HANDBOOK OF MEU RUN Abid HaleemHANDBOOK OF MATERIALS MANAGEMENT SECOND EDITION P. GOPALAKRISHNAN Ex. UN. Advisor on Materials Management Former Professor of Materials Management Administrative Staff College of India Hyderabad (Consultant J.N. Materials Management) ABID HALEEM Professor Department of Mechanical Engineering Faculty of Engineering and Technology Jamia Millia Islamia New Delhi PHI Learning Dcivate Lintied) Delhi-110092 2015HANDBOOK OF MATERIALS MANAGEMENT, Second Edition P. Gopalakrishnan and Abid Haleem © 2015 by PHI Leaming Private Limited, Delhi, All rights reserved. No part of this book may be reproduced in any form, by mimeograph or any other means, without permission in writing from the publisher. ISBN-978-81-203-4801-1 ‘The export rights of this book are vested solely with the publisher. ‘Sixteenth Printing (Second Edition) January, 2015 Published by Asoke K. Ghosh, PHI Leaming Private Limited, Rimjhim House, 111, Patpargan| Industrial Estate, Delhi-110092 and Printed by Syndicate Binders, A-20, Hosiery Complex, Noida, Phase-Il Extension, Noida-201305 (N.C.R. Deli)Contents Preface. nen xxvii Preface to the First Edition.. xxi Acknowledgements anil t. SECTION I MATERIALS MANAGEMENT CONCEPTS Integrated Materials Management Scope of Materials Management — 3 Materials Management—Some Aspects 3 Objectives of Materials Management 6 Approach and Organisatoin Chart 6 Organisational Interfaces 8 915 Supply Chain Management Supply Chain Management and Materials Management—A to Z Aspects 9 Concept of SCM 9 Effectiveness of SCM 10 SCM and Vendor Managed Inventory Issues 10 Global SCM IT Benefits of Outsourcing in SCM 77 Challenges of Outsourcing in SCM 12 Concerns of Supply Chain Managers 12 SCM Details 13 Enterprise Resource Planning (ERP) Parameters 13 SCM—Training AtoZ 14iv Contents Business Logistics Concept of Logistics 16 Physical Distribution 16 Logistics—Steps and Techniques 17 Logistics—Relevanee 18 Road Mode 18 Rail Mode Traffic 20 Air Mode and Role of ATC 21 Training in Business Logistics 2/ Shipping—A to Z Issues 22 Containerisation 24 Logistics Crisis Management 24 Role of Top Management and Materials Management. Corporate Goals 26 SWOT Analysis 26 8-33 User Interface of Materials Management Role of Materials Management 28 Organisation of Materials Management 28 Decentralised Organisation—A to Z 29 Materials Management—Interfaces with other Departments 30 ‘Materials Management User Exchanges—A toZ 37 User—Materials Management—A to Z Issues. 32 Financial Interface of Materials Management. Role of Finance—A to Z Role w Inflation and Materials Management 36 Materials Budget 36 Budgetary Control 36 Forecasting and Materials Management Uses of Forecasts 38 Accuracy of Forecasts. 39 7S Approach and SWOT 39 Forecasting—A toZ 39 Time Series and Trend 41 Moving Average 42 Exponential Smoothing 42 Input-Output Index 43 Correlation-Regression 43 Regression Examples 45 Forecasting by Trend 46 Exponential Smoothing 47Contents V 10. 1. Uncertainties 50 Dynamic Programming 50 Bull Whip Effect 5 Materials Intelligence Introduction I Materials Intelligence Concept. 56 Materials Intelligence Objectives—A toZ 56 Internal Information—A to Z Aspects 57 External Information—A to Z Aspects 58 Intelligence Techniques—A to Z 60 Materials Management—Planning and Budgeting... Decision Making and Budgeting 62 Decision 62 Programmed and Non-programmed Decisions 62 Bill of Materials (BOM) 63 BOM—Guidelines 64 Budgeting Forum 65 Budgetary Control—Concepts AtoZ 66 Performance Budget 67 Production Planning and Control (PPC).. Production Planning and Control and Materials Management 68 Scheduling AtoZ 69 Flow Charts 70 Optimum Lot Size 71 Job Production 73 ‘Techniques of PPC 73 Line of Balance (LOB) and Gant Chart 74 Bill of Material (BOM) Material Resource Planning Schedule (MRPS) 75 Level Scheduling 75 Process Planning: WhayWhy/How 76 Process Type Plant Layout 76 ‘Computer Aided Process Planning (CAPP) 78 0-86 Manufacturing Strategies and Materials Management. Manufacturing Strategies 80 Strategic Decision Making Aspects 80 Strategic Reorientation 81 Technological Innovation 82 Design and Development 82 Process Engineering 83 Technology and Labour Unions 83Contents 12. 13. 14. Reconditioning Strategy 84 Repair and Replacement 85 Insulation Monitoring 85 Level Monitoring 86 Speed Monitoring 86 Temperature Monitoring 86 SECTION II IDENTIFICATION OF MATERIALS Identification by Codification. Advantages of Codification 89 Variety Reduction 90 Brisch and Kodak Systems 97 Check Digit for Cataloguing 9 Codification—Methodology Properties 92 Benefits of Codes 93 National and International Codification 94 Design of Codification Digits 94 Codification Structure 95 Significance of Digits 95 Problem Areas 96 89-96 Bar Code Technology 97-105 Bar Codes Aspects—A toZ 97 Bar Code Terminology—A toZ 98 Types of Scanners Readers 100 Non-Contact Readers 103 Bar Code Applications 103 Standardisation/ Variety Reduction 108-117 A to Z Benefits of Standardisation 106 Simplification and Standardisation 107 Process of Standardisation 108 Ttems to be Standardisation 108 Methods of Standardisation 109 Road Blocks 109 Standardisation in India 109 Concept of Standardisation 110 Preferred Number Series cera Variety Reduction Examples 1/2 Standardisation and A to Z Benefits 1/3 Standards and Quality 154 Professional Approach 1/4 Guidelines and Controls of Standards—A to Z 15Contents 15, 16. 17. 18, 19. Radio Frequency Identification (RFID) .. 118-123 Introduction 118 RFID v/s Barcoding 19 Major Benefits of RFID Technologies 1/9 Transformation of Supply Chain through RFID—Major Issues 120 Tracking Management — 12/ Warehouse Management 122 Yard Management — 122 SECTION III INVENTORY MANAGEMENT 127-134 Inventory Fundamental Significance of Inventory 127 Inventory Goals—A to Z 127 Transaction Motive 130 Precaution 130 Speculative Motive 137 Decoupling Concept 131 Organisation of Inventory 137 Concept of Operating Cycle 132 Levels of Inventory 132 ABC Analysis—The | Step... What is ABC Analysis 135 A to Z Benefits of ABC Analysis 135 ABC Example 139 Limitations of ABC Analysis. 147 Multi Unit Selective Inventory Control—Three Dimension (MUSIC-3D).. 80/20 Rule Examples 142 Limitations of ABC Analysis 142 XYZ Analysis 143 HML Anal 143 FSN Movement Analysis 144 VEIN/VED Criticality Criteria 144 GOLF/SDE/SOS Availability 144 Cost Criticality Availability—A to Z Benefits 145 MUSIC-3D—Cost Reduction 145 MUSIC-3D—A to Z Benefits. 147 RBI Guidelines on Inventories. Tandon Committee—A to Z Issues 148 Implications to Users 157 135-141 142-147 148-151Contents 20. 2. 22, 23. 24, Economic Order Quantity (EOQ).. Classification of Inventory—A to Z 152 Arriving Optimum Inventory 154 Assumptions for EOQ 155 Derivation of EOQ 156 Inventory versus Sales 156 Sensitivity and Staggering 157 Inputs for EOQ 157 Implementing EOQ 159 152-159 Practical P&Q Inventory Models .. sees 160-163 Practical Systems—A to Z Aspects. 160 Periodic Review System/(Desired Inventory Level) DIL 162 Comparison of Q and P Systems 163 System/Optional Replenishment System 163 Materials Requirement Planning (MRP). Material Requirement Planning 164 MRP Inputs and Outputs—A to Z 164 Production Planning 166 Bill of Materials (BOM) 166 Gozinto Matrix 167 Advantages of Bill of Materials (BOM) 167 Use of Past Consumption Data 167 Gantt Chart 168 Line of Balance Technique (LOB) 168 ‘Theory of Constraints 170 164-170 Inventory under Uncertainty .. AMAT Classification of Inventory Problem i7 Uncertainty in Inventory 171 Rationality Principle 173 Minimax Principle 173 Maximax Principle 174 Principle of Optimum — 174 Regret Principle 174 Just-in-Time (JIT), 176-197 JIT Principles 176 Zero Invemtory/ZIN System 177 ‘The Philosophy of HIT 177 JIT Basic Tenets—A to Z 179 Vendor-Managed Inventory (VMI) 182 JIT’s Key Elements 182 Kanban Control 184Contents ix 25. 26. 27. 28. Benefits of JIT 186 JIT Implementation Design 187 JIT in Practice 188 JIT in Service Industry 189 Limitations of JIT—A toZ 190 Environmental Concerns 194 Just-in-Time Inventory has Downside 194 Mitigating Risks Related to JIT 195 Hoarding vs JIT 196 Work in Progress (WIP) Inventory.. Concept of WIP 198 Problems in WIP 198 Production Planning and Control 199 Gantt Charts 199 Line of Balance 199 Tips to Reduce WIP 200 . 198-201 Finished Goods Inventory... Finished Goods Control 202 Objectives of Finished Goods Inventory—A to Z Issues 202 Multiple Warehouses 204 Physical Distribution Management 205 Multi-Echelon Channels of Distribution System 205 Seasonal Inventory. Problems of Seasonality 206 Seasonality—Some Issues 206 Dynamic Programming 208 Assumptions in Seasonal Buying 209 Buying in Stages 210 .. 202-205 206-211 ..212-223 Project Inventory Concept of Project Inventory 2/2 Project—Major Features 2/2 PERT and CPM 2/4 PERT/CPM Major Aspects. 2/4 Problems of Project Inventory 217 Construction Project 218 Network Construction 218 Three Time Estimates in PERT 2/9 Crashing of Activities 219 Coordination of Supplies 220 Forward and Backward Pass 222 Critical Path and Resource Planning 222x Contents 29, 30. 31. 32. 33. Spare Parts Inventory Spares Distinguishing—A to Z Features 224 Categorisation of Spares 227 Overhauling of Spares 227 Rotable Spares 227 Insurance Spares 228 Maintenance Spare Pats 228 Surplus Obsolete Scrap (SOS) Inventory Examples of Obsolescence 230 Surplus Items 230 Definition of Obsolete Items 231 Obsolescence—A to Z Reasons 231 Challenge of Obsolescence 233 Issues on Obsolescence 233 Remedial Measures 235 Movement Analysis 23 Disposal Action 236 Costs of Holding Dormant Items 236 .. 230-237 Inventory Simulation. Concept of Simulation 238 Need for Simulation 238 Examples of Simulation 238 Business Game 238 Application of Simulation 239 Mathematical Optimum 243 Game Theory 243 Using Simulation in Inventory 244 Dynamic Programming — 246 Finished Goods Application 249 .. 238-250 Section IV PROCUREMENT OF MATERIALS Purchasing Strategies. Salient Features of Buying 253 Profit Leverage and Procurement 2 Parameters of Procurement 255 Procurement Objectives 255 .. 253-256 Purchase Cycles and Buying Systems. Purchase Cycle 257 Procurement Cycle 257 Indenting 258 ... 257-262Contents Xi 35, 36. Placing of Orders 259 Chasing and Follow-Up 259 Logistics and Shipping 259 Inspection, Acceptance and Rejection 260 Settlement of Bills 260 Lead-Time 267 Documentation — 26/ Ordering System 263-270 Forward Buying 263 Hedging 264 Speculative Buying 264 Stockless Purchasing 264 Blanket Order 265 Systems Contract 265 Rate and Running Contracts 266 Cash/Bazaar Purchases 266 Tender Procurement 267 Sub-contracting 268 Reciprocity 268 Disposals 268 Ordering—A to Z Systems 269 Indent Control 270 Lead Time. 271-274 Concept of Lead Time 271 Lead Time Control 271 Administrative Lead Time 272 Manufacturing and Transit Lead Time 272 Tips for Follow-up 273 Fluctuations in Lead Time 274 Right Place of Delivery 274 Right Quantity 274 Pricing .. .. 275-281 Steps in Pricing 275 Price Information 276 A to Z—Influencing Factors 276 Price Setting 277 Market Skimming Strategy 277 Open End Pricing 277 Cost Plus Pricing 278 Price Modifications 278 Break Even Analysis 279 A to Z—Aspects of Pricing Strategy 280Contents 37. 38. 39. 40. .. 282-291 Quality and Total Quality Management (TQM). Responsibility for Quality 282 Quality Issues in Six Sigma 282 TQM Philosophy 283 Quality Assurance 285 'TQM’s Components 286 Quality Circles 287 Tools of TQM — 288 Reliability Engineering and TQM 289 TQM and Supply Chain 290 Inspection and Sampling. Objectives of Inspection 292 Acceptance Sampling 292 Quality Specifications 293 Sample Size 293 ‘Consumer Risk and Producer Risk 293 Operating Characteristic Curve 294 Acceptance/Rejection/Rectification 294 Military Standard 105 .D Plans 295 Dodge and Roming Plans 295. Bowker and Goode Plans 295 Quality Circles 296 Yield Loss 296 Input-Processing Output 296 .. 292-298 Materials Handling. Handling Costs 299 Handling—A to Z Issues 299 Concept of Materials Handling 300 Manual Handling 300 Problems Encountered in Materials Handling 30/ A to Z Tips for Reducting the Handling Cost 302 Management Role 303 Handling Rules—A to Z 303 A to Z Ideas on Handling Cost Control 305 Mechanised Handling. Need for Mechanisation 307 A to Z Choice of Equipment 307 Cost-Benefit Analysis—A to Z Aspects 308 Handling Precautions 308 Handling Dangerous Substances 3/1 .. 307-316Contents xiii M1 42. 43, Handle Equipment 312 Fixed Path Equipment 313 Variable Path Equipment 313 Elevating Devices. 3/3 Role of Pallets 3/4 Containerisation 314 Transporting Equipment 315 Forklifts 3/5 Conveyor Systems 3/5 Automatic Warehousing 316 Seasonal Buying Seasonality—A to Z Issues 317 Dynamic Programming 317 Optimal Buying—A to Z Strategy 320 317-325 Governmental Buying Role of DGS & D326 Features of Public Buying 327 Tender Process 328 Inspection 329 Limitations in Public Buying 330 Equality of Vendors 330 Foreign Purchases Objective of Import Control 331 Items Covered in Imports 333 Categories of Importers 333 Sponsoring Authority 333 Licensing Authority 334 Documentation for Importing 334 Import Procedure 335 Problems of International Buying 336. Trade Reforms 337 Documentation Issues—A to Z 338 Indigenisation Relevance of Import Substitution 342 A to Z Benefits of Indigenisation 342 Problems in Indigenisation—A to Z 343 Intellectual Property Rights Trips 344 Strategy of Technology 345 R&D and Technology 345xiv Contents 45. 46. 47. 49. Source of Supply. Right Source Concept 346 Source Location 346 Supplier Selection—A to Z Parameters 347 Developing Resource 348 Number of Sources 348 Monopol 349 Ancillary Development 349 Problems of Ancillary Units 349 Global Instability and Sourcing (350 Key to Strategic Sourcing 352 Sharing Information 352 Buyer-Seller Relations.. Need for Cordial Relations 354 Buyer's Role in Improving Relations 354 Basic Requirements 355 Role of Buyer/SCM — 355 A to Z of Seller's Frustrations. 356 A to Z of Buyer’s Problems 357 Vendor Rating . Objectives of Supplier Rating 359 Four Stages of Supplier’s Evaluation 359 AtoZ Issues on Rating 361 Rating Methods 361 Vendor Managed Inventories. 363 Subcontract Management. Subcontractor Management 365 Total Cost Approach—A to Z 365 Advantages Over Engaging Specialised Agency 366 Supplier Evaluation/Registration in Approved List 367 Evaluation at Post Supply Stage 367 Negotiations .. Why Negotiate 375 Definition of Negotiation 375 Negotiation Parameters 376 Situations to Negotiate 376 Important Aspects of Preparation 377 A to Z Approach to Negotiation 378 A to Z Qualities of Negotiator 379 GST and Negotiations 380Contents xW. 50. 51. Business Negotiations 387 Price Negotiations 382 Preparations for Negotiation 383 Negotiation Techniques 384 ‘Theory of Bargaining 384 Learning Curve 385 Negotiation Checklist Improve Your Results 386 Ato Z Negotiations 387 Legal Aspects of Procurement. Logical Needs 389 AtoZ of Purchase Order 389 Bid Evaluation Criteria 390 ‘Term of Purchase 397 INCO Terms 391 Law of Agency 392 Negligence 393 Major Stipulations 394 Inspection and Acceptance 394 Warranties 395 Breach of Contract and Damages aay Works Contract 395 Special Clauses 395 Arbitration and Sales Tax Laws 396 Octtoi 396 Excise Formalities 397 Contract Management... Meaning of Contract 398 Various Aspects of Contract 399 Offer/Acceptance/Consideration 399 Fraud and Mistepresentation 400 Liquidated Damages 400 Penalty and Bonus 400 Performance 401 Inspection 401 Contract Packaging 407 Breach of Contract 401 Disputes 402 Termination 402 Warranties 402 Types of Contract 403 Settlement of Bills 404 Contract—A to Z Concepts 404Contents: 52. 53. Contingency and Agency 407 Revocation of Authority 409 Effect of Agency on Contracts and with Third Persons 4/1 AtoZ Right Contract 472 Subcontracting 4/4 FIDIC (International Federation of Consulting Engineers) 4/4 Make-Buy Decisions. Important Considerations 415 Reasons for Manufacturing 416 Preference for Buying—A to Z 4/7 Illustration on Make-Buy with Costs 418 Constant Review of Make-or-Buy Decisions 419 Section V WAREHOUSING AND LOGISTICS MANAGEMENT Logistics Management. Introduction to Logistics Managment 423 “Push” and “Pull” Logistics 424 Mission of Logisti 424 Activities in Logistics 424 Integrated Logistics 425 Five Operating Objectives of Logistics 426 Logistics Performance Cycles 426 Communication Systems in Logistics 427 Various Aspects of Logistics System Design Logistics Strategy 428 Logistics Process Design 429 Warehouseing — 43/ Logistics: Performance Measurement and Reporting 432 Desirable Characteristics of a Performance Measure 433 Strategic Performance Metrics 433 Order Planning Metrics 434 Supplier Performance Measures 434 Delivery Performance Measures 434 Transportation... Macro Level Decisions 435 A to Z Parameters on Choice of Transport 436 Indian Railways 437 Freight Forward Scheme 437 Road Transport 438 International Shipping 439 Incoterms. 439 Transport Costs. 440Contents xvii 55. 56. 57. Sea Transport 440 Air Transportation 442 Using Inland Waterways for Freight Transportation 443 Relevant Issues 445 Reverse Logistics 446 Air Mode Clearance 448 Integrated Transport Plannin ‘Transportation Infrastructure 457 Principles of Transport Functionality 452 Transportation Service 452 ‘Transport Service Providers 452 Economie Drivers of Transportatoin Cost 453 Packaging... Buyer's Role in Packaging 454 Important Aspects of Packaging Railway Packing Conditions 455 Containerisation 455 Labelling and Packing 456 Tips for Protection 457 Packing—A to Z Requirements 458 Cartoning 460 Packing Material 460 Economics of Packaging 461 Insurance Management. Risk Analysis 462 Risk Avoidance 462 Insurance Contract 463 Fire and Natural Calamities 463 Erection All Risks (EAR) Insurance 464 Marine-cum-Erection (MCE) Policy 465 Contractors All Risk (CAR) Policy 466 Contractors Plant and Machinery Policy 466 Machinery Breakdown Policy | 467 Boiler Explosion Insurance 467 Electronic Equipment Insurance 468 A to Z of Insurance Policies 469 Loss Minimisation 469 Indemnification 470 Fire Insurance 470 ‘Consequential Loss Policy 471 Marine under Insurance 471 ‘Transit/Motor/Burglary 472 Storage-cum-Erection Insurance 473 451-453xvi Contents 58. 59, 60. Importance of Stores Relevance of Storage 474 Profit Centre Potential and Return on Investment (ROI) 475 Need for Warehousing 476 Demand for Warehouses 476 Warehousing as a Business 478 Central Warehousing Corporation 478 Services by Warehouses 478 Public Distribution System 479 Super Markets 479 Warehouse Management Systems (WMS) 480 Improvements in Warehouse 482 Future of Warehousing 483 Organising the Warehouse. Concept of Custodian 485 Duties of a Warehouse Manager 485 Objectives of Warehousing 486 Interface Problems 486 Corporate Social Responsibility 486 Principles of Stores Organisation 487 Organisational Factors 487 Why Store At Al? 489 Need for Storage 489 Objective for Storage 490 Manpower Requirements 490 Responsibilities of Store Manager 497 Location and Layout Location Considerations 492 Raw Material Storage 492 Finished Goods Warehouse 492 Centralisation and Decentralisation 493 Layout Considerations. 493 Layout Procedure 494 Aspeets of Security and Safety 495 Classification of Materials 496 Level of Operations 497 Layout Valuation — 497 Cost of Storage 499 Quantities to be Stored 499 Location 501 Multiple Warehouses 502 Location and Layout 503 492-505Contents xix 61. 62. 63. . 506-511 Physical Aspects of Stores. Physical Aspects 506 Layout and Construction 509 Storage Equipment 5/0 Safety Measures S11 Firefighting and Preservations Hazards 512 Storage Preservatives 513 Special Items Preservative 516 Application of Preservatives Guidelines 517 Pilferage Protection 518 Storage Precautions 519 Metal and Spare Parts 5/9 Machinery Spares 520 Stores Operating Systems .. Factors in Stores System 521 A to Z Types of Materials 521 Consumables/Machinery Spares/Tool Cribs 523 Work in Progress 523 Finished Goods/Bonded Warehouse 524 Organisational Factors 525 Inventory Problems 525 . 512-520 521-529 Management of Receipts. . 530-545 Criticality of Receipt Management 530 Receipt Determination 537. Purchase Requisitions 537 Receiving Process/Sourees 532 Inspection Infrastructure 533 Goods Receipt Note 533 Rejected Materials 534 Shortages and Excesses 534 Endorsement of Bills S35 Requirement Determination 535 Receiving Process 537 Physical Receipt 537 General Inspection Quality Assessment 538 Sampling Plans 539 Role of GRN 540 Bill Endorsement 541Contents 65. 66. 67. 68, Management of Outputs/Issues. Importance of Output Management 546 Item Issue Systems 546 Physical Issue Difficulties 548 FIFO Issue System 549 Emergency Issues 549 Return to Stores 549 ‘Management of Outputs 550 Procedure for Issue 550 Physical Management of Issue 552 Consumption Control 554 Costing the Issues 554 Pack and Despatch 554 Warehousing Costs Storage Costs—A to Z ‘556 Overstocking Cost 558 Stockout Cost 558 Order Processing Charges—A to Z Issues 558 Service Level 560 Stock Verification, Verification Theme 567 Reasons of Discrepancies 561 Verification Agency 562 Role of Warehouse Personnel 563 Verification Pro S64 561-565 Issue Pricing and Valuation... Importance of Valuation 566 Valuation Strategy 566 Stock Valuation 570 Example of Valuation 577 FIFO vs. LIFO Accounting 573 Standard Cost Accounting 573 Financial Accounting 573 Distressed Accounting 574 Legal Aspects of Storage. Legal Issues 575 Customs Duties 575 Procedure of Clearance 576 Excise Formalities 577 Removal of Goods 577 .. 575-578Contents xxi 70. 1. 72. MODVAT Scheme 577 Procedure for Credit 578 Sales Tax Formalities 578 Octroi Formalities 578 Recent Trends of Automation in Warehousing.. 579-590 Automation 579 Other Automations 587 The Past 581 Automation in Control 582 Future Trend 583 Lesson for Indian Companies 583 Lease vs Ownership S84 Moving Up the Value Chain 585 Bonded/Coldstorage 585 Rail Warehousing 586 Hub and Spoke Model 587 Challenges Facing Developers. 587 Essential Features in WMS ‘588 Retailing and Warehousing 589 Bharati-Walmart 589 Problem Areas 590 Private Brands 590 Hazardous and Radioactive Materials 591-596 Introduction 997 Issues in Logistics of Hazardous Materials 592 Managing Radioactive Material Logistics 593 Issues in Logistics of Radioactive Materials 594 Safety Management. 597-611 Significance of Safety 597 Safety Principles and Guidelines 599 Accident vs. Incident 599 Simulators for Training 599 Handling Mistakes and Failures 599 Responsibility for Safety 600 How Work Safety Permit 600 Fault Tree Analysis 603 Nuclear Safety 605 Accident Prevention 605 House Keeping and Safety 608 Fire Prevention and Precautions 609 Electrical Safety Precautions 6/0xxii Contents 73. 74. 75. 76. Waste and Scrap Control 612-618 Concept of Waste 612 Limited Resources 613 Aspects of Sorting of Scrap 6/4 Wastes in Warehousing 6/4 Control of Off-cuts 614 Technical and Managerial Research 615 Disposal of Scrap and Waste 615 Waste Reduction Tips 676 Section VI FINANCIAL ISSUES IN MATERIALS MANAGEMENT Basics of Finance for Materials Management. Financial Issues in MM 621 Balance Sheet Structures 622 Depreciation and Depletion 624 Depletion 626 Use and Abuse of Balance Sheet 628 Issues of Balance Sheet 628 Cost Control Systems... Cost Control 630 Cost Reduction Kit. 637 Cost Concepts 632 Marginal Cost 634 Standard Costing 635, Marginal Costing in Materials Management 635 Value Analysis.. Concept of Value 637 Scope of Value Analysis 637 Cost, Price and Value 638 Types of Value 638 Value Management 639 Items for Value Analysis 639 Key Questions of Value Analysis 640 ‘Techniques of Value Analysis 640 Problem Areas 642 Why Value Analysis 643 Organisation for Value Analysis 644 Steps for Value Analysis 645Contents xxi 7. 78, 79, 80. 81. .. 646-651 Leasing of Equipment. Concept of Leasing 646 ‘Types of Leases 647 Advantages in Leasing 647 Problems in Leasing 649 Future of Leasing in India 657 Life Cycle Costing. Introduction 65 LCC Concept 653 LCC Elements 654 AwWZoLCC 654 Capital Equipment Buying .. Need for Investments 657 Macto Factors and Investment 65 Capital Equipment Buying vs Conventional Purchasing 659 Economic Appraisal 660 Investment Analysis Example 662 MAPI Investment Method 663 Replacement of Equipment 664 Second-hand Equipment 664 Working Capital Inventory... Issues on Working Capital 665 MIS for Working Capital 668 Concepts on Working Capital (WCM) 670 RBI Guidelines on Working Capital 670 Working Capital Cycle 671 Creditor’s Management 672 Cash Management 672 Debtors Management 672 Audit and Materials Management. Why Audit — 674 ‘Types of Audits 674 CAG Audit 675 Operations Audit 676 Management Audit — 676 Management Audit—Appraisals 677 EDP Audit 678 Social Audit 679 Top Management and Boston 78 Approach 679 Materials Audit — 680 Audit Professionals 687 Japanese 5S and Audit 681 .. 652-656xxiv 82. 83. 84, Contents Section VII ORGANISATIONAL AND ETHICAL ISSUES. IN MATERIALS MANAGEMENT Professional Ethics Ethical Scenario 685 Corporate Double Standards 685 Significance of Ethics 686 Professionalisation 686 A to Z Tips of Ethics Improvement 687 Buyer Beware 688 Philosophy of Ethics 688 Professional Process 690 Ethical Process 691 Human Resource and Training—Vital Aspects of HRD Vital Aspects of HRD 692 A to Z Issues of HRD 693 A to Z of Repetitive Act in Material Management 694 A to Z of Non-repetitive Jobs in Materials Management 695 A to Z Role of Training 697 Leadership and Materials Management. A to Z Leadership Qualities 700 Decision-Making Conduct 702 Leadership Tasks—A to Z 703 A to Z Innovation and Creativity 705 Winners and Losers 706 Section VIII IT INTEGRATION AND PERFORMANCE REPORTING IN MATERIALS MANAGEMENT Inevitable Computer Invasion by Computer 709 MIS (Management Information System) 710 Hardware 7/0 Sofiware 712 Information Storage 713 A to Z Disadvantages 7/3 A to Z of Computer Advantages 7/5 Computers and Materials Management — 776 Mechatronics 71986. 87. 88. 89. Bibliograph, Questions. Index Role of IT in Materials Management Introduction 721 Objectives of IT in Material Management 722 IT as an Enabler of Material Management 722 Existing Information Technology Tools and Applications in Material Management _ 723 Emerging and New Information Technology Solutions for Material Management 726 Benefits of IT in Material Management 729 Challenges in Implementing IT in Material Management 729 Communication in Materials Management. .. 730-735 Benefits of Communication 730 Communication Barriers and Media 730 A to Z of Internal Communication 737 A to Z of External Communication 732 A to Z Tips for Improved Communication 723 Role of Communication 734 Reporting Use of Reports 736 Monitoring Records 736 Systems Design 737 Source Documents 737 Exception Reporting 737 A to Z Contents of Reports. 738 Computer Reports 739 Office Automation 739 Reporting and Communication — 740 .. 736-740 Evaluation of Materials Management. . 741-753 Need for Evaluation 741 Internal and External Agencies 741 Methods of Evaluation 742 A to Z Ratio Analysis 742 Note on Ratio Analysis 745 A to Z of Financial Ratios. 746 Additional Ratios 747Preface This well-organised comprehensive book on Materials Management is presented as Handbook written specially for Indian requirement. ‘This book clearly analyses all the concepts, processes and applications of Materials Management, Supply Chain Management, Logistics Management, and Multimodal Transport. It covers basic principles and practices concerning these areas as well i$ to its application in Indian conditions. Here we have tried to explain in a simple language the concept of integrated materials management with the help of diagrams, charts, photos and solved examples, covering all the aspects of materials management. The book provides a number of solved practical problems and examples for better comprehension. It also supports theory with short cases, to present the subject-matter with right perspective. The suggestions of practising professionals, academicians and researchers have been appropriately incorporated in this book. An attempt has been made to strike a balance between conceptual frameworks and practical aspects of materials and its management. Target Audience Intended primarily as a textbook for graduate students pursuing materials management courses in Indian universities, this comprehensive title will also serve as a ready reckoner for the executives practising in areas such as materials, logistics, SCM, purchase, warehousing and inventory management. The students of business management, engineering, Indian Institute of Materials Management (IIMM) diploma and other related programs/courses will find this book extremely useful. This book will also provide the required support materials to managers and students who are specialising in other functional areas but wish to have understanding of this subject. Decades of in-depth intensive interaction with students, executives and top management has enabled us to provide a rigorous, all embracing treatment in this key field. The title offers strategic solutions to the problems faced by materials executives in this dynamic world, in an easy to understand manner. The title reflects current knowledge about skills development and confidence building. There may be some repetitions, which have been made to fulfil each chapter's requirement and help them stand alone. xxviiXXViii_—_ Preface Content Structure This book is divided into eight cohesive sections of 89 chapters. These sections are designed Jooking into the present requirements and also the likelihood of (scope for) future developments. First Section is Materials Management Concepts. This comprises eleven chapters, dealing with the basic topics such as Integrated approach to Materials Management and to Supply Chain Management. This section also covers basic concepts related to Business Logistics, Role of Top ‘Management and Materials Management, User Interface of Materials Management, Financial Interface of Materials Management, Forecasting and Materials Management, Materials Intelligence, Materials Management—Planning and Budgeting, Production Planning and Control (PPC), Manufacturing Strategies and Materials Management, Second Section, Identification of Materials, covers related topics through four chapters, viz Identification by Codification, Bar Code Technology, Standardisation Variety Reduction and Radio Frequency Identification (RFID). Third Section on Inventory Management comprises of sixteen chapters covering areas such as_ Inventory Fundamentals, ABC Analysis, Multi Unit Selective Inventory Control (MUSIC-3D), RBI Guidelines on Inventories, Economic Order Quantity (EOQ), Practical P&Q Inventory Models, Materials Requirement Planning (MRP), Inventory under Uncertainty, Just-in-Time (JIT), Work in Progress (WIP) Inventory, Finished Goods Inventory, Seasonal Inventory, Project Inventory, Spare Parts Inventory, Surplus Obsolete Scrap (SOS) Inventory and Inventory Simulation. Fourth Section on Procurement of Materials comprises twenty one chapters. This includes Purchasing Strategies, Purchase Cycles and Buying Systems, Ordering Systems, Lead Time, Pricing, Quality and Total Quality Management (TQM), Inspection and Sampling, Materials Handling, Mechanised Handling, Seasonal Buying, Governmental Buying, Foreign Purchases, Indigenisation, Sourcing of Supply, Buyer-Seller Relations, Vendor Rating, Subcontracting Management, Negotiations, Legal Aspects of Procurement, Contract Management and Make or Buy Decisions. Fifth Section on Warehousing and Logistics Management comprehensively covers the related issues in twenty one chapters. The section includes Logistics Management, Transportation, Integrated Transport Planning, Packaging, Insurance Management, Importance of Stores, Organising the Warehouse its location and layout. Physical Aspects of Stores, Firefighting, Preservations, Stores Operating Systems, Management of Receipts, Management of Outputs/Issues. It also considers Warehousing Costs, Stock Verification, Issue Pricing, Valuation and Legal Aspects of Storage. It also describes Recent Trends of Automation in Warehousing, Managing Hazardous and Radioactive Material—Logistics, Safety Management, Waste and Scrap Control Sixth Section, Financial Issues in Materials Management, teaches basics of Financial Management, a must-know for Materials Management professionals, in eight chapters. This predominantly includes, Cost Control Systems, Value Analysis, Leasing of Equipments, Life Cycle Costing Capital Equipment Buying, Working Capital Management, Inventory and very important issue of Audit and Materials Management. Seventh Section describes organisational and ethical Issues in Materials Management in three chapters. This broadly presents related material on Professional Ethics, Human Resource and Training as vital aspects of HRD and Leadership issues as required for Materials Management Eighth Section on IT Integration and Performance Reporting in Materials Management has five chapters. This section describes the inevitability of computer and role of IT in MaterialsPreface xix Management. Further, communication issues in Materials Management are covered along with Performance reporting and evaluation of Materials Management function. A question bank of more than 600 issues, many taken from question papers of different examinations has been placed after Section VIII. These questions can be quite helpful to the readers specially, the students in their academic endeavours. Through this work, we have sown the seeds of Materials Management in the fertile minds hoping that some of the seedlings would become sapling and ultimately turn into a healthy huge tree bearing fruits, and that the process goes following the underlying philosophy of “SARVE BHAVANTU SUKHINO”, Let all the people on this earth remain happy. P. Gopalakrishnan Abid HaleemPreface to the First Edition Today, Materials Management has gained acceptance in all developing economies. The materials department accounts for over 60 per cent of the cash outflow and 90 per cent of working capital of most of the organisations. With every Five Year Plan, the size of investments has been increasing, offering great challenges and opportunities to the materials professional T have had the privilege of intensive, indepth interaction with numerous senior executives engaged in materials, finance, production and warehousing management, inventory control, and so on, who attended the courses on Materials Management conducted by me in the Administrative Staff College of India, Hyderabad, as well as those conducted by leading private and public sector organisations. Experience gained in training, research and consultancy in Materials Management during the last three decades in India and abroad, including my role as a United Nations Advisor during 1979-1981, has convinced me the need for a Handbook on Materials Management; for, there is no single Handbook available in the country today, which covers all aspects of Materials Management. This research-based Handbook on Materials Management is divided into 6 parts: Warehousing (Chs. 1-13), Cost Reduction (Chs. 14-29), Inventory Control (Chs. 30-42), Purchasing Strategies (Chs. 43-54), Materials Management Policy (Chs. 55-67), and an Integrated Policy Case (Ch. 68). ‘The reader may note that the findings here could differ from organisation to organisation, depending on the product, organisational culture, and type of organisation (private or public sector or Govt. department/undertaking) The book has certain unique features. Each chapter ends with 10 points to ponder, which also act as a summary. Another distinguishing feature is the provision of A to Z tips for improvement in Materials Management. The Integrated Policy case given at the end is aimed at improving the analytical skills of the reader. Each chapter is compact, comprehensive, concise and application oriented, ‘The text is primarily intended for students of Engineering and Business Management. It is also addressed to practising executives involved and interested in marketing, production, inventory, procurement, finance, materials function, logistics and inspection. waiXXxxii___Pretace to the First Edition I wish to acknowledge the help rendered by a large number of organisations and senior executives, while preparing the manuscript, by answering the research survey questionnaires, which form the basis of this text. I thank the many colleagues, professionals and management students who encouraged and assisted me in writing this book. Also, the assistance provided by a large number of petrochemical organisations by giving data in the preparation of Ganapathy Ram Petrochemicals we is acknowledged. I also wish to thank Ms. Mahalaxmi Ramakrishna for her neat typing of the manuscript. Finally, Tam indebted to my wife, Indira, who has significantly contributed to this book by suggesting various ideas and correcting the manuscript; besides, her patience and understanding during the preparation of the manuscript was remarkable. During my four decades of association with her, she has convinced me that the housewife is the best materials manager in the world! P. GopalakrishnanAcknowledgements We are grateful to a large number of organisations Materials Managers, for their intensive, and enriching interaction with us and providing material for the benefit of the entire academic community involved in supply chain/materials management from private, autonomous and government institutions. In particular, we are thankful to past presidents of IMM—Founder Hariharan Madhav Capoor, A.K. Sharma, J.N. Mallya, $.K. Jain, Venkat Reddy who participated in ASCI materials management training programes. Mr. Venkataraman, GM Materials, Ashok Leyland and Mr. Venkatachalan, Senior Vice President, Ms. Bisma Mannan, Prof. Mohammad Asim Qadri, Mr. Sanjay Kumar and Mr, Javed Khan and many other researchers for their useful contribution in updating this book. We profusely admire the publishers PHI Learning for their meticulous processing and bringing out this updated book in a remarkably short time. Dr. Gopalakrishnan is indebted to his wife—Indirakrishna for her blind support to his ventures and withstanding his ideosyncracies during the last six decades! The patience and understanding she showed was remarkable when she withstood several calamities. Professor Abid Haleem is grateful to his father Dr. Abdul Haleem, for his persistent motivation, He is also grateful for the help of wife Shahida and children Hammad and Ibrahim, and support that came from a number of valued sources; friends, colleagues, students, researchers, members of professional associations like IIMM, ASCI, International Federation of Purchasing and Materials Management (IFPMM) (US), American Supply Institute and Overseas, professional assoc academicians from autonomous institutes and Government universities. P. Gopalakrishnan Abid HaleemSECTION I Materials Management Concepts Chapter 1 + Integrated Materials Management Chapter 2. * Supply Chain Management Chapter 3. * Business Logistics Chapter 4 © Role of Top Management and Materials Management Chapter 5 * User Interface of Materials Management Chapter 6 * Financial Interface of Materials Management Chapter 7 * Forecasting and Materials Management Chapter 8 * Materials Intelligence Chapter 9 * Materials Management—Planning and Budgeting Chapter 10 © Production Planning and Control (PPC) Chapter 11 ¢ Manufacturing Strategies and Materials ManagementIntegrated Materials Management SCOPE OF MATERIALS MANAGEMENT The concept of materials management has been known since time immemorial. Kautilya’s Arthasastra describes the scope of materials management as follows: This Si Praveno Vakpatu Dheeman Swami Bhaktscha Nischayaha ! Pralubdaha Satyavadi Cha Bhandgari Sa Ishyate !! skrit sloka suggests that the materials management should be truthful, adept in the art of communication, intelligent, loyal to the organisation and should suppress personal greed and obviously serve the user!! MATERIALS MANAGEMENT—SOME ASPECTS (a) (b) (c) @ e) Supplies of essential commodities are often in excess when not needed, and scarce when required. To effectively combat the uncertainties in their availability, the management has to adopt aan integrated approach to materials management, i.e. purchase, stores and inventory control under the materials manager One of the earliest recorded narratives of the scope of materials management is the story of Joseph in the Old Testament, giving an account of how he procured grain during the seven years of plenty to provide for the following seven years of famine. Due to opening up of economy, the scope of materials management has increased in a challenging fashion, forcing the materials manager to acquaint himself with the latest techniques. ‘The industrial age has given way to the information age, calling for unmatched kind of organisations filled with innovations—as success in the past does neither assure continued success, nor a good reputation or bigger size in future as trillions of rupees are invested in production of assets and stocks. 34 Handbook of Materials Management (Q) In today’s competitive globalised economy, surv ability to rapidly innovate and improve. (g) As a result an increasing search is on for methods, processes that drive improvements in quantity, costs, profits and productivity. (h) Companies must improve at a faster rate than their competitor if they became or remain leaders. (i) To confront this challenge, enlightened multinational leaders are adopting, and adapting “best-in-class” manufacturing practices and improvements in materials management systems. (j) The materials management activity is not a purpose in itself, it is a necessity of which the production units and the materials department, not only for a short term, but sometimes for a long term, imposing a rigorous definition of each person's responsibilities (k) Considering the mutations in the industrial equipment’s technical complexity and the accidental failure’s catastrophic consequences, from the economic and social points of view, it should be assigned as a new dimension to materials activity. al of companies also depends on thet () The present uncertainties involving many industrial companies future, due to global uncertainty, natural disasters, financial crises, inflation, are obviously a great challenge to the professional materials manager in order to reduce the overall production cost. ‘The materials activity evolution is described in Figure 1.1 to describe the scope of materials management. Proper Materials Management can Improve Profits Here the materials enter an organisation as raw materials, components, spare parts and consumable items. Raw materials get converted into work in progress, and finally into finished goods that are sold in markets Spares and consumables are needed for some other functioning of production machinery. It can be seen that on average, materials input account for 60 per cent, with labour, salaries, taxes accounting for 30 per cent, remaining 10 per cent profitability. Let us consider a firm's turnover as & 100 crore. The aim of any firm is to increase corporate profitability from 10 to 13 crore. ‘One way is to increase the sales turnover by 30 per cent with additional advertising, salesforce giving the additional & 3 crore profit. It should be more, as another way is to ‘decrease’ the materials) put cost by 5 per cent or 3 crore profit—[5 x 60/100]. Hence we have 5 per cent reduction in materials. Cost requires some effort in the inflation inbuilt global economies, arresting the price increase— is the same as increasing sales by 30 per cent through additional marketing efforts. ‘Thus the ratio for profit contribution is six times more by materials-purchase, stores-inventory control, than the marketing efforts. Hence the importance of materials management and the objective should be directed to this.Chapter 1+ Integrated Materials Management Cooperation (0) Good Contracting Transfer (c} Good Activities Information's Exploit Department Dapariaeat Production aterals_) Maintenance Manager Purchase Store Invention Control Evolution Manager Production / Maintenance Staff Transfer Activities and Staff Y vat (1) Methods of maintenance (2) Achievement (3) Planning, programming (a) Good Materials Set Up Figure 1.1 Materials activities. Return on Investment (RO!) Improves with Materials Management ‘The major corporate objective is to increase in the return on investment. The return on investment is defined as return/investment. If you want to increase ROI, then numerator has to increased—this depends on market conditions—or decrease the denominator. Profit Investment Profit Fixed Assets + Current Assets Fixed assets constitute the money already sunk in building, plant, machinery, and utilities, whose capacity utilisation only can be increased. Bulk of current assets 90 per cent working capital is tied up in stock of all varieties. To increase the ROI, the materials manager should examine the scope of reducing all kinds of inventories without affecting the primary objective of servicing the user in the least costly manner without affecting quality of service of providing required material to user,6 _ Handbook of Materials Management OBJECTIVES OF MATERIALS MANAGEMENT Materials management is a service department offering best quality of service to the user at the lowest cost. The material's objectives results out of general corporate strategies, which is an industrial firm’s case, focus on profitability, growth, security, ete. The overall profitability appears to be a priority for the great majority of industrial firms—general corporate objectives, the respect restrictions, and in particular the regulations—micro and macro levels—related to security, identify the action variables that available for achieving the objectives, methods and means of materials management, as well as estimation and control the variables. In this context five olympic zeroes are relevant. These include zero breakdown, zero failures, zero stock, zero delays, zero paper— easily said but you have to work hard to achieve these. The systematic analysis of the materials objectives Table 1.1 gives per cent material cost in industries. ‘Table 1.1 Materials Input Cost in Per cent Industry groups Per cent material cost Fabrication, Construction, Projects, Electrodes, Petroleum Refining Over 75 Commercial Vehicles, Cotton, Yarn, Furniture, Jute, Sugar, Scoots, Wool, Earth moving machinery 65-75 Bread, Cables, Textiles, Dyestuffs, Power generation, Tyres, Hotels, Refrigeration, Ship building, Equipment 55-65 Cement, Chemicals Electronics, Engineering, Explosives, Paper, Machine tools, Pharmaceuticals, Agriculture Asbestos, Cigarettes, Fertilisers, Ferto alloys, Newsprints, Newspaper, Steel, Transportation, R&D is of balance sheets of The above materials input cost per cent has been obtained by an anally a large number of companies. APPROACH AND ORGANISATION CHART The 7S approach of the Harvard—Boston group is also used to determine the organization structure. These are (1) Super ordinate goal, (2) Strategies, (3) Structure, (4) Systems, (5) Skills, (6) Staffing and (7) Styles of management. As you control five fingers in your hand through wrist/forearm, similarly top management must control the interfaces, problems between the five departments through coordination meetings. Sometimes the words such as chain manager/business logistics are also used and these are discussed in further chapters.Chapter 1 + Integrated Materials Management 7 Restrictions Input Flow Materials Means: PurchaseiStore/Staft = Equipment —» Costs ~ Materials = Documentation Manager Materials ‘Quality Materials Indicators Objectives Action Input Variablos Flow [ Budget and Materials |. Technical Objectives Quality [ Actions Related to the Means =Cos's Management Materials Staff The Estimation and Control User Satisfied at =Reliabilly (organisational chart, Lowest Availabilty motivation, ete.) Cost of | Financial Objectives | | - Materials and Replacements| Service | Human Objectives (stock's optimization) + Reliability “Security ~ Cooperation in Materials - Materials = Work Conditions = General Documentation Over the Equipment Indicators Figure 1.2 Systematic analysis of materials objectives. In order to achieve the corporate goals of increased profitability, improved ROI and excellent service to the user, materials management can be defined as the function responsible for coordination of planning, sourcing, purchasing, moving, storing, inventory control, controlling materials, disposal of obsolete-scrap (getting the materials inspected)—in an optimum manner so as to provide a predivided service to the customer at a minimum cost. If some of the above functions are not coordinated, but separately handled, there is bound to be a conflict of interest/delays/arguments, thereby defeating the corporate objectives. The purchasing department, if allowed to work independently, may go in for bulk purchasing to benefit quantity discounts, resulting in suboptimisation, without even bothering about whether they can be accommodated in the warehouse. You have to balance the conflict of interest from the viewpoint of total organisations. Integration helps to minimise conflict of interests by proper coordination of planning, purchase, stores, inventory control, obsolescence control, source development, vendor rating, monitoring all activities with better control and accountability. Through centralisation of authority, the integrated materials manager is responsible for all materials function. User departments can direct their problems relating to materials to one authority. This enables the evaluation of materials function in an objective fashion. This creates an atmosphere of trust and better relations between departments. Great speed and accuracy is possible as all activities are integrated with lower costs, better inventory turnover, reduced stockouts, reduced working capital and easier adaptability and better team spirit. We will discuss these activities and subfunctions in the following chapters.8 Handbook of Materials Management ORGANISATIONAL INTERFACES In the integrated set up, the materials manager—nowadays called supply chain manager, logistics manager, which will be discussed in Chapters 3 and 4 in detail—reports to the chief executive ot top managing director. In materials intensive organisation—like crude in refinery, cotton in textile, steel in fabrication—the top man himself acts as the materials manager in view of the high proportion of inputs in the final product. Suitable manpower in the form of planning, purchase, warehousing, inventory, computers, transport, source development. The organisation may be commodities or product groupwise, purchasing. In muliplant activities, central purchasing will take care of common items—like Central Government's Director General of Supplies and Disposal/DGS&D—at the headquarters, liaising with required staff in each plant. The materials managers in an integrated set up has to interact with departmental heads of finance, marketing operations and human relations. These interfaces with other departments will be discussed in great depth in the subsequent chapters. Coordination meetings are held daily, weekly, monthly—usually presided over by the top executive—for sorting out minor/major issues between departments. Figure 1.3 indicates a typical organisational chart. The power of delegation depends upon individual organisation and usually informed by a policy manual providing guidelines issued to all concemed, We conclude this chapter by identifying integrated materials manager to include all activities from supplier to consumer. Chief ExecutiverMD ot Finance Operations | [Market Materials HRI Costing Production |] Research | | Supply chain] | Personnel ‘Audit PPC Marketing | |Management] | Selection Working Capital] | Maintenance || Selting Director’ | | Induction EDP TOM Channels of } | Manager | | Promotion Distribution Manpower Forecasting Purchase Issue Inventory ‘Source developer Receipt Control Buyer, Seller, Retailers] | Physical Standardise LLocal/imports Stock Codlify Purchase Inspection Value Logistios Liaison Analysis Safety MRP Information Buyer Raw Material Substores Raw Materials Obsolete items. Buyer Consumers Buyer Spares Buyer PartsiComponents: Buyer-Civil Engineering (Buyer Castings/Forgings} Figure 1.3 Organisation chart of a representative organisation.Supply Chain Management SUPPLY CHAIN MANAGEMENT AND MATERIALS MANAGEMENT—A TO Z ASPECTS Supply chain management (SCM) as a concept, is gaining popularity and accepted as the Indian economy is growing over 8.5 per cent per annum. Investment in SCM has increased significantly since 2010, even though the concept was discussed amongst US Academicians in 1995 onwards. Managing procurement smartly and ensuring that products are distributed efficiently are becoming vital ingredients for success. In the face of rising commodity prices, growing transportation costs and rapidly changing customer demands, the companies that have mastered the intricacies of SCM are the winners. Today's organisations, competing in the global market, believe that the performance of single corporation will not be sufficient to reduce the risks and to achieve greater profitability by adding value and satisfying the customers. The overall costs decrease due to reduction of redundancies, lower inventory levels, decreased lead time and reduced demand uncertainties. Serving the right customers, finding the right suppliers, and fostering trust with the right partners have a great impact on today’s as well as future business performance. In this process SCM faces challenges in—strengthening linkages with customers and suppliers, understanding technology needs, trends and adoption, forming collaboration relationship with all stakeholders, reducing risks and costs of operations, gaining access to global network, promoting sustainable growth, enhancing public perception of the industry, etc. CONCEPT OF SCM Supply chain management is defined as the management of a network of relationships, within an organisation and between interdependent companies and business units consisting of materials suppliers, purchasing, operations, finance, logistics, marketing related systems that facilitate the forward and reverse flow of materials, services, financing and information from the original product to final customer with the benefits of adding value, maximising profitability through efficiencies and customers satisfaction, Supply chain management is the well organised management of end to end process. It begins the design of the product or service and ends with the time, when it has been sold, consumed and 910 Handbook of Materials Management in the end discarded by the end user. This process involves product design, procurement, planning, forecasting, production, distribution, fulfilment, after-sales support and the end of life disposal Inspection and anticounterfiling for merchandising are vital contents of supply chain management. Enterprises which need to open the market completely have to offer consumers a real time information in queuing platform on commodity, and to let consumers have a clear understanding of the entire life cycle of the goods they consumed and to give them a convenient way to identify the accuracy of the products. Thus SCM is a network of various organisations involved both in upstream and downstream linkages in various activities and processes. EFFECTIVENESS OF SCM Usually supply chains were viewed merely as supply channels for movement of raw materials or components and distribution of products with related information. Today SCM is practised in a more strategic manner. The scope of SCM is expanding to include all of the business processes that enable rapid precise fulfillment of customer satisfaction from product development to relationship management. In order to strengthen their competitive performance, the supply chain itself is transforming into a network by forming partnership. Supply chain must be a source of competitive advantage. It must support, enhance and be an integral part of a company's competitive business strategy. For sustaining competitiveness, it must leverage a distinctive model. It must execute well against a balanced set of operational performance objectives. SCM must focus on a limited number of business practices—reinforming each other to support the operating model. By simplification of the supply network SCM reduces cost of goods sold by reducing operating costs. By streamlining operations SCM reduces overhead expenses and resource requirements including inventories SCM results in improved customer satisfaction and strengthens value proposition of marketing enabling competitive entry into global arena. SCM is an important strategic tool for organisations efficiency. The Centre for Monitoring of Indian Economy—CMIE is an authentic source of Indian economy (process database) and provides an overview of supply chain management and its benefits. Managing procurement smartly and ensuring that products are distributed efficiently are beginning vital inputs for global competition. Supply chain strengthens competitive performance and supports strong growth impulse at micro and macro levels by combining the internal functions of the firm with external operations of suppliers and customers, The process measures the performance of the supply chain by comparing against internal and external industry targets. The phrase sustainable SCM is being used, after the firm produces sustainable reports, as a part of integrated strategy. Supply chain managers are asked to improve customer service by continuity of supply, reduce unexpected risk by improving design process, reduce waste, improve service quality by adopting a wholistic approach. SCM aims at an integrated system that brings together supply base, the firm and its customers. Even today many researches are trying to find out the best way to integrate the process by Delhi research survey. SCM AND VENDOR MANAGED INVENTORY ISSUES ‘Vendor managed inventory (VMI) is a means of optimizing supply chain performance in which the supplier is responsible for maintaining the buyer's inventory levels. This concept also is yet to be