 60% of the sale price represents cost of purchased materials. While purchasing is the major area for cutting production costs, let us consider the importance of purchasing in an enterprise assumed to be making 10% profit on its sales. In other words, out of the sales of one rupee you get a profit of 10 cents. Fifty cents out of the sales of one rupee represents the cost of materials. If the purchase manager can save out of the 50 cents spent on materials, an additional cent, what you save on materials is clear profit. Thus your profit goes up to 11 cents in the rupee, i.e a 10% profit increase. This saving could be due to reduction in purchase price or reduction in cost of purchasing, either one or other. 3. POSITION OR STATUS OF P& MM IN AN ENTERPRISE Recognizing the importance of the contribution the P & MM function can make towards increase of profit as shown above and the influence P & MM can exercise over other departments of an enterprise, the position on status given to P & MM is being revised from the position ( once considered to be ) of relatively minor importance to that of Managerial position, and then on to the position of Director of

7

Purchasing and Materials Management. The following three charts will indicate the stages of the raising of the status of P& MM in an enterprise. Those position are of course not exclusive . In fact, there can be as many differences in status as types of the organization or the enterprise as they vary.

STAGE (I)

Board of Directors

Managing Director

Internal Audito General Manager

Manager Finance Or

Personnel Manager

Research &Dev Adm. Manager Sales Manager Manager

Manager Production

Purchase Officer

Stores Stock Control Officer

Officer

8

STAGE ( II) Board of Directors Managing Director

Internal Auditor General Manager

Manager

Personnel

Production

P& MM

Manager

Manager

Purchase Officer

Buyer A

Buyer B

Finance. Manager

Stock Control

Stores

Officer

Officer

Asst. Stock Store keeper Controller

A

Sales Manager

Manager Research & Development

Store keeper B

9

STAGE (III) Board of Directors

Managing Director

Internal Auditor

Director Purchase

Finance

R & D

Technical

& Material Mgt.

Manager

Manager

Production

Sales Manager Personnel Manager

Manager

Purchase

Stock

Stores

Manager

Controller Manager

4. INTER-DEPARMENTAL RELATIONSHIP

A Purchasing & Materials Management Department, exists to supply the need of other departments, in the enterprise. To a considerable extent, the attitudes reactions of these other departments towards the P& MM department depend on the degree and kind of service the P& MM extends to those other departments and the nature of the inter- departmental relations that exist. a. Production & P&MM Organizational / Corporate goal is efficient and profitable operation. However, the parochial objectives of the Production Department and the P & MM Dept. differ. Production wants the best quality and the maximum quantity. P& MM will naturally think in terms of excessive investment and quality that suits the need. These conflicts of objectives can be solved by compromised exchange of information. Thus the tendency for the P& MM to be unpopular can be avoided.

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b. Engineering and P& MM Engineering is primarily responsible for designs and space. Engineering knows the physical and chemical properties. However, there are frequently several materials possessing suitable properties. P & MM can help by extending information from its own experience and from expertise gained from suppliers. c. Sales and P& MM Sales Department sells what is produced. 50% to 60% of the cost of materials is bought by P & MM. There should be exchange of information regarding sales quotas and expectations with P &MM for the latter to arrange schedules of purchasing and negotiations. d. Finance and P& MM Close co-ordination is necessary to provide funds ,also for P& MM to regulate its scheduling. This is more so in the public sector where there is much budgeting constraints. e. Stores and P& MM If stores and Purchasing are independent, there should be much closer liaison between them. If stores and purchasing are under one Supplies or P& MM Manager, he does the coordination through procedural measures under his control. 5.

SUPPLIERS/ OUTSIDE AGENCIES AND P& MM Much of an enterprise‟s reputation for integrity and fair play comes from P& MM‟s dealings with vendors. Vendors can render valuable financial aid (prices and terms of payment). Technical aid (design and manufacturing) and service (on- time delivery and maintenance service ) P&MM also can be benefit from vendor research offer if relations between P&MM and vendors are cordial. ** ** ** ** ** ** ** Recommended Reading:1.

Purchasing and Materials Management. - P. Gopalakrisnan. ISBN- 0-07-451650-7. (From pages 3 to 8)

2.

Purchasing and Supply Management- Text & Cases.- Donald. W. Dobler & David. N.Burt. ISBN - 0 -07- 114144 - 8. (From pages 17 to 40)

3.

Purchasing and Materials Management - Text & Cases. - Lamar Lee Jr & Donald .W. Butler.(From pages 18 to 27)

4.

Purchasing Management & Principles. - Peter Baily, David Farmer, David Jessop and David Jones. ISBN -0-273-62381-8. (Part I - Chapter -2)

11

INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981)

HO No. 01/03

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. Introduction Materials & Services are essential for the functioning of any organization in the public or Private Sector. There must be a proper mix of what Management expects having identified as 5Ms viz. Money, Men, Materials, Machinery and Management, for an organization to function effectively. The relative importance of materials component in this mix has changed considerably over the decades. Spectacular technological advances that took place after 19th century and the rapid growth of mass production, materials assumed more and more importance so that in most industries today, the materials component amounts to more than 50% of the total cost of production. As the volume of production increased, unit of labour decreased. The reduction of unit layout costs increased the relative importance and cost of materials in the production process. This change in the value of materials relative to total production costs continues to date. 2. Materials in the Public Sector The proportion of the Budgets of various Government Departments spent on material has been steadily increasing both in developed and developing countries. For its various operations the Government of Sri Lanka spends about 25% of its annual expenditure budget for the purchase of recurrent and special requirements of materials and equipment. State manufacturing Corporations spend about 50% of their master budgets for purchase of materials, fuels, spare parts and components etc. required for production 3. Materials in the Private Sector In private sector industry approximately 50% or more of its sales revenue is spent on materials, supplies, etc. In Sri Lanka the large Corporate Industrial organizations allocate approximately 50% of the Master Budget to their Materials Budgets. 12

Therefore, it will be seen that efficient and effective Purchasing & Materials Management is vital to reduce unnecessary expenditure, obtaining the best value for money spent to place the organization on the path to profit. This will make a positive contribution to our National Economy. 4. Purchasing and Materials Management Purchasing and Materials Management can be defined as an integrated management approach towards:a) b) c) d) e) f) g)

Planning Forecasting Purchasing Inventory (Stock) Control Receiving Storage Issuing and distribution

This process of management is from the initial stage when the need arises to the stage when the need is satisfied; it is concerned with the total materials flow in an organization. All the activities connected with the materials flow have to be effectively co-ordinated and integrated so as to afford the optimum service at the minimum cost. Purchasing and Materials Management is a dynamic function because there is constant development of new techniques of purchasing and materials management based on technological advancement. There is increasing use of network analyses, operations research, computer techniques and value analysis in materials management. Thus, endorsing dynamism towards progress to perfection. 5. The scope of Purchasing and Materials Management The scope of Purchasing and Materials Management fall broadly in to three categories: Inventory (stock) Control, Storage and Purchasing. Although there are the basic functions of Purchasing and Materials Management in an organization, there are related functions that have to be carried out efficiently by the Materials Manager to achieve maximum results and to contribute effectively towards attaining the corporate goals of the organization. Basic functions of the three categories are as follows:a)

Inventory Management (Stock Control) Reporting to management Computer Print Out on production Stock Returns on production Monitoring of Stock Movement 13

Control of Obsolescence and Redundancy Stores Accounting Stock Verifications Determining stock levels Ranging and scaling Classifications, coding and cataloguing b)

Storage Inspection of Materials Receiving Raising GRNs Storing Stock protection and preservation Issuing Recording Maintenance of scrap and their disposal

c)

purchasing Materials Budgets Provisioning (calculation of requirements) Description of need Selection of source Ascertaining the price Placing the order / contracting Progressing order Certifying voucher payment Purchasing is no longer regarded as just a cost center more importantly it is considered as a Profit Centre.

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Recommended reading:-

1.

Purchasing and Materials Management.- P.Gopalakrishnan ISBN -0-07-451650-7. (Particularly case studies in part II)

2.

Purchasing and Inventory Control. By K. S. Menon. ISBN -81-85814-10-4

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INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/04

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. INTRODUCTION

The main objective of a Supply Department or a Material Management Department is to provide the organization it serves with the goods and service required from outside organizations in the Right Quality, Right Quantity from the Right Source, at the Right Price at the Right Time and the Right Place. In order to achieve this objective, the Supply or Materials Management Department should ideally consist of the following three main divisions: a) Provisioning and Stock Control Department b) Buying or Purchasing Department c) Storehouse or Storage Depots. Materials Management Department (figure -1)

Provisioning & Stock Control

Storehouse or Storage

Department

Depots.

Buying or Purchasing Department.

The essential focus of this subject is to identify the organizations required to forecast the needs in terms of quantity and quality; buy what is required correctly and thereafter to hold what is bought 16

efficiently and economically, until required by the user or production line and issued to them also in an efficient manner. Provisioning and stock control functions, the Purchasing function and Storehouse functions are inter linked. The Stores function has to work closely with both Purchasing and Stock control functions.

2. PROVISIONING AND STOCK CONTROL FUNCTION a. Definition and Objectives Provisioning and Stock Control Function in simple terms means what must be purchased?, How much to be purchased?, When to be purchased? .. In more elaborate terms, Stock Control or Inventory Management may be defined as the holding of Stock of the Right Quantities for supply to users as and when they require them at a minimum investment of working capital and at a minimum cost of servicing such supplies. The objectives of Stock Controls are to: -

i

Ensure that the minimum amount of working capital is tied up in Stocks at any one time.

ii

Ensure that an effective continuity of stocks to service operational needs are maintained at all times, and

iii

See that all stores operations are carried out at minimum cost, reducing it as far as possible the incidence of duplication, obsolescence, deterioration and loss of stores. The objectives are conflicting, but it is the function of Management to add policies which satisfactorily balance these conflicting objectives.

would

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b.

Organization of Stock Control Office STOCK CONTROL OFFICE (figure -2)

Correspondence

Scales &Specification and Records

Catalogues

Asst. Stock Control Officer Control officer

Asst. Stock Control Officer

Asst. Stock Control Officer

Group I –(Stationery) (Spare Parts)

Section

Section

i/c ledger

L/clk

L/clk

i/c ledger

L/clk L/clk

Legend:- i/c - incharge,

Group II-(Raw Materials)

Group III –(Spare Parts)

Section

Section

Section i/c ledger

L/clk

L/clk

Section

i/c ledger i/c ledger

L/cl

L/clk

L/clk

i/c ledger

L/clk

L/clk

L/clk

L/clk- Ledger Clerk

The executive who is in charge of the Provisioning and Stock Control office is designated the Stock Control Officer. He works under the direction of the Materials Manager. Under the Stock Control Officer are Assistant Stock Control Officers in charge of groups (groups of stores) eg: Stationery, Raw Material, Spare parts … etc Some organizations use the term Inventory Control instead of Stock Control. In some Organizations the Stock Control Officer functions under the direction of the Chief Stores Manager. Inventory, is Stock of goods in an Organization. Stocks are maintained for a variety of reasons. They may be stocked for day to day consumption, for feeding the production lines in the manufacturing process or even for special projects. Stocks represent major portion of cash of the organization. Since capital is tied up in stocks, the stock control officer has the difficult task of carrying minimum of Stock levels of the different items while ensuring the production process or the project activities run smoothly without stock outs. Whilst past usage is an indicator for provisioning, the Stock Control Officer should forecast

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requirements giving due consideration for items which are freely available in the market and those items which have long lead times to receive in-to stock. In a Stock Control Office, the Asst. Stock Control Officers are in charge of group of items. Each group may consist of a particular type of stores, eg: Stationery or Spare parts or Raw Materials stores. Each group is sub-divided into sections and each section is headed by a senior Ledger clerk called as in charge of ledger. Under the i/c Ledgers, are the clerks who handle the ledger sheets of the different sections. The clerk enters the data in to the ledger sheets when they receive the GRN for receipts and enter the issues when Issue Voucher are received. Each ledger sheet will also indicate information such as the purchase price, Re- order level (ROL), Provision Action Figure (PAF) … etc

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3.

PURCHASING FUNCTION

a. Organization of a Purchasing Department

Chief- Buyer/Chief Purchasing Manager (figure -3)

Senior Buyer /Purchasing Manager (PM)

Finance& Specification Budget

Scales &

Supplier

Market

Registration Research

Catalogues

Buyer / P/Manager

Buyer/ PM

Buyer/PM

Buyer/ PM

Buyer /PM

Overseas Quotations Tender

Contracts

Local Purchase

Purchase Ports( Air/ Sea) Clearance Team Order Progress Control

L.P Collection Teams

20

The executive in charge of the Purchasing Department is called the Chief Buyer or Chief Purchasing Manager (CPM). He should have adequate authority & intimate knowledge of the working of the entire organization .In addition he should have a thorough understanding of the purchase function. He must plan, concentrate on and execute strategies and system for his field of activity.

Under the chief Purchasing Manager are the Purchasing Managers(PMS) who are assigned various subjects and activities that are carried out in a Purchasing Department such as Planning the finance as per budgets, Maintain the Register of Suppliers, Method of buying Local Purchase ,Over seas Purchase, Tender, Quotations &Contracts Negotiations , Order placing , Order progressing, Certification for settlement of bills , Maintaining Records, Purchasing Strategy ,Market Research, Developing Supply sources … etc to achieve the objectives of the purchasing department . b. Recognition of Needs The recognition of needs as far as the Purchase department is concerned is the purchase requisitions received in the Purchase department from the user departments, Stores department Stock list from stock control department, production department & other purchase lists such as Capital items, special project item… etc. The final purchase list is collated and compiled after careful scrutiny by the Budget committee under the Chairmanship of the Managing Director where the Purchasing Manager and Material Manager are members along with other senior Managers of the organization, such as the General Manager, Production Manager, Finance Manager and the Marketing Manager who sit as members. c. Descriptions of need (Specification) The description of the items in the requisition or stock list is the basic form of specification used in describing needs. Where a stores catalogue is available, this task is generally simplified as the catalogue description and code numbers can and must be used to describe the needs of each department. The Purchasing Manager must carefully check the nomenclature and description of the item and when in doubt check with stores catalogue and also from past purchase records. Any doubtful cases must be referred to the party originating the requisition for clarification through consultation. Specification is of primary importance because it states what is required and it must follow that if that item delivered is not what is required all other considerations are of no importance. The purchasing manager does not normally write specification unless he is requested to do so, but receives, them from the technical department. (ie. Production or Engineering departments). He must retain the privilege to challenge specifications on the grounds that they are in- complete or not clear, that they are unnecessarily expensive for the purpose ,which an alternative can fill or that they are ambiguous or misleading. Specification where ever applicable should include the performance they are required to give in service and should state the quality and reliability standards to be met and that inspection that should be carried out and be expected to be carried out by the supplier.

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d . Selection of source In order to facilitate the selection of sources of supplies, a purchase officer should have a list of pre – determined approved suppliers for selected groups of stores. For the preparation of the suppliers list , invitations are placed in the news papers calling suppliers and contractors to register themselves with the organization under groups of item such as building Materials , Electrical items , Stationery, Machinery and Equipment Paints and Varnish, …etc. Groupings will have to the determined to facilitate the buying of the type of item and services required by the Organization and the type of goods and services handled by the various suppliers and contractors. Suppliers credentials, should be checked by reference to their Bankers Trade Chambers or Embassies and only those whose credentials are sound and who are capable of handling orders for the respective item or service should be included in the Approved List of Suppliers . It is desirable to have separate lists for local suppliers and foreign suppliers e Ascertaining Price i

ii

iii

In industrialized countries and in others where there is no restriction on imports, most standard items can be bought by merely referring to suppliers catalogues or by telephoning a few suppliers in the Approved List of Suppliers – where suppliers are listed item- wise and it is necessary to check the current price quoted by some of item. When goods are not available with approved suppliers at standard prices, it becomes necessary to locate a supplier and negotiate with him. Negotiation implies a certain amount of bargaining between buyer and seller. It must however be borne is mind that buyer should approach the negotiations with much background information as possible about the commodity he is buying, rate of use, production facilities of the suppliers …………etc Another method of ascertaining the price is thourgh an invitation for offers or quotation. Government purchases have to be almost always made on the basis of public tenders or selective offers from approved suppliers.

What ever the method that is approved in selecting the supplier and ascertaining the price, the buyer must always keep in mind that the final decision should be made on the basis of the combination of factors ,quality, quantity, price, delivery , after sale, service……….. etc which will give the maximum advantages to the organization for which the purchase is made. f. Placing of order The next step in the procedure of procurement is the placing of order. Generally orders are placed with approved suppliers whose credentials are established before hand. The purchase order issued by the purchase department must indicate:-i. ii. iii. iv. v. vi. vii.

Serial or reference number, code and catalogue numbers of the purchasing department. Name and address of the buyers organization. Name and address of the seller and their quote/tender reference Complete description, part numbers ,specification. Quantity in proper units ie dozens, pairs, tons, kgs……. Etc Delivery instruction including packing and packaging details . Price per unit and extension to total amount including discount

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Viii ix.

Payment terms ie COD, 50% on receipt balance after inspection……etc Authorized signature of purchasing officer and seal.

The number of copies of the order to be made depends on the procedure adopted by the organization. A minimum of three copies are necessary . When the value of order is large it is advisable that the supplier be informed to submit a Performance Bond in the form of a Bank Guarantee to ensure that he supplies. When orders are placed with a foreign supplier, the purchasing officer opens a Letter of Credit through his Bank to the suppliers Bank. To ensure satisfactory supply of the item, the Purchasing Manager could stipulate conditions in the Letter of Credit in consultation with the supplier. g. Mechanics of Payment No sooner the seller delivers the item to the Stores Organization, he expects his invoices to be settled promptly. Stores Organization on receipt of the supply, raises the Goods Received Note (GRN). One copy of this GRN should be received in the purchase department to cross check whether items ordered has been received correctly. If the receipt is in order the Purchasing Manager makes an endorsement “ Approved for payment “ and forwards to the Finance Department for settlement. In order to maintain the good relationship and the image of the Organization ,the Purchase Manager should liaise with the Stores Officers to avoid delay in sending the GRN copies to the Purchasing Department.

23

4.

STORE HOUSE (STORES) FUNCTIONS

a. Store house Organization (figure - 4)

Chief Stores Manager Deputy Chief Manager Stores Admin Office

Transport &

Records

Security Stock Taking

Industrial

Section

Team

Storage

Coding&

Specification

Planning Cataloguing

Trailer Section

&

Fire

Protection

Standardization

Stores Manager Stores Manager Manager Traffic Group

Stores Manager

Group I

Receiving Issues Section Bay Bay Csk

Group II

Section Section Csk Csk

Stores Manager

Group III

Section Section Csk

Stores Manager Group IV

Section Section

Csk

CSK

Sk

SK

Sk

Sk

Sk

Sk

Sk

Sk SK

SK Sk

Sk 24

Legend:- Csk- Chief Store Keeper

SK- Store Keeper

The chief executive in charge of the Stores Complex or the warehouse complex is called the Chief Stores Manager or the Chief Ware house Manager. He functions under the direction of the Material Manager. The stores complex is organized to ensure that the Stores functions are carried out efficiently and economically. The Chief Stores Manager and his team of stores officers and store keepers efficiently carry out their roles and responsibilities for the efficient functioning of the Stores organization.

The basic activities that come under the Stores functions are Receiving, Storing, Issuing and maintaining Record of all transactions. Apart from these, the Chief Stores Manager should also give consideration for Lay out of Stores,Storage Planning, Specification and Standardization, Coding ,Cataloguing, and Vocabulary, Maintenance of stock , Stock checking and Verification, Operations of Store house and Stock yards, Review of obsolete of Surplus Stock , Disposal of surplus, Obsolete, Obsolescent and damaged item of stock, Security, Fire precaution of stock and Safety and Health factors of the personnel involved in the Stores functions. b.

Importance of Store house function

Stocks are vital for the efficient functioning of an Organization. Industrial organization spend around 50% to 60% of their working capital, while Government administration and public utilities and service spend 20% to30% of the budgeted expenditure on purchasing and Stocking of supplies materials and equipment of a very wide and varied range. A good proportion of working capital is tied up in stocks. If not tied up in stock, the capital could have been used else where to generate profits and earn dividends. While cash is taken care of, but people are not so careful about stocks which actually represent cash tied- up . Also unlike cash stocks are subject to deterioration and need protection and preservation in storage. Thus efficient and economical storage and control of stocks is very necessary.

The Stores or storehouse functions can be divided in to four sub- functions they are: a. b. c. d.

Requisitioning and Receiving Storage including maintenance in storage. Issuing Recording.

c. Requisitioning and Receiving

The activities involved in this area are: -

a. Receiving requisitions or indents for items required to be stocked both for provisioning and re provisioning according to stock levels. 25

b. Checking and filing copies of indents or purchase orders. c. Reserving space for storing when received. d. Receiving and accepting stock after checking with order copy as to whether it is in accordance with the specification , quality and quantity and other terms of the order. Item should be rejected, if not in accordance with the specifications or are sub standard. Here the advice of technical staff from the Inspection Department should be sought especially regarding technical item. Usually the inspections are done in the Receiving Bay which is separate from the actual stock holding section. After inspection and acceptance the goods are brought on charge and passed to the stock holding sections. The stock holding sections are organized to “Stores Groups” where the grouping, tally with groups of stores in the stock control office and even the grouping in the approved suppliers list held in the purchasing departments. Goods are taken on charge by entering the Goods Inwards Register (GIR) and thereafter preparing the Goods Received Notes (GRN). The number of copies of GRN made depends on the receipt procedure adopted in a particular organization. A basic minimum of three (03) copies are required in small organizations while larger organizations prepare up to six (06) copies to enable copies to be held in the Receiving Bay ,Relevant Storehouse, Stock Control, Purchasing Department ,Finance Department and Records. e. Receiving Finished Good for issue to Sales Department is also part of receiving function. d.

Storage & Maintenance Materials must be properly stored, not only in the interest of effecting economy in utilization of space and convenient identification but also to provide suitable protection to ensure that it is fit for use when required. To this end , provide adequate storage conditions in respect of: a. b. c. d. e. f. g. h. i.

Cleanliness Yard Storage Stores arrangement Protection of Stores Identification Systems Stock Location Mechanical handling equipment Regular Inspection of Stores Identify, Obsolescent, Obsolete, Slow moving, Damaged and excess stocks and obtaining authority for disposal action from management. j. Surprise/ Spot check of Valuable and Attractive (V & A item) item and those item Vulnerable to pilferage. k. Fire precautions Issuing The activities involved in the issue process are:i ii iii

Scrutinize authority for issue. Verify the demands / indents for issue are reasonable and as per approved scals. Arrange for distribution where necessary

26

iv v

Prepare Issue note or Issue voucher and obtain valid receipt. As far as possible, issue on a First In –First out basis –(FIFO)

Recording Essential recording of activities are as follows: -

i ii iii iv v

vi

Post Bin Cards/ Cardex / Store Books / Ledger…. etc up to date, with receipt ,issues and stock balance duty entered and up dated. Prepare periodic stock reports and returns- Low stock reports, Nil stock reports ……etc Monitor Stock Movements. Control Stock levels. Ensure coding and clarifications of stock and prepare store Vocabulary/ Store Catalogues. Report to Management on condition of stock and stock movements……..etc

5. PLACEMENT OF THE STORES FUNCTION ORGANIZATION

a.

Placement The way in which the stores function is organized may differ from one organization to another. Some organizations may place it under Purchasing, whilst another may place it under Production or Manufacturing or even under Finance.

b.

Integration The tendency to- day is to integrate both purchasing and stores function and put them under one departmental manager, usually under the Stores manager since he shoulders the responsibilities for the vast amount of stores under his charge.

The stores manager has to be a co-ordinator. Firstly to co-ordinate the work of the stores organization to obtain optimum results, thereafter co-ordinate the purchasing, the production and finance to achieve the goals of the total organization.

27

INTEGERATED MATERIALS MANAGEMENT DEPARTMENT

CHIEF MATERIAL MANAGER (figure -5) OR (CHIEF STORES MANAGER)

PURCHASING FUNCTIONS

STOCK CONTROL FUNCTIONS c.

STORES FUNCTIONS

Advantages Of Integrated Set up

The Chief Materials Manager / Chief Stores Manager , assumes, total responsibility for the efficiency of the Supplies function. (Purchasing, Stock Control and Storage functions responsibilities are clear and inalienable.) Misunderstanding is eliminated and maximum co-operation obtained. Facilities for training in the different and wider area (ie purchasing stock control and storage function) leads to improved promotional prospects.

** ** ** *** *** *** *** *** *** *** *** *** ** ** **

28

Recommended reading:1. Purchasing Management. Westing, Fine & Zenz. ISBN -0-85226-911-0. 2. Purchasing and Materials Management. . P. Gopalakrishnan. ISBN -0-07-451650-7

29

INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/05

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

INTRODUCTION 1. The Purchasing and Material Management Cycle involves the function of Inventory Management.

Purchasing, Storage and

THE PURCHASING CYCLE 2. The operations of a Purchasing Department involving a large number of suppliers and varied range of items are both various and complex. 3. Basic procedures, which are more or less common purchasing operations called the Purchasing Cycle. The cycle of operations are: a) Recognition of need. b) Description of need. c) Determination the quantity needed. d) Raising requisition. e) Selection of source. f) Ascertaining price. g) Placing Purchase order. h) Ensuring that suppliers have received the order- receipt of “acknowledgement copy” i)

Follow up order

j)

Receipt of advice of dispatch note

k) Checking goods on delivery against specification, quantity…etc l)

Certifying Invoice and Voucher

m) Payment n) Maintenance of records and documents relating to each purchasing transaction

30

THE PURCHASING CYCLE Recognition of need

Maintenance of records and documents relating To each Purchasing transaction Description of need

Payment Determination the quantity needed

Certifying Invoice and Voucher

Raising requisition

Checking goods on delivery against specification, Quantity ….etc Selection of source

Receipt of advice of dispatch note Ascertaining price

31

Follow up order

Placing Purchasing order

Ensuring that suppliers has received the order –receipt of “Acknowledgement copy” 4. Recognition of the Need by a User Department (a)

Stock items - Obtain stock items from stores, which will eventually be replenish through Purchasing Department.

(b)

Non-Stock items - Send requisition to Purchasing Department for placement of order.

(c)

Fixed assets - Same as for. (b)

5. Estimation of Needs The Purchasing Officer in consultation with stores department determines the needs and size of order to obtain better terms. It is also his responsibility to develop alternative sources of supply and suitable substitute. 6. Description of the Need and Establishment of Specification For regular items of stock, standard specification would have been established. Such items are classified, codified and shown in a printed catalogue or price list. In the case of items not carried in stock, they should be accurately described, so that the buyer and seller and all parties concerned know what is exactly required. In order to prevent an item of wrong description being purchased, the purchaser and user should consult each other and decide on the proper specification the internal specification should be properly determined. The external specification on which the order is placed can then be formulated so that the supplier knows what the buyer requires. The purchasing officer should posses sufficient knowledge of items required. The characteristics properties and availability in the market and alternative material which could be used as substitute must be identified. Purchasing Officer acts as the buying agent for his organization. He should not at any stage alter, unilaterally, the description furnished by the user. 7. Determining the Quantities Needed Consider the following:a.

Past consumption.

b. c. d.

Existing stock Future needs - Forecast of requirements. Likely lead period (the period that lapses between initiation of the demand the time the item is received at the store) Storage space available. Shelf life items. Earmark quantities foe special projects. (Projects other than those for regular needs)

e. f. g.

A purchasing officer has the right to question the estimated or requisitioned if in his opinion the consumption trends not appear to justify the quantities demanded.

32

Where there are a large number of suppliers to select from the panel of registered supplies. On the case of the value of purchase being small and item is regularly purchased, the Purchasing Officer choose one supplier from the list of registered suppliers bearing in mind the price, ratability and the desire to maintain good will amongst all suppliers. In the case of Government Department purchases, competitive bids are obtained from a panel of preselected suppliers or invite open tenders. After evaluation of offers, an order is placed on the supplier who offers the most advantageous terms to the Department. 8. Ascertaining the price For small value purchased and repetitive orders for standard stock items, price could be obtained from catalogue or supplier's price list. Even in this case, check price regularly to ensure prices are competitive. The second method of obtaining the price is by negotiation with the supplier. Negotiations for high value items requires the purchasing Officer to have a good background knowledge of the item (price and cost analysis), supplier capabilities, market conditions and price trends. The third method of ascertaining the price is to obtain competitive bids or competitive quotations either from pre-selected suppliers or by open invitation. / tender process. 9. When the supplier has been selected and the price ascertained, a formal order is placed on the supplier. This constitutes a legal contract. The order should contain the following information:  Correct name of supplier  Correct description of item  Quantity to be supplied  Place at which delivery should be made  Date of delivery  Price  Stipulate whether item should be ex- work site, F.O.B., C.E.R., C.I.F.  Method of transport  It is the policy of the Government to use Air Lanka and the Ceylon Shipping Corporation to transport overseas freight, whenever possible. Where tonnage is high, it may be cheaper to get it on a chartered vessel. The Purchasing Officer must ensure that the supplier delivers at the right time and at the right place. 10.

Placing of Requisition Methods of requisitioning supplies from the Purchase Department. a.

11.

Purchase Requisition

b. Traveling Requisition c. Bill of Materials The Purchase Requisition a. b. c. d. e.

Accurate description of item required with part number catalogue number, etc. Quantity required in appropriate Date by which item is required Appropriate account to be changed Signature of officer placing requisition, date and authorization where necessary

33

At least two copies of requisition are made. One copy for the purchasing department and the other retained for follow up action.

12.

Traveling Requisition A card for each stock item is filed in the stores Department. The description of the item is entered only once in the heading of the card space is provided for several subsequent requests to make purchases. When stock has gone down to re-order level, the storekeeper enters the date and the pre-determined quantity desired to replenish stock and sends card to purchasing through Stock Control. When Purchase has been made, it is posted on the card, which is returned to the stores Department.

13.

The Bill of Materials A list of materials or parts required to make the item concerned or to do the job is made by production or engineering Department and the Purchasing Officer bases his purchasing programme on list. Items available in stock are deleted by stock control and action to purchase remainder on the basis of the production schedule is submitted. It is essential to submit all requisitions to be signed by an authorized officer to whom authority is delegated to sign requisitions.

14.

Selection of Source After the need has been recognized, quantified and properly described by the user. It is the function of the purchasing officer to select the source of supply by obtaining a price quotation or pro-forma. When the requirement is for a branded or patented product there may be only one supplier. Prior to purchase the requirement should be screened and order placed only when the purchaser is satisfied after consulting the requisitioner.

15.

Follow-up by User/Storekeeper As soon as requisitioner user/ storekeeper receives his copy of the order from, he should check it carefully to ensure that the following particulars are correct:a. b. c. d. e.

Conformity to specification or requisition. Conformity to quantity Conformity to price. Conformity to place of delivery. Conformity to time of delivery.

If there are discrepancies, the Purchasing Officer should be informed immediately. 16. 17.

Ensuring that Supplier has received the order Supplier should be asked to acknowledge receipt of the order. Such acceptance should be duly noted on the office copy of order.

34

17.

Follow -Up of order The Purchasing Department should have a follow -up system with supplier .The requisitioner too should keep in touch with the Purchasing Department.

18.

Advice of Dispatch Note This is a note sent by the Supplier to the purchaser informing him that the goods stated in the order have been dispatched to the destination stated in the purchase order. Some times when goods are sent in supplier's transport, the note accompanies the goods. It is desirable that the purchaser receives the advice of Dispatch note at least 2 weeks before the goods are received. The advice note when received should be sent ASAP to the stores/goods receiving sector to ensure the following:

(a) (b) (c) (d)

To be informed of the date of receipt of goods (not necessary it is stipulated in the purchase order) To be informed of quantities to be received. To arrange for space in the stores to accept. To prepare / arrange required mechanical handling equipment and / or manual labor force to unload and store goods in the stores. Advice of Dispatch Note contains the following information:(a) (b) (c) (d) (e) (f)

Purchase Order No. Date of Dispatch and date of arrival at purchaser's stores Description of goods. Quantities involved. Number of packages and sizes of packages. Mode of transport.

This note also advises the storekeeper to prepare space for his goods. And also arrange for mechanical handling devises and/ or manual workforce to unload and store receipts. 19.

Checking and Receipt of Materials This is mainly a function of storekeeping. In most departments the goods received are weighed opened and checked, documents compared, inspection carried out to ensure goods delivered are as per specifications and are not damaged. A lean receipt is then given to the supplier on his delivery note. If goods are not as per order and specification or are damaged, then a clean receipt cannot be given to the supplier.

20.

The Goods Received Note (GRN) The storekeeper then prepares the GRN for each delivery giving the following information. The number of GRN copies prepared depends on the receipt procedure adopted in the organization. In small stores organizations minimum of two copies are made. (a) (b)

Date of receipt. Consignor

35

(c) (d) (e) (f) (g) (h) (i) (j) (k)

Advice Note number Purchase Order No Description Quantity received undamaged Number and type of packages Method of transport Damage /Shortage report (If applicable) Any delivery in excess of quantity ordered Storekeeper's signature.

(When prepared in duplicate the original goes to support the payment voucher, and duplicate copy for storekeeper's file) It is most important that the original copy of GRN is sent to the finance department, to make payment. This is to prevent multiple payments being made by fraudulently using copies of the GRN. 21.

Checking of Invoices and Certification of Vouchers for Payment. Is this a purchasing or accounting function ? (a) (b)

22.

Checking is part of the purchasing transaction because receipt of the invoice is the usual notification that the goods have been shipped or dispatched. It is the purchasing Officer's duty to ensure that his orders are accurately filled and billed. It is his duty to inform the supplier to rectify the errors. If the Accounting Department is handling this task, there could be a delay in informing the Purchasing Department which will have to connect the supplier.

(c)

As the Purchasing Department is familiar with the order, they can easily detect discrepancies and quickly take corrective action before the invoice is paid.

(d)

For the Accounting perspective it may be said that invoice checking is basically an Accounting function, which can be efficiently handled by this Department.

(e)

Another argument is that if this task is given to the Accounts Division, the certification will be done with sufficient promptness to ensure eligibility for cash discounts.

(f)

The normal practice today is for the Purchasing Division to check invoices, certify vouchers recommending payment and send them to the finance Division for payment.

The following four steps are involved in a purchase transaction: (a) (b) (c) (d)

Authorization Approval Certification of Voucher Payment

Steps (a), (b) and (c) are carried out by the Purchasing department and passed to the Finance Department for payment. In the Purchasing Department the authorization of a purchase and the certification of payment should be by independent officers. Auditors stress this procedure as vital for the proper control and accountability of expended funds.

36

As supplier are entitled to payment with out delay, G. R. N's should be quickly processed and passed for payment preferably within 48 hours of supply being made. GRN' s and invoice registers should be maintained and regularly checked by the purchasing officers for delays. 23.

Payment This is the penultimate step in the Purchasing Cycle. Payment is a function of the Finance Division. It is however the duty of the Purchasing officer to ensure certified invoices and Vouchers are passed to the Accountant promptly. Suppliers are reluctant to deal with customers who are habitually late in payment. In a sellers market where bank interests are high and cash flow is limited, the supplier may quote at a considerably higher price to cover the risk of delayed payment.

24.

Maintenance of Records of Purchase This is the final and vital step in the Purchase Cycle. Records relative to every Purchase transactions are maintained to :-

(a)

Serve as a historical record of expenses incurred by the organization in respect of material/goods consumed during the budget period.

(b)

Enable the Purchasing Department make a time series analysis to ascertain prices that must be made for same or similar products in future Purchase transaction. ****************

Recommended reading:1.

Purchasing and Inventory Control.- K.S. Menon. ISBN- 81 -85814-10-4. (From page 30)

2.

Purchasing and Materials Management.- P. Gopalakrisnan. ISBN -0-07-451650-7. (From page 143)

Wg. Cdr. J J / Maj Gen. T. S/ Dec 2003.

37

INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981)

HO No. 01/06

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. INTRODUCTION Materials Management (MM) holds a crucial position in an organisation. This is specially so in the case of a manufacturing / production organisation, as over 50% of the total cost of production relates to supplies, materials and equipment needed for production. Failure to supply materials in the required quantities at the correct time will disrupt production and other operations, causing colossal losses to the organisation. As materials management (MM) is a key area department, it has to interface efficiently, effectively and economically with other departments of the organisation such as production, engineering, marketing, finance, maintenance and design engineering. We will examine the relationships between materials management and the other departments separately. 2. PRODUCTION In a manufacturing or production organisation, production is the main customer of the MM department. For quite a long period in the past, owing to the dependency of production on the ready availability of supplies and materials to meet manufacturing needs without disruption, purchasing and stores functions were put under the jurisdiction of production. Even now some production concerns continue with the aforesaid practice though it is an unsatisfactory managerial hierarchical structure, This arrangement exists and continues to exist in some organization, shows the dependency of production on the materials management function. It demonstrates the concerns of production not only in connection with the provision of materials but also in connection with the maintenance of stock levels in accordance with the inventory policy of the organisation.

As partners in the company management team, materials management and production should strive for the optimum benefit of the Organisation. To achieve this necessitates complete and efficient cooperation between the two functions. Time is the essence of this co-operation. Production needs to give materials management time to obtain the materials from the right source. Materials management should ensure that materials are delivered to production when they are required and in the right 38

condition. Materials management should advise production promptly of any changes in supply information, thus enabling any changes in scheduling to be carried out with the minimum of delay. Production in turn should communicate any major changes in their schedules to materials managers via their schedules of demand. Finally a major part of the liaison task is co-operation between the two departments in locating and testing new or alternative raw materials or components. 3. MARKETING The purchase / production / marketing cycle starts with a sales forecast. Production schedules are derived from sales forecasts and materials schedule from the requirements of production. Effective liaison between materials management and marketing can result in the operation of an early warning signal for both departments. Area where purchasing and sales should co-operate closely is in the area of reciprocity (buying from customers). Co-operation and co-ordination are vital to achieve the best interests for the organisation as a whole both in the short and long term. 4. FINANCE Every purchase order placed by a MM department results in a commitment of company funds. Therefore, efficient liaison needs to exist between materials department and finance so that the resultant total commitment is within the scope of the working capital of the organisation. The materials manager should be of the right calibre and stature (Professionally qualified and competent) so that he meets financial management on an equal footing. Liaison is also needed in the area of financial control. Budgets, capital expenditure, Inventories, stock valuation, methods of pricing of stocks, invoice clearance and control of letters of credit are all areas where efficient liaison is necessary.

39

5. INTER – RELATIONSHIP The inter – relationship between materials management, production, marketing and finance is shown in the diagram below

Marketing

Production

Dept.

Dept

Sales

Production

Materials

Finance

Forecast

Schedule

Budget

Budget

Distri-

out put

bution

M. M. Dept. Finance Dept.

Trans

in put

Purchasing

Finance

formation

The success of a corporate enterprise depends on effective co-ordination and liaison that subsist all these functions.

6. ENGINEERING Materials management and engineering have many mutual problems. Particularly, design engineering mostly influences the amount of time materials management has to handle a procurement job. Engineering is usually responsible for preparing the technical specifications for a company‟s products and the materials that go into them. To exercise this responsibility effectively, engineering must have the constant help of materials management. The prices paid for product on materials and the cost to fabricate them are inextricably related to their specifications. Specifications can be written in a manner that reduces or enlarge the number of firms willing to supply specific items. If profits are to be maximised, the materials specified by engineering must be both economical to procure and economical to fabricate, and they should be normally available from more than one low cost producer. Engineering should give enough time to purchase. If enough time is not given materials management will have little time to obtain competitive offers and make the best buy-procurement involves lead time. Many users forget to give enough time to materials management to procure and want rush orders to be placed. The aforesaid means that cooperation and liaison are essential between the two departments.

40

7. QUALITY CONTROL Materials Management depends on quality control to ensure that goods procured conform to specifications laid down. It is the duty of the quality control department to promptly report to materials management about rejection of goods so that materials management could immediately contact the supplier concerned and take corrective action. Quality control could, in association with management visit suppliers to find out about methods of manufacture, equipment standards and quality assurance, facilities. The two departments could work in consultation and in consonance in regard to purchasing research, value analysis and other cost reduction areas.

8. MAINTENANCE Operation of the maintenance department would be seriously impaired if materials management (Stores Division) service of supplying spares is delayed. Maintenance department and Stores Division should work closely. The former should advise the Stores of its programme of repairs and overhauls and spares needed for the programme. When new plant and machinery are installed, Stores and Maintenance should consult each other to fix quantities for initial procurement of spares. 9. CONSTRUCTION As in the case of production, good liaison is necessary between materials management (Stores Division) and the construction department. Particularly in the case of in-house construction. Stores have to maintain stocks of construction materials in accordance with bills of quantities. Communication between two departments should be regularly done in order to co-ordinate the smooth flow of materials in to and within the organization.

** ** ** ** ** ** ** *** Recommended reading:-

1.

Purchasing and Materials Management. - P. Gopalakrishnan. ISBN -0-07-451650-7. (From page 15)

2.

Purchasing and Materials Management - Text & Cases. - Lamar Lee Jr & Donald . W. Dobler.

Wg. Cdr. J J / Maj Gen. T. S / Dec 200

41

INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/07

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. INTRODUCTION In evaluating purchasing performance, comparisons with budgeted figures have been undertaken by companies and a popular practice in industrial concerns. Two general types of budgets are used for purchasing activities. One is the Purchasing or Materials budget and the other is the department‟s Operations budget. The Materials budget is a planned estimate of the amount of materials, parts and supplies to be purchased during the budget period and is derived from the production schedules. The department‟s Operations budget, on the other hand, deals with the estimated costs of running the purchasing department, and although related to the expenditure for maintenance materials, does not include cost of raw materials for production.

Although some companies do not appreciate the value of budget, a number of reasons can be advanced for utilizing the budgetary process. An operating budget establishes a standard of performance of a very general nature. A materials budget enables other departments in the organization co-ordinate their activities with those of the purchasing department. For instance, the materials budget provides information to provide funds needed to meet commitments that the purchasing department will make, and it gives the receiving and stores departments the pattern of their work during a given period. Another advantage of budgeting results from the manner in which budgets are made. Implicit in their preparation is the concept of planning. Planning in any business activity is certainly desirable. In addition, the preparation of a budget means that the plans have been formalized to the extent of being quantified for a specified period of time. Thereafter placed on record in writing. This can be of importance in subsequent periods if it becomes necessary to make changes or take steps to prevent the recurrence inaccuracies in projected operations. Although the advantages of budgeting are significant, it should be observed that some difficulties are experienced in their use as a control device in purchasing operations. This is more true of the materials budget than the operations budget. The main difficulty stems from the fact that a purchasing officer ought to buy what is needed rather than what has been forecast. In some instances, adherence to a budget may result in fewer buying with its attendant costs.

42

In other instances, adherence to the budget may lead to shortages and consequent stoppage in plant operations. In both cases the department would be given a high rating on the basis of adherence to the budget, but could not be considered as functioning satisfactorily. Another difficulty with purchasing budget arises from the mental attitude of many people towards a budget. Many purchasing officers consider budget as an infringement on their prerogatives. They frequently argue that budgets are not applicable to their company or industry. Most of these difficulties arise from an improper under- standing of the purpose of budgets. Budgets should be a apart of the evaluation procedure for evaluating the performance of the purchasing department.

2. BUDGETING A budget is a detailed plan expressed in quantitative terms, that specifies how resources will be acquired and used during a specified future period of time Budgeting has long been recognized as an effective tool in managerial planning and control. A company budget is a device which balances the planned allocation of expenses with forecasted income during a specified period of time. A typical company budget is composed of numerous subbudgets, each covering specific department‟s operational activities. Budget Period Budget period depends on the type of business, uncertainties etc; Generally it is one year. Companies with fluctuating seasonal demand should consider shorter budget periods. However, in industries with high capital expenditure which requires long-term planning, budget period may even be more than one year Advantages of budgeting There are many advantages of budgeting, including:      

Budgeting provides managers with a vehicle for communicating their plans in an orderly way throughout the entire organization. Budgeting requires managers to give planning top priority. Budgeting provides a means of allocating resources to those parts of the organization where they can be most effectively used. Budgeting uncovers potential bottlenecks before they occur. Budgeting coordinates the activities of the entire organization by integrating the plans and objectives of the various parts. Budgets provide benchmarks for evaluating subsequent performance.

Essential Elements of a Budget i. ii. iii. iv. v. vi.

Prepared in advance Based on a future plan of actions Based on objectives to be attained Statement expressed in monetary and /or physical units Time bounded Provides basis for controlling and performance measurement. 43

Methods of Budgeting based on the Budgeting process 

Imposed (top down)  Key aspects  

Senior management allocates funds Centralized decision making

 Advantages  Organization-wide perspective  Saves time  Disadvantages  Lack of operational level knowledge  Lack of commitment from lower levels 

Participative (bottom up)  Key Aspects  

Resource requirements are collected at the lowest management level Consolidated information is sent to the senior management for budget setting

 Advantages  Staff involvement  More realistic than imposed budgets  Disadvantages     

Narrow departmental view at the expense of other departments or the organization Time consuming Budget padding to safeguard departmental interests Required resources will be over & above that is available

Negotiated (parallel)  Key aspects  

Senior management set broad goals & constraints Resource allocation through active discussion and negotiation with the departmental management.

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 Advantages    

Commitment & ownership at departmental level Departmental concerns & requirements are considered Provides an understanding of how individual departmental actions affect the organization as a whole Budget focuses on corporate objectives

Methods of Budgeting based on the Budgeting technique Incremental budgeting In incremental budgeting, budgets are prepared based on the previous years budget or actual expenditure, by simply increasing the budgeted figures by a pre determined percentage. Incremental Budget is steady in nature, characterized by gradual changes and any change introduced are easily visible. The total concept of Incremental Budgeting is simple and easily comprehendible, hence operation-friendly in nature. It also helps the managerial level officials to operate consistently in their individual departments

However there are many drawbacks in Incremental Budgeting process, it encourages a "spend it or lose it" attitude, managers might try to spend the total allocation for the year with the fear of loosing budget allocation for the next year. Another failure in this method lies in not considering the changing economic circumstances. The assumption on the part of Incremental Budget that the modes of operation and activities will remain the same all throughout is incorrect.

Zero based budgeting A method of budgeting in which all expenses must be justified for each new period. Zerobased budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one This is a time consuming method but considered much better than the incremental budgeting due to following benefits. Enhances coordination and communication within the organization. 

Compels the spending centers to understand their missions and their inter-relationships, for achieving overall goals.



Acts as a driving force for managers to search for cost-effective measure to develop the operations further



Quick identifications and immediate eliminations of unused and outdated operations



Helps in the detection of inflationary budgets 45



The financial resources are efficiently allocated, on the basis of requirements

Stages in Budgeting process 1. Communicating details of budget policy and guidelines The very first step in budgeting process is to communicate the Strategic plan of the organization to the people who are involved in the process. Team should also be educated on the method of budgeting to be used, allowances that are to be made to prices and expected changes in industry demand and output. In addition it is always important that all departments use one standard format and use same assumptions such as exchange rates and inflation rate in preparing the budgets. 2. Determine the factor that restricts output Once everyone is conversant with the preparation stage, it is important to understand the factors that determine or restrict out put of the organization. Mostly it is the sales demand, there is no point of preparing budget for more than what the organization can sell, sometimes the limiting factor would be the capacity, may be the demand is there but if the organization do not have the capacity to meet the market demand, then capacity becomes the limiting factor. It is necessary to determine the factor that restricts performance as this factor decides the point at which the annual budgeting process should begin 3. Preparation of the sales budget After identifying the factor/s that restricts out put, any organization has to start the budgeting process with the Sales Budget In the Sales Budget, Volume of sales forecast and sales mix, that is how many units of each product/brand/item is expected to be sold during the period concerned need to be quantified. Therefore sales budget is the most difficult plan to produce because it depends on consumer behaviour, state of the economy and actions of competitors which is very difficult to predict 4. Initial preparation of various other functional budgets A “bottom up” process in budget preparation is always important as it improves the ownership and acceptance of the budget. Therefore it is a good practice to ask each division to prepare their own budget using past data and expected changes in future. Guidelines from top management is always required at this stage to avoid misunderstanding of the process and to avoid misaligning of divisional budgets with the company overall objectives and strategic plans.

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Figure 1. An illustration of budgets moving up the organizational hierarchy 5. Negotiation of budgets with superiors After the initial preparation of budget by the individual department, it is then submit to the next level of management for necessary changes and to incorporate it with other budgets. At each level, budgets will be negotiated between the budgetees and their superior and will be agreed by both parties. In this process superiors may ask to submit explanations for some or all of the areas included in the budget and may question why and how they arrived at the figures given in the initial budget. However it is essential that the superior does not revise the budget without giving full consideration to the subordinates‟ arguments and finally it should be a budget agreed by both parties. 6. Coordination and review of budgets Individual budgets from each function must be examined in relation to each other Some may be out of balance and may require modifications due to conditions and constraints which are beyond a manager‟s knowledge or control. Any changes should be done by the responsible manager which means budget may have to be re-cycled two/three times. At this stage a budgeted profit and loss account, a balance sheet and a cash flow statement should be prepared. 7. Final acceptance of budget When all budgets are in harmony with each other they are summarised into a Master Budget. Once the Master Budget is approved it is passed down to the respective managers.

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8. Ongoing review of budgets Budget process should not stop once it is approved. It is important to compare the actual results with the budgeted results on pre agreed intervals. Most organizations conduct monthly and quarterly reviews . these reviews helps managers to keep a track of their achievements and to take action if actual are not in line with the budget

MASTER BUDGET The master budget consists of a number of separate, but interrelated budgets. It Summarizes planned activities of all sub units such as sales, production, purchasing and finance. Master Budget can also be defined as “ A periodic business plan that includes a coordinated set of detailed operating schedules and financial statements.” Components of Master Budget

A. Operating Budget • • • • •

Sales budget Purchase budget COGS budget Operating expenses budget Budgeted income statement

B. Financial Budget

• • •

Capital budget Cash budget Budgeted balance sheet

The Purchasing Managers /Executives concerns with regard to budgeting centers on two budgets (1) (2)

Materials Budget Purchasing Depts‟ Operating Budget.

MATERIALS BUDGET

Based on presumption that production will take place at pre-determined level, a materials budget could be formulated. Preparation of detailed materials budget is therefore practical only for those products whose sales can be forecasted reasonably accurately, or for materials that are used on variety of products whose aggregate demand can be forecasted. This means that many companies will find it difficult to develop a materials budget for one full year in advance. Some companies s may budget only for selected key materials (say raw materials or class „A‟ items).

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Nevertheless wherever possible most purchasing departments find it profitable to develop a materials budget expressed in terms of units, if not in terms of monetary values. Production department prepares the production schedules based on the Sales forecast and the purchasing department prepares the material budget based on production plan. Materials budget shows the quantity and cost of direct materials to be purchased. The budgeted cost of direct materials to be purchased is then computed by multiplying the required units of direct materials by the anticipated cost per unit. Purchasing department need to give two types of information ie: (i) (ii)

Estimates of materials PRICES and Specific TIMING of purchases.

This information gives the Finance Dept the necessary data to draw up a realistic schedule of cash requirements for each operating period. The Finance Dept can adjust the CASHFLOW accordingly. When a material budget is to be used for measuring and controlling purchasing performance, it must be expressed in terms of monetary values.. Even when the materials budget is expressed only in terms of units there are benefits in planning purchasing activities such as: 

Can be used as a guide in contract purchasing and placing blanket orders.



Quantity discounts can be utilized more effectively.



Inventory investment and its associated risks can be reduced by advance planning of requirements.



Materials budgets provide maximum purchasing lead-time which could be utilized to: a) Carefully select qualified suppliers b) Negotiate without pressure of dead lines. c) Obtain maximum value for money spent.

Purchasing operating budget: The Purchasing Operating Budget (POB) comprises of costs that include salaries and emoluments for all Purchasing Department staff, rent and energy costs for their office space, transport and communications for their work process, stationery etc. The POB is essentially a financial plan used as a control tool to evaluate the purchasing department‟s performance against its expenditure. This tool also becomes a measure to evaluate efficiency of the Purchasing Department as a cost center. It should enable an efficient Purchasing Manager to balance materials costs, and their delivery and quality in relation to the Materials Budget. Hence the POB can be shown as a percentage or ratio in relation to the organizations Materials Budget. Where Materials Budget accounts for about 50% -80% of the total operating costs of an organization, there is always an opportunity to minimize the POB in relation to the Materials Budget and there by make the organization more competitive. This exercise should be an ongoing one if an organization is to maintain its leadership in the market. There can be a complementary effect to the POB if an effort is made to reduce costs on materials through product substitution, EOQ, sound logistics, standardization, better terms and flexibility of supplies, better transportation arrangements for materials deliveries, change of specification and other cost reduction techniques. ** ** ** ** ** ** ** ** ** ** ** ** ** 49

“A good budget is more than just a process of collecting & consolidating numbers. It’s a map that can guide your company to competitive advantage”

Recommended reading:1. Purchasing and Inventory Control. - K. S. Menon ISBN -81-8514-10-4. (From page 326) 2. Purchasing and Materials Management.- P. Gopalakrishnan. ISBN -0-07-451650-7. (From page 153) 3. Purchasing and Supply Management - Text & Cases. - Donald. W. Dobler & Davin. N.Burt. ISBN -0-07-114144-8.

Wg. Cdr. J J / Maj Gen . T. S / Nov 2003. Edited By Gayan Perera ( October 2009)

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INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/08

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

1. Introduction “The purchasing department must have a plan for carrying out its activities. In fact, managerial efficiency start with planning. With-out a plan, purchasing will tend to be carried out in fits and starts, and the department may be very much overloaded during some months and be relatively with out much work for the rest of the year” A plan is a predetermined course of action about what has to be done to achieve an objective. At the beginning of the year, the purchase department must determine what to buy and when .It must make a time schedule and a programme for purchase. In purchase, time is of vital importance. 2. Planning The Purchase To plan ahead one must learn about:a) b) c) d)

What to purchase For whom to purchase When to purchase and Where to purchase

a) What to purchase Depends on the nature of the activities of the organization. If it is an organization purchasing for resale, the type of things to buy are those that are needed by its customers. In such an organization planning has to commence withb a survey of customer needs. Quantities to be purchased will depend on the number of customers and the extent of buying power of the customers. We are, however not directly concerned with purchase for resale at a profit. Our primary concern is purchase for industry , manufacture, Construction, production, in short for consumption, conversion and/or fabrication with added value. What to purchase, therefore, depends on the nature of the organization for whom we purchase. Our planning for purchase, then has to be aimed at obtaining the materials and services required by the particular organization to which we belong.

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b) For whom to purchase Our main concern here is planning for purchasing for consumption or conversion . It may be for a particular industry like the manufacture of cement, production of consumer articles like soap, textiles etc. it may be for particular projects like the fabrication of plant and machinery and installation of it. It may even be for transportation or construction of buildings road etc. purchasing for each of these must be planned and executed according to the nature of the industry or source. c) When to purchase The timing will depend on the period required from the planning stage to the out put stage, taking in to consideration the times of the various processing activities – the planning system may have several phase – i. ii. iii.

Annual plan Medium term plan ( say 2-3 years) Long term plan (say 3-15 years)

d) Where to purchase This depends on the source selection systems in the availability of established sources. How long have we been dealing with established suppliers? Does the present climate warrant a change? Do we have cost related date on current and pervious suppliers? What previous sourcing decisions need to be reviewed? Do we need a changed approved lists of foreign suppliers and local suppliers ? Are there likely advantages in the substitution of foreign suppliers, with local suppliers in related areas ? Is it timely or appropriate to review already established make or buy decisions? 3. Budget as a means for planning, coordination and control Since planning is looking ahead and anticipate difficulties expects the expenditure and performance as regards production, sales, purchases and plant utilization etc Coordination means weaving together the segments of the organization so as to operate at the most efficient level and produce maximum profit. This is achieve as all sections like sales, purchase, production, finance and personnel etc. works together to achieve common goals as defined in the budget . Controlling means systematic appraisal of results to ensure that actual and predicated performance coincide and remedial actions are taken, if there in any deviation. The budget is a means, by which plans are regularly compared with actual results regarding expenses and performances. 4.

Material Budget a.

Materials Budget shows the mouth wise quantities for each major type of raw material required to produce the goods as per production budget. Material quantities are assessed on the basis of past records, or technical estimates. In other words, material budgets, are the estimates of materials to be used in a given period of time achieving a given production schedule and for this purpose the necessary requirement of funds are to be planned and arranged for the period of materials budget.

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The materials budget takes following points in to account – i.

Inventory materials in stock

ii. Purchase orders placed iii. Materials requirement during the period iv. Availability of funds v. b.

Forecasts of price trends

Purpose of the material budgets are :i.

To plan and control the purchase

ii.

To assess and make a provision for financial requirement of the purchase

iii.

To help in achieving the production schedule

iv.

To plan and control the consumption of materials by the concerned departments.

v.

To suggest ways and means to improve the next budget estimates.

vi.

It makes the organization cost conscious, and which in turn makes it productive conscious.

5. Purchase Budget Purchase Budget is prepared with the help of materials budget. It represents the quantities of the materials to be purchased ( monthly or quarterly wise) and the estimated cost of the materials . Purchase budget helps in making purchase plans in accordance with established inventory procedures to purchase the required materials- sufficiently in advance so that materials are available in time. 6.

Purchasing Policies and Procedures It is very desirable for an enterprise to lay down its purchasing “policies”. A policies can be defined as a board statement of producer or principles which is meant to guide executive action. A policy ensures proper direction in decision making as it indicates a define course of action and is the foundation of management activities. A policy acts as a guide to the action of managers, and since they are principles, they serve as boundaries within which activity may take place. Policies guide departmental action towards a basic company objective. A“ Procedure” may be defined as a series of steps to be taken in doing a task. It is a detailed guide for action for the personnel doing a specific work.

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7. Internal factors that influence the purchase The following factors related to the internal activities of the organization will influence the purchase activities.

     

Production technology – Unit, batch, mass Objectives of the organization Purchasing policies The nature of the business and products purchased Lead time decides the inventory level Working capital requirements and availability

8. External factors that influence the purchase The major factor that influence purchase is the market situation. The market can be stable or unstable or fluctuating due to various reasons. a. Stable Market In the long run, in a reasonably competitive economy the general forces of supply and demand tend to determine the price levels at which standard products will be sold. In the short run the short run buyers can only influence the price through some type of volume buying arrangement. b.Unstable Markets Substantial short-run fluctuation of the supply and price factors exists for numerous raw materials such as crude rubber, copper, tin, zinc, lead etc. The supply of such raw materials is influenced by political forces, weather conditions, etc. Hence the prices of these tend to fluctuate over a wide range. In most cases, the market is supplied by a large number of relatively small producers. The market price of these materials varies substantially from week to week. c. Import policy of the Government Import of restrictions or embargoes or heavy taxes will have an impact on the purchasing activity. d. Credit policies of Bank The credit policies of banks will also have an impact on the purchasing activities and need to be taken in to consideration. e. Timing the Purchases The buyer‟ s primary concern is to ensure that the organization gets adequate supply of materials while the secondary objective will be to get these at optimum price considering quality and other requirements. Generally, in a market where the price is stable, timing is not a critical matter. Timing becomes an important matter when purchase is made in an unstable market. Careful observation and analysis of market conditions are essential if buyers are to satisfy the availability and price objective.

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Normally buyers cannot influence the market price, they can however, by timing the purchases, control to some extent the price they pay. f. policies related volume / time buying The approach could be ; 

Purchase according to current requirements. As the name implies, this is a buying policy designed to cover only a firm definitely known requirements of the firm and is considered the best approach in a market with price risk.



Purchase primarily according to supply market condition. Under this approach, materials are purchased exceeding current requirements, but not beyond the actual foreseeable requirements.



Hand –to-mouth buying is the practice of buying materials to satisfy current operating requirements in quantities smaller than normal economic order quantity.

9. Annual buying plan The material budget only provides information on the quantity of materials required by the organization, based on their planned activities or production. Once the materials budget is developed and priced and buying plan should be structured for each major item or categories of items, in keeping with the organizational objectives. The main objectives of the buying plan will include ;  To develop effective suppliers / relationships  To buy competitively  To assure materials availability and optimize investment  To buy quality effectively  To coordinate effectively with the users  This will involve finding answers to the following questions such as               

Make / do or buy? How much to buy ? When to buy ? How much to buy at a time ? (EOQ or not ) From whom to buy? ( National or International – Manufactures / agents / wholesalers) From existing suppliers or new suppliers ? Single sourcing or multi-sourcing ? Rationalize supplier base? Are buying related decisions to be made by terms or the buyer? What purchase method to be adopted ? Long term contracts, stockless purchasing, purchase card use , etc. Should new suppliers be created or exiting suppliers developed ? Consortia purchasing ? Should JIT purchasing be introduced ? Reduce cost of purchasing operations,. Computerize, E. commerce, EDI. Etc. Environmental concerns, redesign product using environmentally friendly materials, Waste disposal ? What price ? premium, lower, standard ?

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 

Value analysis ? Transport cost reduction ?

10. Strategic Materials planning Strategic planning is defined as "…. The continuous of making present risk taking decisions systematically and with greatest. Knowledge of their futurity, organizing systematically the efforts needed to carry out these decisions: and measuring the results of the decisions against the expectations through organized systematic feed back “ ( Peter F Drucker ) Strategic planning is concerned with the development of a firm‟ s plans for long-term materials requirements – 5 to 10 years ahead and these and plans focus management‟s attention on long-term competitiveness and profitability. Adjustments may be done to the annual buying plan, based on the decisions taken. Once a complete picture of the purchase a activities in known and the work load imposed is assessed, the resources required to carryout the activities, and the sequence of the activities can be assessed and planned on a systematic basis. The resources required will be in terms of Men, Money, Machinery, and Method can be worked out band arranged so that all activities can be carried out in a systematic manner at optimum cost.    

Manpower Money Machinery Methods

-Adequacy of number, skills, training requirements -Adequacy, cash flow, etc. -Adequacy , additional requirements, etc. -Adequacy, revisions if necessary, procedure Manual , etc.

Planning by itself will not be adequate for the effective functioning. The purchase function has to be organized, coordinated and controlled to achieve the objectives assigned to it.    

Organizing ( internal organization, Centralized, De-Centralized, etc ) Coordinating (methods of coordinating the internal activities, coordination with other departments, external agencies, etc.) Communication system provided ( Channels of communication, reports , Module Learning System , etc) Control (Control information, reports, performance indicators, etc)

11. Symptoms of inadequate planning The following are some of the symptoms :      

High incidences of shortages Insufficient lead time for purchasing Receipts have no relationship with actual requirements Extremely large inventory turnover Adhoc and emergency purchase activities Unnecessary in- fighting

12. Conclusion “ The Materials Planning is the most important function that distinguishes the buyer as a manager and segregates him from other categories of staff. To spend money is easy, but planning enables the buyer to

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spend the money better in an optimum manner. Materials Planning activity raises the level of the buyer from an order placed to a purchase manager. Efficiency cannot be visualized without sensible or effective planning. Purchasing planning aims at motivating people and serves as an effective control device” ** ** ** ** ** ** ** ** ** ** Recommended reading:1.

purchasing and materials Management. - P. Gopalakrishnan. ISBN 0-07-451650-7.

2.

Purchasing and Supply Management- Text & Cases. - Donald. W. Dobler & David. N. Burt. ISBN 0-07-114144--8.

3.

Purchasing Management. Westing, Fine & Zeng. ISBN -0-85226-911-0. Wg. Cdr. J J / Maj Gen. T. S / Jan 2004

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INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT (Incorporated by Act of Parliament No. 3 of 1981) HO No. 01/09

COURSE:

Graduate Diploma in Purchasing & Supply Chain Management

MODULE:

No. 01 – Principles in Purchasing and Materials Management

A specification is an explicit set of requirements to be satisfied by a material, product, or service. Specification of an item of stores is a description of the item, its dimensions, analysis, performance or other relevant characteristics in detail to ensure that it will be useful for the purpose for which it is intended. In Engineering, Manufacturing and Business, it is vital for Suppliers, Purchasers and users of materials, products, or services to understand and agree upon all requirements. A specification is a type of a Standard which is often referenced by a Contract or procurement document. It provides the necessary details about the specific requirements. Specifications may be written by government agencies, standards organizations (SLS, ASTM, ISO, CEN, etc), trade associations, corporations, and others. A product specification does not necessarily prove the product to be correct. Just because an item is stamped with a specification number does not, by itself, indicate that the item is fit for any particular use. The people who use the item (engineers, trade associations, etc) or specify the item (building codes, government, industry, etc) have the responsibility to consider the available specifications, specify the correct one, enforce compliance, and use the item correctly. Validation of suitability is necessary. A specification might include:                

Descriptive title and scope of the specification Date of last effective revision and revision designation Person, office, or agency responsible for questions on the specification, updates, and deviations. The significance or importance of the specification and its intended use. Terminology and definitions to clarify the meanings of the specification Test Methods for measuring all specified characteristics Material requirements: physical, mechanical, electrical, chemical, etc. Targets and tolerances. Performance testing requirements. Targets and tolerances. Drawings, Sketches photographs or technical illustration Workmanship Certifications required. Safety considerations and requirements Environmental considerations and requirements Quality requirements, Sampling (statistics), inspections, acceptance criteria Person, office, or agency responsible for enforcement of the specification. Completion and delivery.

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

Provisions for rejection, reinspection, rehearing, corrective measures.

A good engineering specification, by itself, does not necessarily imply that all products sold to that specification actually meet the listed targets and tolerances. Actual production of any material, product, or service involves inherent variation of output. With a normal distribution, the tails of production may extend well beyond plus and minus three standard deviations from the process average. The process capability of materials and products needs to be compatible with the specified engineering tolerances. Process controls must be in place and an effective Quality management system, such as Total Quality Management, needs to keep actual production within the desired tolerances. Effective enforcement of a specification is necessary for it to be useful. Specifications form part of the contract documents that accompany and govern the construction of a building. While there is a tendency to believe that "Specs overrule Drawings" in the event of discrepancies between the text document and the drawings. The actual intent is for drawings and specifications to be complimentary, with neither taking precedence over the other. The Specifications for construction works fall into 50 "Divisions", or broad categories of work involved in construction. The "Divisions" are subdivided into "Sections” that address specific work scopes. For instance, fire stopping is addressed in Section 078400 - Fire stopping. It forms part of the Division 7, which is Thermal and Moisture Protection. Division 7 also addresses building envelope and fireproofing work. Each Section is subdivided into three distinct areas: "General", "Products" and "Execution". The National Master Format system has been uniformly applied to residential, commercial and much though not all industrial work. Specifications can be another "performance-based", whereby the specifier restricts the text to stating the performance that must be achieved in each Section of work, or "prescriptive", whereby the specifier indicates specific products, vendors and even contractors that are acceptable for each work scope. Example:

While North American specifications are usually restricted to broad descriptions of the work, European ones can include actual work quantities, including such things as area of drywall to be built in square meters, like a bill of materials. This type of specification is a collaborative effort between a spec writer and a quantity surveyor. This approach is unusual in North America, where each bidder performs his or her own quantity survey on the basis of both drawings and specifications.

Specification writing is a professional trade with its own professional designations, such as "CCS", which means "Certified Construction Specifier". Spec writers can be either employees of or sub-contractors to architects. Spec writers frequently meet with manufacturers of building materials who seek to have their products "specified" on upcoming construction projects so that contractors can include their products in the estimates leading to their proposals.

Pharmaceutical Products Pharmaceutical products can usually be tested and qualified by various Pharmacopoeias. Current existing pronounced standards include:  

British Pharmacopoeia European Pharmacopoeia

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  

Japanese Pharmacopoeia The International Pharmacopoeia United States Pharmacopoeia

If any pharmaceutical product is not covered by the above standards, it can be evaluated by the additional source of Pharmacopoeia from other nations, from industrial specifications. or from standardized formulary such as

  

British National Formulary for Children British National Formulary National Formulary

A similar approach is adopted by the food manufacturing, of which Codex Alimentarius ranks the hightest standards, followed by regional and national standards.

Formal Specification Formal specification is a mathematical description of an item that may be used to develop an implementation. It describes what it shall do, not (necessarily) how it should do it. Given such a specification, it is possible to use formal verification techniques to determine whether the item is correct with respect to the specification. An alternative approach is to use provably correct refinement steps to transform a specification into a design, and ultimately into an actual implementation, that is correct by construction.

Functional specification In software development, a functional specification (also, functional spec / specs or functional specifications document (FSD)) is the set of documentation that describes the behavior of a computer program or larger software system. The documentation typically describes various inputs that can be provided to the software system and how the system responds to those inputs. Functional Specifications are what levels, grades and grading, sizes, standards, and achievements etc. that has to be achieved on the utilization of the item in question. Specifications are drawn up for the achievement of a set of objectives on performance. Therefore Functional specifications are the standards that will be looked for in a Handing over- Taking over exercise, for the final conclusion of a supply contract. Especially in the purchase of Equipment, Machinery, Plant etc. Both Technical Specifications and respective / relevant Functional Specifications are both necessary to be intimated to the prospective supplier base, whereby you will be recipients of the right item more often than not and save a lot of time and costs in a procurement exercise, if not intimated. Accordingly, specifying a need is of paramount importance in addressing a procurement exercise. The benefits achieved thereof are so very useful to both the Supplier and the buyer. Always it is preferable to also refer to any of the under noted, for any further information. 

Sri Lanka Standards Institution

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              

Construction Specifications ICTAD Defense Standard Diagnostic design specification Formal specification List of ISO standards Performance testing Process specification Product design specification, detailed specification (created before a product is designed) of what it is required to do. Publicly Available Specification Requirements analysis Shop drawing Statistical interference Tolerance (engineering) Verification Verification and Validation (Prepared by Nimal Gonaduwa, FISMM)

February 2009

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