The overall objectives of an organization tend to be achieved most efficiently when the organization is structured by grouping similar activities together. The process begins by dividing the total operation into its basic functional components. Each component, in turn, is divided into a number of sub-functions. The process is continued until each individual job encompasses a reasonable number of related tasks. The basic aim is to have a system that is functionalized, has proper control over the activities and is well co-ordinate.
Materials Management provides an integrated systems approach to the co-ordination of the materials activities and the control of total material costs. Obviously, the MM organization is derived from its fundamental objectives. Since Materials management function ranges from receiving the material requisition to placement of purchase orders and then on the other hand to receiving the material and making it available to the users, a commonly seen organization of materials management is divided into integrated sections as:
- Purchasing
- Stores
- Inspection
- Traffic
Purchasing: Once the whole Materials Management function has been divided into its different sub-functions as above, the sub-functions too are divided into their functions which are usually seen to be as:
Administrative: Purchasing administration involves all the tasks associated with the management process, with emphasis on the development of policies, procedures, controls and the mechanics for coordinating purchasing operations with those of other departments.
Buying: It addresses to a wide gamut of activities such as reviewing requisitions, analyzing specifications, investigating vendors, interviewing sales people studying costs and prices and negotiating.
Expediting: This is basically the order follow up activity involving various types of vendor relationship work.
Reviewing Order status, providing clarifications on transportation, writing and emailing vendors etc.
Special projects (Non routine) : In order to facilitate smooth purchasing in a highly competitive business environment , purchasing authorities have to keep building the capacity to do better by taking up as special projects activities such as vendor development, vendor registration, value analysis, market studies, system studies etc.
Routine : Purchasing process or procedure involving routine or every day activities such as dealing specific purchase file , placing orders, maintaining records of commodities, vendors etc.
Purchasing
Purchasing refers to a business or organization attempting to acquire goods or services to accomplish the goals of the enterprise. Though there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations. Typically the word “purchasing” is not used interchangeably with the word “procurement”, since procurement typically includes Expediting, Supplier Quality, and Traffic and Logistics (T&L) in addition to Purchasing.
Overview
Purchasing managers/directors, and procurement managers/directors guide the organization’s acquisition procedures and standards. Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process. The three departments do not all report to the same senior manager to prevent unethical practices and lend credibility to the process. These departments can be purchasing, receiving; and accounts payable or engineering, purchasing and accounts payable; or a plant manager, purchasing and accounts payable. Combinations can vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved.
Historically, the purchasing department issued Purchase Orders for supplies, services, equipment, and raw materials. Then, in an effort to decrease the administrative costs associated with the repetitive ordering of basic consumable items, “Blanket” or “Master” Agreements were put into place. These types of agreements typically have a longer duration and increased scope to maximize the Quantities of Scale concept. When additional supplies are required, a simple release would be issued to the supplier to provide the goods or services.
Another method of decreasing administrative costs associated with repetitive contracts for common. +material is the use of company credit cards, also known as “Purchasing Cards” or simply “P Cards”. P-card programs vary, but all of them have internal checks and audits to ensure appropriate use. Purchasing managers realized once contracts for the low dollar value consumables are in place, procurement can take a smaller role in the operation and use of the contracts. There is still oversight in the forms of audits and monthly statement reviews, but most of their time is now available to negotiate major purchases and setting up of other long term contracts. These contracts are typically renewable annually.
This trend away from the daily procurement function (tactical purchasing) resulted in several changes in the industry. The first was the reduction of personnel. Purchasing departments were now smaller. There was no need for the army of clerks processing orders for individual parts as in the past. Another change was the focus on negotiating contracts and procurement of large capital equipment. Both of these functions permitted purchasing departments to make the biggest financial contribution to the organization. A new terms and job title emerged –Strategic sourcing and Sourcing Managers. These professionals not only focused on the bidding process and negotiating with suppliers, but the entire supply function. In these roles they were able to add value and maximize savings for organizations. This value was manifested in lower inventories, less personnel, and getting the end product to the organization’s consumer quicker. Purchasing manager’s success in these roles resulted in new assignments outside to the traditional purchasing function – logistics, materials management, distribution, and warehousing. More and more purchasing managers were becoming Supply Chain Managers handling additional functions of their organizations operation. Purchasing managers were not the only ones to become Supply Chain Managers. Logistic managers, material managers, distribution managers, etc all rose the broader function and some had responsibility for the purchasing functions now.
In Accounting, purchases are the amount of goods a company brought throughout this year. They are added to Inventory. Purchases are offset by Purchase Discounts and Return & Allowances When it should be added depends on the Free on Board (FOB) policy of the trade. For the purchaser, this new inventory is added on shipment if the policy was FOB shipping point, and the seller remove this item from its inventory. On the other hand, the purchaser added this inventory on receipt if the policy was FOB destination, and the seller removes this item from its inventory when it was delivered.
Goods brought for the purpose other than direct selling, such as for Research & Development, are added to inventory and allocated to Research and Development expense as they are used. On a side note, equipments brought for Research and Development are not added to inventory, but are capitalized as assets.
Selection of Bidders
This is the process where the organization identifies potential suppliers for specified supplies, services or equipment. These suppliers’ credentials (qualifications) and history are analyzed, together with the products or services they offer. The bidder selection process varies from organization to organization, but can include running credit reports, interviewing management, testing products, and touring facilities. This process is not always done in order of importance, but rather in order of expense. Often purchasing managers research potential bidders obtaining information on the organizations and products from media sources and their own industry contacts. Additionally, purchasing might send Request for Information (RFI) to potential suppliers to help gather information. Engineering would also inspect sample products to determine if the company can produce products they need. If the bidder passes both of these stages engineering may decide to do some testing on the materials to further verify quality standards.
Bidding Process
This is the process an organization utilizes to procure goods, services or equipment. Processes vary significantly from the stringent to the very informal. Large corporations and governmental entities are most likely to have stringent and formal processes. These processes can utilize specialized bid forms that require specific procedures and detail. The very stringent procedures require bids to be open by several staff from various departments to ensure fairness and impartiality. Responses are usually very detailed. Bidders not responding exactly as specified and following the published procedures can be disqualified. Smaller private businesses are more likely to have less formal procedures. Bids can be in the form of an email to all of the bidders specifying products or services. Responses by bidders can be detailed or just the proposed dollar amount.
Most bid processes are multi-tiered.
Acquisition Process
The revised acquisition process for major systems in industry and defense is shown in the next figure. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.
The process itself includes four phases of development
- Concept and Technology Development: is intended to explore alternative concepts based on assessments of operational needs, technology readiness, risk, and affordability.
- Concept and Technology Development phase begins with concept exploration. During this stage, concept studies are undertaken to define alternative concepts and to provide information about capability and risk that would permit an objective comparison of competing concepts.
- System Development and Demonstration phase. This phase could be entered directly as a result of a technological opportunity and urgent user need, as well as having come through concept and technology development.
- The last, and longest, phase is the Containment and Disposal phase of the program. During this phase all necessary activities are accomplished to maintain and sustain the system in the field in the most cost-effective manner possible.
Material Planning
In any integrated Materials Management environment, planning for getting the materials is the starting point for the whole MM function. Materials planning set the procurement function and the subsequent material functions rolling.
Material planning is a scientific way of determining the requirements starting with raw materials, consumables, spare parts and all other materials that are required to meet the given production plan for a certain period. Material planning is derived from the overall organizational planning and hence it is always a sub-plan of the broad organizational plan. What it does is forecasting and initiating for procurement of materials
Factors affecting Material planning
- Macro factors: Global factors such as price trends, business cycles, government’s import and export policies etc are called the Macro factors. Credit policy of the government is a critical factor as banks follow these guidelines only while extending financial support to a business entity.
- Micro factors: These are essentially the factors existing within the organization such as corporate policy on Inventory holding, production plan, investments etc. For any organization, factors such as Lead time of procurement, acceptable inventory levels, working capital, seasonality, delegation of power are micro factors.
Techniques of planning materials
There are a few techniques used for planning material for the given period. The following two are, however, commonly used:
- Materials Requirement Planning (ERP)
- Requirement based on past consumption
Material Requirement Planning:-
ERP has, as its starting point, the annual production plan of the manufacturing concern. Once a firm determines its annual production plan, the overall material requirement, to meet the given production plan, is worked out. It is a detailed analysis encompassing the materials and quantities available for use, materials with quantities not available and hence needing procurement, the actual lead time of procurement etc.
Since, it is always possible to have a situation where some parts of an assembly are available and some others not available, Bill of Materials is exploded. It is quantifying all the materials (components) needed for various assemblies, all needed as per the production plan. BOM is thus a list displaying the code, nomenclature of an item, its unit and quantity, location of use and also the estimated price of each component.
An explosion chart is a series of bills of materials grouped together in a matrix form so that combining the requirements for different components can be made. Once the BOM is ready, the same is handed over to the Purchasing wing which initiates the purchasing activities. ERP thus keeps in view the Lead time also. Using computers, preparation of BOM through explosion of lists is quite easy and smooth
Techniques of Material planning:-
- JIT
- Kanban
- Push Or Pull
Requirement of material planning:-
An MP system is intended to simultaneously meet three objectives:
- Ensure Materials and products are available for production and delivery to customers.
- Maintain the lowest possible level of inventory.
- Plan manufacturing activities, delivery schedules and purchasing activities
The basic objective of the material planning is to perform the manufacturing operation in a proper way thus they can achieve the desired results.
Manufacturing organizations, whatever their products, face the same daily practical problem – that customers want products to be available in a shorter time than it takes to make them. This means that some level of planning is required.
Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below:
- If a company purchases insufficient quantities of an item used in manufacturing, or the wrong item, they may be unable to meet contracts to supply products by the agreed date.
- If a company purchases excessive quantities of an item, money is being wasted – the excess quantity ties up cash while it remains as stock and may never even be used at all. However, some purchased items will have a minimum quantity that must be met, therefore, purchasing excess is necessary.
- Beginning production of an order at the wrong time can cause customer deadlines to be missed.
ERP is a tool to deal with these problems. It provides answers for several questions:
- What items are required
- How many are required
- When are they required
ERP can be applied both to items that are purchased from outside suppliers and to sub-assemblies, produced internally, that are components of more complex items.
The data that must be considered include:
- The end item (or items) being created. This is sometimes called Independent Demand, or Level “0” on BOM (Bill Of material)
- How much is required at a time.
- When the quantities are required to meet demand.
- Shelf life of stored materials.
- Inventory status records. Records of net materials available for use already in stock (on hand) and materials on order from suppliers. Bills of materials. Details of the materials, components and subassemblies required to make each product.
- Planning Data. This includes all the restraints and directions to produce the end items. This includes such items as: Routings, Labor and Machine Standards, Quality and Testing Standards, Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other inputs.
Outputs
There are two outputs and a variety of messages/reports:
- Output 1 is the “Recommended Production Schedule” which lays out a detailed schedule of the required minimum start and completion dates, with quantities, for each step of the Routing and Bill of Material required to satisfy the demand from the MPS.
- Output 2 is the “Recommended Purchasing Schedule”. This lays out both the dates that the purchased items should be received into the facility AND the dates that the Purchase Order or Blanket Order Release should occur to match the production schedules.
Messages and Reports:
- Purchase Order: An order to a supplier to provide materials.
- Reschedule notices: These recommend canceling, increasing, delaying or speeding up existing orders.
Note that the outputs are recommended. Due to a variety of changing conditions in companies, since the last ERP / ERP system Re-Generation, the recommended outputs need to be reviewed by trained people to group orders for benefits in set-up or freight savings. These actions are beyond the linear calculations of the ERP computer software.
Bill of materials (BOM) is the term used to describe the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture a final product. It may be used for communication between manufacturing partners or confined to a single manufacturing plant.
A BOM can define products as they are designed Engineering bill of material), as they are ordered (sales bill of material), as they are built Manufacturing Bill of Material), or as they are maintained (service bill of material). The different types of BOMs depend on the business need and use for which they are intended. In process industries, the BOM is also known as the formula, recipe, or ingredients list. In electronics, the BOM represents the list of components used on the printed wiring board or printed circuit board. Once the design of the circuit is completed, the BOM list is passed on to the PCB layout engineer as well as component engineer who will procure the components required for the design.
BOMs are hierarchical in nature with the top level representing the finished product which may be a sub-assembly or a completed item. BOMs that describe the sub-assemblies are referred to as Modular BOMs An example of this is the NAAMS BOM that is used in the automotive industry to list all the components in an assembly line. The structure of the NAAMS BOM is System, Line, Tool, Unit and Detail.
The first hierarchical databases were developed for automating bills of materials for manufacturing organizations in the early 1960s. A bill of materials “implosion” links component pieces to a major assembly, while a bill of materials “explosion” breaks apart each assembly or sub-assembly into its component parts.
A BOM can be displayed in the following formats:
- A single-level BOM that displays the assembly or sub-assembly with only one level of children. Thus it displays the components directly needed to make the assembly or sub-assembly.
- An indented BOM that displays the highest-level
Technical Evaluation
Technical Evaluations, evaluations of the technical suitability of the quoted goods or services, if required, are normally performed prior to the Commercial Evaluation. During this phase of the procurement process, a technical representative of the company (usually an engineer) will review the proposal and designate each bidder as either technical acceptable or technically unacceptable.
Commercial Evaluation
Payment Terms
Cost of Money – Cost of Money is calculated by multiplying the applicable currency interest rate multiplied by the amount of money paid prior to the receipt of GOODS. If the money were to have remained in the Buyer’s account, interest would be drawn. That interest is essentially an additional cost associated with such Progress or Milestone payments.
Manufacturing Location – The manufacturing location is taken into consideration during the evaluation stage primarily to calculate freight costs and regional issues which may be considered. For instance, in Europe in is common for factories to close during the month of August for summer holiday. Labor agreements may also be taken into consideration and may be drawn into the evaluation if the particular region is known to frequent labor unions.
Manufacturing Lead-Time – the manufacturing lead-time is the time from the placement of the order (or time final drawings are submitted by the Buyer to the Seller) until the goods are manufactured and prepared for delivery. Lead-times vary by commodity and can range from several days to years.
Transportation Time – Transportation time is evaluated while comparing the delivery of goods to the Buyer’s required use-date. If Goods are shipped from a remote port, with infrequent vessel transportation, the transportation time could exceed the schedule adjustments would need to be made.
Delivery Charges – the charge for the Goods to be delivered to a stated point. Bid Validity Packing Bid Adjustments Terms and Conditions Seller’s Services Standards Organizations Financial Review Payment Currency Risk Analysis – market volatility, financial stress within the bidders testing.
