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Text Books and References Used
INVENTORY MANAGEMENT
V. Vivekanand
Unit 1 : Introduction to Materials Management
 Unit 1 Provides about why we need materials
management , it uses and functions, also provides
about the various subsystems involved in materials
management and how they interact to achieve the end
objective.
V. Vivekanand, IEM, MSRIT
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V. Vivekanand, IEM, MSRIT
Purchasing & Materials Management -Wilbur B. England, Michiel R. Leenders,
1979
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Operations Research, R. Pannerselvam, Second Edition
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Operations Research, S.D Sharma, 4th edition, 2009
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Operation research, N.V.R Naidu, G. Rajendra, . T. Krishna Rao, 1st Edition,
2011
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Production & Invnetory Control Systems & Decisons, James Greene, 1983
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http://pespmc1.vub.ac.be/ASC/SYSTEM.html
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 Integrated systems – Functions, Interfaces
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“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition
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 Provides an overview about the various functions of
 Systems approach
management. The unit would be understood by knowing
the inventory functions, principles. Further the usage of
mathematical models and how these models can be used
in decision making from an inventory perspective would
be understood by knowing the various deterministic
inventory models
Deals with Inventory functions, Principles
Covers mainly mathematical models (70% of unit 3)
Definition, types, needs and functions of inventory
management
ABC, FSN,VED analysis , Spares part management
Replishment Model (With and Without Shortages)
Production Lot Size model (With& Without Shortages)
Production and Operation management : Everette Adam, Ronald Ebert, 5th Edition
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 Purchasing
 How materials management is viewed from a macro
and micro level
 This unit would cover the concept of inventory
Materials Management – Integrated Approach” : P. Gopalkirshnan, P. Sunderasan,
Revised Edition ,2003
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Unit 2 : Purchasing management
 Provides an introduction about the need of materials
management (Definition and Importance)
Unit 3 (Inventory Management & Deterministic
Models
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purchasing department, how various subsystems in
purchasing works, purchasing process, procedures and how
it plays a role in materials management
Functions of Purchasing – systems perspective
Principles, Procedure of Purchasing
Source and Supplier Selection
Learning Curve Concept
Forward Buying
Make or Buy Decision
Legal Aspects of buying
Vendor And Vendee Relations
Vendor Development
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Unit 4 : Deterministic Models and Probabilistic
Models
 This unit covers the deterministic model of inventory
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management where in various real life situation arises
which include how to manage inventory levels when
quantity discounts are provided, also how to manage
inventory levels when dealing with constraints such as
floor space, total value and number of items. The
probabilistic models include determinining inventory levels
situation when demand and lead times are probabilistic in
nature
Price Breaks and Quantity Discounts
Multi Item Deterministic Models – Constraints due to floor
space, total value, number of items
Probabilistic models
Limit Technique
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Unit 5 : Stores Management and Operations
 This unit deals with various aspects of stores, provides an
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overview of a store system, deals with function of
receiving and inspection system of stores also deals with
centralization and decentralization of stores. How
accounting system works in stores area (LIFO, FIFO
system). The unit also deals with how to apply
codification principle, standardization concept to various
materials.
Storage System
Store Location and Layout
Development of Storing
Centralization and Decentralization of stores
Standardization and Variety Reduction
Codification
Materials Accounting and Materials Audit
Materials Management – Introduction –
Unit 1
 Introduction about Materials Management
 Systems approach to Materials Management
 Material Management at Micro and Macro Levels
 References
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Materials Management
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How to Manage
 Why do we need materials management
 Contribution of materials towards turnover is high
(major contribution comes from material cost)
 Improvement in procedures, cost and other aspects
towards materials would make an significant impact
on profit
 ROI (Profit/Investment)
 Investment (Fixed Assets + Current Assets)
 Currents assets can be managed to improve ROI
 Management of Material is a must
 Would be understood in a simpler way if we
develop an objective or a set of objectives
 Objective
 To Improve/Maintain the ROI
 Increase ROI
 Minimizing Material Cost
 Material Cost occurs due to
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Planning function
Procurement function
Production Function
Inventory function
Storage function
 Maintain ROI (Occurs when no further improvements can
be achieved) where decrease in ROI should be avoided
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How to Manage
How to Manage
 We need to two aspects where materials
management can be applied
 Micro Level
 Macro Level
 Micro level
 Deals with factors which affect the various
internal functions and its relationship among
other function
 Macro level
 Deals with factors which are due to external to
the material management system and have an
impact on the system
 Material System
 Economic system
 Socio Political System
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Macro Factors
Micro Factors
 Factors external to the system which would affect
in changing system design, performance and other
attributes of system
 Political Factors
 Government Policies
 Trade Policies
 Economic Policies
 Credit Policy
 Price Trends
 Competition
 Factors internal to the organization which
would have an impact in system design,
performance and other attributes
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Budget
Cost constraint
Plant capacity
Machine utilization
Floor Space
Lead times
Working Capital
Human Factors
 Leadership, Ownership and other attributes
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To manage cost, To manage at micro and macro
level, we need to know the structure of the system
 For knowing about the system we need to have a basic
idea about how a general system is
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How to create a system’s view
 Develop a systems approach
 System
 Objective/Set of Objectives
 What is a system
 Many defintion exist
 Ashby Defined System as “ Set of variables selected by an
 Input
 Iberall Defined as “ Set of arangement or entities together or
 Output
observer”
related or connected so as to form a unity or organic whole”
 Reference : http://pespmc1.vub.ac.be/ASC/SYSTEM.html,
Introduction to cybernetics “ Ashby”
 To understand the concept of system they use three distinctions
 Transformation Process
 External Factors
 Observed object
 Model of the object
 How is the object perceived
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Systems View
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Business System
 Main Objective
 Systems approach
 To make profit
 To Improve ROI
 To Improve ROI
 Minimize various cost out of which material cost
plays an important role
Transformation
Process
Output
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 Thus objective would be to minimize material
cost
 Therefore it is imperative to know what would
be the inputs which affect material cost
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Material Cost System
How to Manage
 We need to know the functions involved which make
up the material cost in a system
 Material cost within a organization has various aspects
 Materials Planning
 Create a plan for ordering materials prior (Materials Requirement Planning)
 Procurement of materials
 This drives towards the need of knowing the functions
 Ordering of materials from various supply chain vendors
individually, its relationship with other function and how all
functions together behave
 Logistics/Transportation Function
 Understanding of individual functions
 Production/Manufacturing Function
 By doing so we can improve the function to achieve the broader
objective
 Understanding of relationships
 Knowing the relationship a model can be developed and hence
make understanding easier
 Understanding of total behavior of the complete system together
is essential
 Transportation of materials to warehouse
 Conversion of Raw materials to finished products
 Inventory Management
 Managing the materials (raw materials, work in progress, finished goods) and
ensuring in time of flow of these materials so that the work is carried out
 Storage of materials (Raw materials, WIP (Work in Progress), Finished
Goods, Scrap Materials)
 Usage of materials into finished product (indicates Slack and Surplus
Materials)
 By doing so we can understand the output performance and
accordingly improve to increase the ROI
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How to Manage
Input
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How to Manage
Planning
Function
Procurement Function
Purchasing Function
Inventory
Function
Warehouse/
Customer
Production/
Manufacturing
Function
Logistic Function
(Transportation and
other functions)
Source : A.K. Dutta “ Materials Management – Procedures, Text, Cases”
 Do we need to link every function or make it
independent
 What would happen if we make independent
function (We are not integrating every function)
 Assume Materials Planning function acts independently
from Procurement Department, Inventory Department
Output
Stores Function
Receiving
Inspection
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How to manage
 Example they provide dates of planning on materials to be
received within a particular date not taking into consideration
of supply chain logistics issues and cost issues on materials
 They order quantity of materials by only looking at BOM
 If every function acts independently the grander
objective of minimizing cost cannot be achieved
since there are constraints involved in achieving
the objective
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How to manage
 There is a need for integration
 By ensuring Integration of various function
 Flow of information can be understood in a broader
view and holistic view
 Control on cost, materials and other aspects can
be achieved
 We need to know the material flow process
 Materials flow
 Information Flow
 We need to create an integrated systems
approach
 Performance of every function can be evaluated
using cost/time and other system measures like
throughput, inventory levels, WIP
 Coordination can be achieved
 Overall performance measure can be created
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How to create integration and ensure
objective is met
Systems View – Materials Planning
 Inputs
 Develop a systems approach
 BOM, AVL, MPS
 AVL (Approved Vendor List)
 Provides vendors list who have been approved to provide necessary
materials
 BOM (Bill of Materials)
 Provide description about material quantity, product tree (parts which would
form subassembly)
 MPS
 Inputs for MPS would be demand forecast, Customer Orders
 Outputs
 Weekly Schedules on Products and Parts to be produced
 System
 Objective/Set of Objectives
 Input
 Transformation Process
 Output
 External Factors
 Outputs
 Order Release and Schedule
 Schedule of orders to be released to the production floor
 Planned Orders
 Generates future plan which would involve providing purchase orders
to the buyers to order and internal floor to control material flow
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Systems View – Purchasing,Inventory,
stores
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How to Manage
2
Planning
Function
 On Board
6
4
Inventory
Function
12
13
Procurement Function
Purchasing Function
5
11
Input
10
Production/
Manufacturing
Integration ensures
 Holistic View
 Shows Interrelationship among various systems and functions
 Performance can be analyzed
 Cost can be analyzed
 Information flow can be understood
 Improvements can be achieved
 Leads to
 Accountability
 Ownership (responsibility)
 Coordination
 Created by assigning responsible owners
 Support and cooperation in achieving organizational goals
 Adaptability to EDP (electronic data processing)
 Good Supplier Relation
 Leads to Optimization of material and logistics and product
distribution
 Control of material cost
 Conflict of resolution
 Performance Improvement
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Warehouse/
Customer
9
Output
8
7
14
Logistic Function
(Transportation and
other functions
Information Flow
Material Flow Source :“ Materials
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Supplier
3
Sales/Marketing
1
Stores Function
Receiving
Inspection
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Management – Procedures, Text, Cases”
References for Unit 1

Materials Management – Integrated Approach” : P. Gopalkirshnan, P. Sunderasan,
Revised Edition ,2003

Production and Operation management : Everette Adam, Ronald Ebert, 5 th Edition

“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition

Purchasing & Materials Management -Wilbur B. England, Michiel R. Leenders,
1979

Operations Research, R. Pannerselvam, Second Edition

Operations Research, S.D Sharma, 4th edition, 2009

Operation research, N.V.R Naidu, G. Rajendra, . T. Krishna Rao

Production & Invnetory Control Systems & Decisons, James Greene, 1983

http://pespmc1.vub.ac.be/ASC/SYSTEM.html
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Purchasing
 Why is Purchasing Important
 Objective of Purchasing
 What should the objective enhance
 Purchasing Principles and Procedures
 Inputs of Purchasing
UNIT 1 Complete
 Outputs of Purchasing
 Transformation Process
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Why is Purchasing Important
 Scope of Purchasing
 Value of Purchases plays a major role in contribution
to value of shipments
 A small reduction in material cost would amount to a
huge cost saving to the organization and customer
 Due to Systems Integration Purchasing forms a
crucial area where there is a huge amount of
information inflow and outflow from and to the
other departments and customers
Objective/Role of Purchasing
 To Buy economically in a competitive market
 To ensure uninterrupted flow of materials
 To keep inventory investment low
 To develop good buyer supplier relations
 To develop alternative and reliable sources of
supply
 To acts as materials intelligence information
centre with regard to specifications, process,
price, quality
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What should it enhance
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Functions of Purchasing
 Decision making
 Make or Buy Decision
 Is it necessary to inventory materials
 How much to pay for materials
 Which supplier should order be provided
 How much is the size of the order
 Delivery date of the order
 Best Transportation route possible
 Is it necessary to Hedge
 Selection of Suppliers
 Analyzing of Bids
 Price Negotiations
 Issuance of Purchase Orders
 Follow Up Actions
 Cost analysis and Market study
 Maintenance of Price Catalogues,
Information Library
 How to dispose surplus materials
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How to go about achieving these
objectives
Purchasing Principles
 Buying the right quality
 By having set of principles and procedures
 Buying the right quantity
 By having systems approach
 Buying the right price
 Buying from the right source
 Buying at the right time and place
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Contd..
Contd..
 Buying from the right source
 Buying the right quality
 Source Selcection is important since it would affect price, qulaity, time
 Definition of quality needs to be emphasized
 Defitnion should be in greater detail and should
be described in purchase order
 Buying the right quantity
 How much quantity should be purchased and
at what time
 Determination of optimal quantity based on
mathematical techniques
of delivery
 Stages of source selction include
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Survey Stage
Enquiry Stage
Negotiation Stage
Experience Stage
 Buying at Right time
 Implies Materials to stores, production is delivered at right time
 Supplier follow commitments of due dates
 Buying from Right Place
 Implies right place of delivery
 Buying right price
 Typically Value (Quality/price) can be used as
guidance to determine the right price
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Contd..
 Implies place of delivery is a must
 Whether delivery is free (Like FOB (free on board) F.O.R ( free on rail),
C.I.F (cost, Insurance, Freight)
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Purchasing Procedure
 Thus there is a need for a procedure which would
ensure the purchasing principles are
encompassed
 How to go about
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 Purchasing Procedures are established for
processing information from various departments,
customers, suppliers and at the same time provide
necessary information to them
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Internal Information towards Purchasing
Internal Information towards Purchasing
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Planning
 Provides information for long term requirements of organization for materials, facilities
 Orderly planning helps in efficiency
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Sales forecasting
 Helps in planning procurement strategies for a long period of time
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Finance
 Payments to supplier
 Cost Studies
 Budgeting helps in coordination from planning and sales, also provides the necessay
cost constraints
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Legal
Planning
Operations
Engineering
Finance
Marketing
Information Systems
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Purchasing
Legal
InventoryControl
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Engineering
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Operations
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Inventory Control
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Stores - receiving
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Purchasing & Materials Management -Wilbur B. England, Harold E
PearonMichiel R. Leenders, 1980
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External Information towards Purchasing
Contracts aggrement on materials
Legal procedure for contratcs ect..
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Type of materials, specification of qualities
Quality requirements of materials, Time , quantities
What needs to be pruchased or ordered at given time
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External Information towards Purchasing
 Market Conditions
Pricing, Discounts
Supplier Production Rates
 Information about prices, supply, demand and
Transportation Details
Existing and New Product
Details
Labor Conditons
Market Conditons
competitors actions
 Sources of supply
 Best possible sources of supply
 Capacity, rates, labor conditions
Purchasing
 Used to determine inventory policy
Sales, Taxes
Sources of Supply
 To check whether assurance of production is
possible
 Prices, Discounts, Custom, sales
Supplier Capacity
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Purchasing & Materials Management -Wilbur B. England, Harold E
PearonMichiel R. Leenders, 1980
Internal Information From Purchasing
Product Development
- Product Details, Pricing
Engineering
Operations
Product, priceInformation
Lead time, Price, WTy
Finance – Budget
Commitments, Price,
Adjsutment
MarketingCompetitve Conditions
 The Ascertainment of need
 An Accurate Statement of the character and amount
of article or commodity desired
 The transmission of purchase requisition
 Negotiation for the possible sources of supply
 The analysis of the proposals, selection of the
vendor and the placing of order
Purchasing
LegalContracts
InventoryControl
Purchasing Procedures
 The follow up on the order
 The checking of invoice and payment of supplier
 The receipt and inspection of the goods
 The completion of the record
Stores – Order Placed
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Purchasing & Materials Management -Wilbur B. England, Harold E
PearonMichiel R. Leenders, 1980
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Purchasing Procedures
Accurate Description of Commodity
 The Ascertainment of need
 Purchasing needs originates with recognition of a definite need by
someone or a department in a organization
 It is imperative to know what would be the individual or department
requirements for the unit
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How much quantity
Type of unit
When is it required
Having a prediction model of forecasting is imperative
This result in creation of material requisition to the stores department Leading to
Purchase Requisition
 Purchase requistion would orginate from
 Department using the materials
 Production
 Request comes from manager, or director, sales or R&D, ect.
 Types of order
 Large orders, small orders, emergency orders, rush orders.
 To Provide the specification of the part
 Exact Details
 Can be established by standard codification, standardization
procedure
 Standardization of requisition form
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Date
Number
Originating Department
Account to be charged
Complete description of material desired, quantity
Shipping instruction
Signature of person authorized to issue
Purchase order number
Delivery Dates
Buyers Signatue
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Transmission of Purchase Requisitions
 It is important to have few copies of
requisitions
 Issuer should have a copy
 Copy send to purchasing department has
 Purchasing department has to clearly establish
who has the power of requisitions
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Negotiations for source of supply
 Prior preparation for negotiations is a must
 Record of outstadning contracts against orders are
placed are required
 A commodity classifciation of items
 Classified record of vendors
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Analysis of Bid
 Placing of order
 The follow up on the order
Order form
 Purchase order(Purchase
For Non Stock Items Only)
 The checking of invoice and payment of
From :
Deliver to :
supplier
Purchase Order No :
Vendor
Please Supply the following in accordance with the instructions contained herein and subject to
the terms and conditions printed overleaf
Order Date
Description
:
F.O.B
Qty
Rate
Conditions of Delivery :
Terms of Payment
:
Mark Order No and Date on Invoice and Dispatch Advice
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 The receipt and inspection of the goods
 The completion of the record
Price
Delivery
Buyer Signature
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“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition
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Inputs to Purchasing
Purchase Requisition Form
 Purchase Requisition
Purchase Requisition form
( For Non Stock Items Only)
 Requisition received form storekeeper
 For stock items
 Planning Department for special purchases for non stock
items
 After Receipt of the purchase requisition, the buyer obtains
quotes and other necessary details
 Forms typically are used
 Form for stock items
 Form special materials
 Form for non stock items
 Travelling purchase requisition
From :
Deliver to :
Purchase Order No :
Vendor
Please Supply the following in accordance with the instructions contained herein and subject to
the terms and conditions printed overleaf
Order Date
Description
 Originate from stores or inventory control
:
F.O.B
Qty
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Date
Qty
Material Code No
Balance on Hand
Last Purchase
Requisition no
and the name of
the supplier
Signature
Signature
Store Keeper
Approved by
Note : Sometimes additional information like time, place and date of delivery are also mentioned
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Buyer Signature
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Purchase Requisition form
( For Special Materials)
Special Order No :
Specification No :
Drawing No :
Description
Qty

Supplier
Requisition no :
Part/Code No :
Delivery
:
Order No
Date
“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition
“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition
Other Inputs

Delivery
“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition
Purchase Requisition form
( For Stock Items Only)
Description
Price
Conditions of Delivery :
Terms of Payment
:
Mark Order No and Date on Invoice and Dispatch Advice
 Form is in the form of card
 Used when stock level goes and is needed for replenishment
Purchase Order No :
Rate
Product Specifications
 Describe the item on purchase order
 Let supplier know what exactly is required
 Help in verification of ordered item upon receipt
 Types of specification used to describe a material
 Blueprint
 Market Grades
 Describes and specifies quality of goods which are generally traded in
commodity markets
 Commercial Standards
 Bolts, nuts, Pipes, electrical items
 Material Specifications
 Describe physical or chemical properties
 Performance characteristics
 Used when other criteria are provided
 Determined using individual standards
 Determined by private agencies, government
national agencies
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Other Inputs
 Resource Limitations, Constraints
 Implies availability of Men, Materials, finance
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Outputs
Supply Sources
 List of Supply Sources
 Internal Sources
 Market Conditions
 Company itself
 Price Determination
 External Sources
 Discounts
 Purchase Decisions
 Outside Suppliers
 Market Place
 Selection is made based on
 Delivery terms
 Cost advantage between internal or external
 Timing of purchases
sources (Make or Buy Decision)
 Hedging
 Quality, Quantity, Delivery time, Low cost
 Buying in respect to sales and legal
implications
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Market Conditions
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Price Determination
 Conditions are influenced by supply and
demand conditions in the market
 Purchasing procedure depends upon the
type of demand for the material
 High Volume, Continuous Requirements, High
Frequency
 Large Volume Single order
 Price Vary according to Demand and
Supply conditions
 Dependent upon competitive conditons,
monopoly, duopoly or oligopoly
 Price is set on basis of cost plus profit or
market price basis
 Need of Fair Prices
 Typically Published prices would be used
or competitive bidding and Price
Negototiations
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Discounts
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Local Buying and Reciprocal
Buying
 Trade Discounts
 Quantity Discounts
 Local Buying
 Minimizes Freight Cost
 Cash Discounts
 Seasonal Discounts
 Better Delivery
 Better After Sales Service
 Generates Good Public Relations
 Disadvantage is Restricts Buyers choice on Prices
 Reciprocity
 Implies Buying from a company which is also a
potential buyer of the buyer’s company product
 Restricts buyers freedom and also is uneconomical
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Delivery Terms
Timing of purchases, Hedging
 Delivery terms needs to be clearly stated since loss of material
pays a huge loss to the company
 Hand to Mouth Buying
 Average down on the marker
 F.O.R ( Free on Rail)
 Buyer has to take the risk for loss or damage in transit and
seller’s responsibility is to deliver the goods in good
condition and at right time.
 Speculative buying
 Forward Buying
 F.O.B (Free on Board)
 Supplier Pays for transportation and freight charges
 C.I.F (Cost, Insurance, Freight Paid)
 Cost of materials, Insurance, Freight
 Supplier is responsible for goods and all charges until the
good arrive at the destination point
 F.A.S (Free Alongside Ship)
 Buyer Designates Port, Berth, Vessel and the Supplier is
responsible for obtaining the goods to the ship and the buyer
V. Vivekanand, IEM, MSRIT
takes the responsibility thereafter
Source selection
 A record of tenders with respect to quality
standards, dependability, performance and
other dimensions important from company,
customer point of view is needed
 Evaluation of the initial results needs to be
supplemented by on spot study team visit
at vendors plant which should involve
production engineers, quality controllers,
financial team
 Based on their inputs necessary supplier would
be selected
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Supplier Quality Assurance
Program
 This program helps in obtaining assurance of quality of
items supplied by outside vendors to specifications needed
at minimal cost
 Specification here implies a means of communicating the
needs of the buyer to the seller and at the same time
meeting the quality standards specified by the buyer
 Requirements are translated in terms of
 Classification of quality charecterstics
 Acceptable quality level (AQL)
 Inspection level (Sampling Scheme)
 Method of checking (Gauges)
 The System should ensure to be defect prevention
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Vendor
Selection – Factors to be considered

Quality

Delivery

Performance History

Warranties and Claim Policies

Production Facilities and Capacity

Price

Technical Capability

Financial Position

Procedure Compliance

Communication System

Reputation and Position in Industry

Desire for Business

Management and Organization

Operating Controls

Repair Service

Attitude

Impression

Packaging Ability

Labor relations record

Geographical Location

Amount of Past Business

Training aids
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Supplier Goodwill
 When selecting source of, buyers look at
goodwill aspects
 Goodwill usually is cultivated through
 Development of trademarks, brands, advertisement,
regular calls by salesperson, and other creative abilities
of marketing manager
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Qualifications of Good Supplier
 Good supplier is one who
Supplier Evaluation- Vendor Rating &
Evaluation
 Existing Sources
 Provides quality specified
 Monitoring is essential
 Delivers on time as promised
 Supplier Quality Assurance Program
 Provides accetable price
 Potential Sources
 Reacts to unforeseen needs such as
 Vendor rating
 Accelerated or decelerated volumes to business
 Changes in specifications, service problems, other
legitimate request
 Takes initiative in suggesting better ways serving
customers and attempts on developing innovative ways
products and services
 Provide technological expertise
 Remain competitive on a continuing basis
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Vendor Rating
 Taking of monthly tabulation of invoices from each supplier
and finding the value of supplier material rejected during the
month. The obtained value is then divided by the value of
materials shipped. The final result is rate of rejection
 Compare rejection rates among competing suppliers are
against average rejection
 Delivery can be compared by those expediting on a
continuing basis
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Evaluation

Technical Capability
 Experience, Number of technical person
 Design and Development of facilities
 Following supplier assurance program
 Past rejection rates

Manufacturing Strengths
 Types and number of equipment's installed
 Technical aspects of equipment
 Manufacturing capacity of items
 Methods of production planning
 Methods of follow up and progress planning
 Expansion plans and future programmes

Financial Strengths
 Initial capital investment and working capital requirements
 Financial sources, loan from banks, institutions
 Inventory turn over and profits
 Clearance of government duties and taxes

Management Capability
 Number of managerial position, managers employed at various levels
 Number of supervisory personell employed at varrious levels
 Total strength of workforce
 Partnership/Private/Public/Government undertaking
V. Vivekanand,
 Quality Perfomance
 (Number of Lots accepted/Number of Lots
supplied)*100 = Weightage
 Delivery Perfomance
 Adherence to time schedule
 (Number of Deliveries made in time/Total number of
scheduled deliivery)*Weightage
 Adherence to quantity schedule
 (Quantity Supplied/Schedule Delivery)*Weightage
 Price Perfomance
 (Minimum Price Offered/Vendor’s Price)*Weightage
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Vendor Development
IEM, MSRIT
Vendor Development
 The development would benefit buyer and supplier in a
 Deals with development of new sources of
supply which happens due to situation
beyond control of buyer
 Happens due to
 Parts which have not been made
 Complexity of designs
 Utilization of unfamiliar materials for which there
is no prior information or methods
 Available sources are too distant
 High Prices
 Political unrest
 Production capacity may be very high for the
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buyer to derive material
technical, financial, management sense and also from futuristic
growth
 Assessment of
 Technical
 Manufacturing strengths
 Financial strengths
 Management capability needs to be looked at
 What is important here is
 Buyer makes the difference wherein the buyer takes the
initiative to define the scope of work
 This is due to Technological changes
 Increasing development of new products, materials, processes
 Need of international trade
Sales Response
Supplier
Buyer
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Buyer Intiaitive
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Vendor Development – What is
needed

Catalogs
 Availability of materials
 Information about materials (Specification, Part Details)

Microfilms
 Information of suppliers are recorded on microfilms

Trade Journals
 List of publications
 Provides advertisement
 Provides text information which enhances buyers knowledge on
new products, existing ect..

Industrial Advertising

Trade Directories
 Volumes which list leading manufactures proividng
address,number, affiliations, products, financial standing

Sales Representation

Vendor Files

Video tapes of supplier plants
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Price Policies / Determination
 Why is price important
 Price is an integral and important factor in making a
sound purchasing decision
 Price paid by the organization indicates its best buy
method and provides an understanding whether the
organization has understood the complexity of the
market, supply demand aspects, supplier aspects
 Eventually depicts how much the organization is
spending and provides a way to show the
responsibility of the organization
Price Policies / Determination
 Why is pricing important
 Relation of Cost to Price
 Various approaches for price determination
 Cost approach
 Market approach
 Techniques for Price/Cost analysis
 Learning Curve
 Types of Purchases
 Negotiation
 Forward Buying
 Hedging
Relation of Cost to Price

The belief is that fairness is needed is a true statement hence a fair price needs to
be paid (Only this enhances better relationship in the business world)

What is Fair Price
 Lowest price which ensures that supply of materials would be achieved based
on the purchasing principles and at the same time there would be a continuous
supply of these materials

The choice of fair price should ensure that the product can be sold in a
competitive market at a profit and also can be sold in a non competitive market
with sufficient cost benefit ratio

Determination of fair price
 The term continuous supply can be possible only when the vendor makes profit

Would be based on several factors
Judgment of market, supplier
Need of intuitive ability of the purchaser


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What is cost and why we need to
know cost

The need to know or understand cost is essential for the purchaser and supplier as cost is what would
determine long term supply capabilities and by improving on cost, profit can be enhanced and price can
be made fair

Direct Cost
 That which can be accurately assigned to a given unit of production
 Example Produce 100 good in 10 hrs of time and accordingly labor rate can be determined
 10 tons of steel manufactured

Indirect cost
 Cost which ar e incurred in the operation of production plant or process which cannot be allocated
directly to any given unit of production
 Example Machine Depreciations, Property Taxes, Power, Light, electricity
Cost can be divided as Variable, Semi variable, Fixed cost

Direct cost usually tends to be variable,
 Volume is main reason why there is variability in direct cost (In a month 100 units or 1000 units can
be manufactured)
 Cost vary with unit of production

Learning Curve



Real estate taxes will be fixed irrespective of volume used
Factors involved in determining Learning Curve





Heat, electricity would vary based on capacity usage
Fixed cost
Why Do we need Learning Curve
 Provides a graphical of describing the realtion between experience
and proficiency (Improvement, productivity)
 Experience can be defined as more repetition of the work, Labor
hours of work
 Proficiency can be described in terms of volume produced
 It has wide implications for cost determination, negotiation
 Would provide a better understanding on cost involved
 Typically learning curve is more related direct labor
semi variable cost


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


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

The learning rate of Labor
The motivation to increase output of labor and management
The development of improved methods, procedures and support systems
The substituion of better materials, tools and equipment or more effective use of
materials, tools and equipment
The flexibility of job and people associated with it
The ratio of labor verus machine time in task
The turnover of labor in unit
Preplanning done prior to task
Formulas and examples on board
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Other Means of Determining Price
 Depends upon the type of product being bought
Other Means of Determining Price
 Raw Materials / Sensitive Commodity
 Raw Materials
 Made of Sensitive Commodities, examples include copper, wheat,
crude petroleum, jute ect.
 Special Items
 Items and materials which are special to the organization’s
product line and are therefore custom ordered
 Standard Production Items
 Includes items such as nuts, bolts, steel, valves, tubing wherein prices
are stable and are quoted on list price with discount
 Items of Small Value
 Includes items of small comparative value
 Trend in the price is more important than the price at
a particular moment
 Determining the price can be achieved easily when
there is a well organized market where market
conditions can be easily seen
 Forecasting and planning for orders becomes easier
when trend is price is available
 Timing of order place a great role in obtaining the Right
Price
V. Vivekanand, IEM, MSRIT
Other Means of Determining Price
 Special Items
 These are parts which are of large variety and also
V. Vivekanand, IEM, MSRIT
Other Means of Determining Price
 Standard Production Items
 Here prices are stable where quotes can be obtained
special materials specific to the organization product
or service (Custom Made or Custom Ordered)
 Price fluctuation are minimal
 Specific IC (Integrated Circuit), Defence Products
 Price can be determined using catalog, discount
 There would be no Availability of published price
 In such cases prices are obtained by quotation where
in analysis can be achieved by various scientific
methods
 Make or buy decision is usually suitable for such kind
of items
 Variation in price would exist among supplier since
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the item is unique
Other Means of Determining Price
 Items of small value
 These items do not fit in a catalog value nor be
quantified as bulk commodity
 To obtain price for such items various innovative
methods exist
 To send unpriced order for such items
 Use the last price quoted within a recent time frame
 Quotation obtained by phone can be placed as
agreement of purchase
 Trust from the supplier would ensure fair price of the
small items (Vendor – vendee relationship)
 Spot Checking method – Selecting an item which can
be used to create a base price for the particular class of
item
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based on discounts
sheets ect.
 The unit price plays a role since these items are used
in bulk
 Other methods to determine price would be by using
representatives who can provide the necessary
information
V. Vivekanand, IEM, MSRIT
Other approaches to pricing
 Pricing varies depending upon commodity,
industry, market which is dictated by
 Competition
 Oligopoly (Market or Industry is dominated by few
number of sellers) Example
 Monopoly (Microsoft, Diamond – Debeers company,
Rockefeller Standard oil)
 Two approaches are used
 Cost approach
 Market approach
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Other approaches to pricing
Other approaches to pricing

 Cost approach
 Price should be a little more than direct and indirect
cost so has to have a suitable profit margn
 Suitable for purchaser as identifying low cost
suppliers to so as to obtain nominal price by ensuring
lower cost of manufacturing and also creating a room
for negotiaitons
V. Vivekanand, IEM, MSRIT
Negotiation
Market approach
 Price are set in the market place and need not be related to cost
 Demand and Supply would control market prices to an extent
 High Demand Relative to Supply implies price increases
 Low Demand relative to supply decline in prices
 This need not be the case when the market is monopolistic or when market is
controlled by strong multinational firms (Here pure competition does not hold)
 In such cases purchaser must adjust to the scenario or find alternatives
 Selection of suppliers who are willing to offer non price incentives, good
delivery, good quality, concessions, discounts ect..
 Check on possible negotiations
 Check for lower prices in different market (Different geographical place like
currently China, India) but this can change when multinationals firm gain
stronger establishment where in long run only geographical distance
(transportation charges) play a role
 Check for similar material but not identical to ensure monopolistic or
Oligopolistic grip on market do not arise
 Example Aluminium and copper can be used interchangeably
 Use of make or buy decision when there is less restriction on labour skills,
raw materials, technological process (Free Trade Policies)
V. Vivekanand, IEM, MSRIT
Negotiation
 Implies “Conference with another with a view to compromise
or agreement”
 From Purchasing point of view it is a discussion between
buyer and supplier with a view to reaching an agreement
 Discussion with vendor on price
 Fair enquiry into cost
 Request to justify quotation
 On Delivery dates, Quality
 By negotiation it can be ensured that the supplier
 Provides prices in line with the competitors
 Does not take advantage of a privileged position
 Make proper and reasonable adjustment of claims
 Compete on same terms as qualified competitors
 To ensure special needs of buyers organization can be considered
 If negotiation have to be reasonable or fair then the following needs to be
avoided and not encouraged
 Price Haggling/Bargaining
 Bargaining need not ensure fair price
 Collusive Bidding
 Implies when biding for a price supplier can act in collusion and
accordingly create a price
 This drives for need of proper policy like legal action, seek new
sources, reject the bids and adopt bargaining strategy for fair
game
 Revision of price upward
 Occasionaly price can be increased after a contract has been given on the
basis of bidding
 Sometime cooperation between buyer and seller is required for an aggreement
 In a seller market the buyer may have to adjust to market pressure to increase
prices
V. Vivekanand, IEM, MSRIT
Purchasing Situation where negotiaiton is valuable
 Contract written covering price, specifications, terms of delivery, quality
standards
Forward Buying
 Objective
 Purchase of items made to the buyer specifications
 To ensure an available supply
 When changes are made in drawings or specifications after a PO has been
 Example : To have a constant supply of rice the buyer
has to buy the rice prior
 Example : At times some materials are needed to be
kept prior to a particular season like iron ore, coal are
purchased prior since in cold areas transportation of
these materials will become difficult
 To ensure cost is kept low
issued
 When quotation have been solicited from responsible bidders and no
acceptable bids have been issued
 When market or economic conditions require change in prices or quantities
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Forward Buying
 Complex situation arises when purchasing materials for long
Hedging
 Implies transactions on the exchanges where a future sale
term ( as pricing becomes difficult to determine, variation in
prices)
or purchase of commodities is made to offset a
corresponding purchase or sale on a spot basis
 Mainly done to eliminate price risk and fluctuations
 Typical for commodities like rice, wheat, jute ect hedging is
useful
 Two types of transactions are involved during hedging
 Purchases made on spot quotations and transaction
closed by down payement on delivery
 Transactions take place at a future date whereas
purchases made at quoted price and actual delivery
takes place as specified in the contract
 Cash transaction (Current exchange of physical goods)
V. Vivekanand,
IEM,price)
MSRIT
 Future transaction (Current purchases
at a quoted
 Variation in prices occur in three ways
 Open end pricing
 Escalation
 Price redetermination
 Forward buying is a purchasing system where buying is
done from a long term perspective
 Factors considered when doing forward buying
 Forward buying would involve risk and usually it is unavoidable
 Prices can come down
 Forward buying can involve gain when prices increase
 Need is controlling factor based on which the production schedule and
requirements can change which can have effect on the items bought
and to be used
V. Vivekanand, IEM, MSRIT
 If need decreases then inventory carrying cost increases
Hedging (Cash market, Future market)
Legal Aspects of Purchasing/Buying
 Purpose
Cash market
 Creates a contractual relationship to the contract made
Future market
between buyer and seller as per the terms and
conditions agreed to in the course of a deal
Company buys
Company sells 1000 kg at a future
1000kg of rice at Rs 50 per kg
date at Rs 52 per kg
amount and the quantity is delivered
on that date
Company Sells 1000 kg quantity of
rice amount 49
 Contract is legal document which has a direct
bearing on the company as to the performance of
the contract.
Company buys 1000 kg at future
date at Rs 51 per kg
V. Vivekanand, IEM, MSRIT
Legal Aspects of Purchasing/Buying
 Terms and conditions, use of phraseology of the
clauses are to be included in the purchase
contract
 Purchasing person should be familiar with certain
basic principles of law which are applicable
under all conditions this is to minimize area of
misunderstanding and conflict and in particular to
avoid litigation in any case
V. Vivekanand, IEM, MSRIT
V. Vivekanand, IEM, MSRIT
Legal aspects – Law of agency
 The acts of agent done within the apparent scope of his
authority binds his principal with respect to third parties
 This implies the purchasing officer acting on behalf of his
company is actually acting on behalf of his principal within
the apparent scope of his authority
 Seller has the right to rely on the apparent authority and in
general the status of agency is established by direct
authorization of the seller
 If the executive acts outside of his apparent authority but
within what can be reasonably inferred as his apparent
authority, the supplier firm can hold the company liable for
such action. If however the limits are exceeded of both
actual and apparent authority, the supplier firm cannor hold
the company of the purchase officer laible for such action,
but the executive can be held liable
V. Vivekanand, IEM, MSRIT

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Law of Contract
Law of contract
 The law of agency has direct implications
on purchase contracts

Basic Elements for valid contract
 An aggrement resulting from an offer and acceptance, understood in the
same sense
 Consideration or Obligation in the same form
 Parties should be competent to contract
 The purpose of contract should be lawful

Requirements of contract
 Formal contract should be signed by authorized officer or agent and this
binds the seller and buyer
 A purchase order is issued in acceptance of a specific bid or offer by a
vendor and only when this is done would it be accepted as contract
 It imposes an obligation on both parties, for example if quantity requirements
or time of completion is not known an estimate should be provided
 The contract should not be in conflict with the existing laws of the land and
the performance of the contract should not be unlawful and needs to be in
agreement
 Buyers responsibility
 To ensure that the purchase contracts are
properly drawn and to see that they are legally
binding the supplier
 For a valid contract
 Aggrement resulting from an officer and
accpetance understood in the same sense
 Consideration or
V. Vivekanand, IEM, MSRIT
Legal status of buyer
References
 Legal problems arise between buyer and seller
due to the following issues

Materials Management – Integrated Approach” : P. Gopalkirshnan, P. Sunderasan,
Revised Edition ,2003

Production and Operation management : Everette Adam, Ronald Ebert, 5th Edition

“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition
 Quality

 Delivery
Purchasing & Materials Management -Wilbur B. England, Michiel R. Leenders,
1979

Production & Invnetory Control Systems & Decisons, James Greene, 1983

http://pespmc1.vub.ac.be/ASC/SYSTEM.html
 Price, payment
V. Vivekanand, IEM, MSRIT
Unit 3 &4 – Inventory Control
 Basic Concepts to understand Inventory
 What is inventory
 Why is Inventory Needed
 Problems and Discussion on Board
 Types of Inventory
 The cost involved
 How to classify inventory
 Inventory Model (Deterministic Models)
 EOQ Model (Economic Order Quantity)
 P and Q system
 Replishnment models, Production shortages models
 Quantity discount models
 Inventory Model : Stochastic
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Reference
Stores System

Materials Management – Integrated Approach” : P. Gopalkirshnan, P. Sunderasan,
Revised Edition ,2003

Production and Operation management : Everette Adam, Ronald Ebert, 5th Edition
2nd

“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “:

Purchasing & Materials Management -Wilbur B. England, Michiel R. Leenders,
1979
Edition

Operations Research, R. Pannerselvam, Second Edition

Operations Research, S.D Sharma, 4th edition, 2009

Operation research, N.V.R Naidu, G. Rajendra, . T. Krishna Rao

Production & Invnetory Control Systems & Decisons, James Greene, 1983

http://pespmc1.vub.ac.be/ASC/SYSTEM.html
 Receipt System
 Usually the system is activated when the
purchase order is placed
 Quantity and date of delivery
 Supplier also provides dispatch date on when
order was released
 Transport carrier prepares transportation
details like consignment number.
V. Vivekanand, IEM, MSRIT
References for Unit 5
 Discussion and examples on board

Materials Management – Integrated Approach” : P. Gopalkirshnan, P.
Sunderasan, Revised Edition ,2003

Production and Operation management : Everette Adam, Ronald
Ebert, 5th Edition

“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “:
2nd Edition

http://pespmc1.vub.ac.be/ASC/SYSTEM.html
V. Vivekanand, IEM, MSRIT
Text Books and References Used

Materials Management – Integrated Approach” : P. Gopalkirshnan, P. Sunderasan,
Revised Edition ,2003

Production and Operation management : Everette Adam, Ronald Ebert, 5th Edition

“ Materials Management : Procedures, Text and Cases : :A.K. Dutta, “: 2nd Edition

Purchasing & Materials Management -Wilbur B. England, Michiel R. Leenders,
1979

Operations Research, R. Pannerselvam, Second Edition

Operations Research, S.D Sharma, 4th edition, 2009
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Operation research, N.V.R Naidu, G. Rajendra, . T. Krishna Rao, 1st Edition
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Production & Invnetory Control Systems & Decisons, James Greene, 1983
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http://pespmc1.vub.ac.be/ASC/SYSTEM.html
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