Material Management Cases Essay

Electronics Corporation of India Ltd. (ECIL) is a Public Enterprise under the Department of Atomic Energy established with the purpose of supporting India’s Nuclear Power Programme and help the country achieve self-reliance in professional electronics. Over the years the company evolved itself into a multi-product and multi-disciplinary organisation with focus on Computers, Control Systems and Communications. In the post-liberalisation scenario, the compulsions of global competition on local soil guided its Vision, Mission and Objectives.

To help the country achieve self-reliance in Strategic Electronics. Mission To strengthen the status as a valued national asset in the area of Strategic Electronics meeting the requirements of Atomic Energy, Defence, Space, Civil Aviation, Security and such other sectors of strategicimportance. Objectives 1? To strengthen the technology base and thereby the capability to combattechnology denials. 1? To promote creativity and innovation and realise higher levels of operational efficiency through actionable learning 2? To attain and maintain world-class competitiveness by pursuing global benchmarks 3?

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To lay down plans and programmes for effective succession at senior management level 4? To consistently ensure a customer-centric organisational culture 5? To achieve steady growth in business performance and generate reasonable internal resources The operations are therefore focussed towards meeting the requirements of Strategic Electronics in the Nuclear, Defence, Security and such other sectors of National Importance. The Crisis The post-liberalisation period of 90s was characterised by intense competition from both the MNCs and private sector. The impact of the globalisation process and the sanctions in the wake of Pokhran-11 xperiments have brought the company to the brink of sickness in 1998-99. ECIL suffered a loss of Rs. 10 crore in 1997-98 and a substantial loss of Rs. 60 crore in 1998-99. The networth of the company was badly eroded and ECIL had to be reported to BIFR. The Initiatives in Materials Management The company had to initiate a number of innovative measurers to tide over the crisis. Material costs constituting around 55-60 % of the total cost, it became imperative for the company to introduce a host of innovative practices in the area of materials management.

These initiatives need to be in consonance with the nature of global electronics business characterised by high rate of obsolescence, falling prices, high quality inputs and global sourcing. More over the business environment of ECIL is different even from other PSUs as there is no assured market, customer-driven requirements and threat of denials. It is against this background that the entire supply chain is addressed and briefed below are the salient aspects of this process. Supplier Communication

It was ensured that the requirements of the customers of ECIL are clearly communicated to the suppliers, thus making the latter jointly responsible for ensuring customer satisfaction. This is done through constant touch with the suppliers to indicate the priorities through written and verbal means and by hosting vendor meets Vendor Development and Quality Assurance The suppliers were continuously provided all the support during product development and engineering, prototype testing, evaluation, qualification and guidance in the implementation of ISO 9000 Quality Management system and other industry standards and practices.

Emphasis was on prevention rather than detection and correction. Suppliers are encouraged to imbibe the culture of ‘Ownership of Quality’ as? Inventory Control The scheduling of placement of orders and receipt of materials was streamlined to ensure efficient inventory management covering such requirements as timely availability of material, minimisation of waste and surplus due to obsolescence etc. Negotiations and Payments Suppliers are involved right from the tender stage to offer the most competitive terms to the customers in terms of quality, cost and delivery. Mutually beneficial payment terms are negotiated and strictly adhered to.

Implementation of IT All the processes involved in Integrated Materials Management are fully computerised for speedy disposal of material requisitions, resulting in substantial reductions in lead times across various operations. The Results These simple intiatives were implemented effectively resulting in incredible results that culminated in the historic turnaround of the company that brought wide recognition and national awards like SCOPE award for Outstanding Performance and Contribution to Public Sector Management. Specifically the following achievements were realised. Between 1998-99 &2002-03 Turnover shot up from Rs. 250 crore to Rs. 1000 crore ? Profitability reversed from a loss of Rs. 60 crore to a profit of 130 crore ? Networth increased from Rs. 7 crore to Rs. 309 crore ? Loans Outstanding and Statutory Outstandings became nil ? Inventory levels and Sundry Debtors demonstrated efficient Working Capital Management ? Substantial cost Reductions were realised through negotiations and improved quality levels across           various processes ? Procurement lead-times reduced substantially from about 60 days to 30 days Customer Satisfaction       Index improved phenominally from 66% to 95% ?

MoU rating of ’Excellent’ has been achieved and is maintained and ? Image of the company enhanced remarkably. Future Plans The multi-disciplinary competencies and capabilities of ECIL coupled with the Strategic Sectors it has chosen, is bound to give the company a competitive advantage to succeed in the national market but explore avenues in the international market. Many of its products have been identified for export promotion and the brilliant performance of the Electronic Voting Machines in the recent general elections established its export worthiness with many countries evincing interest in the product.

While all the processes under materials management are fully computerised, plans are underway to instal a fully IT enabled Supply Chain Management including e-procurement. The company is fully aware of the competitive global environment surrounding it in the high technology electronics and is focussing continuously on enhancing its technology base and enrichning its skill base to strengthen its status as a valued national asset. Case : 2 RFID and its application in Materials Management

Introduction Imagine in a supply chain and inventory management where manufacturers, warehouse managers, distributors and retailers can automatically locate any of the items that were shipped in a given case or pallet, Warehouse manager locating a misplaced item in a warehouse containing 150,000 varieties of items. Where receiving facilities know immediately whether a shipment’s contents match the advance shipping notice and the right personnel are immediately notified of any discrepancies.

Where manufacturers and retailers automatically adjust forecasts and orders based on sales velocity during promotions. Where theft or tampering is immediately evident, without requiring product inspection. There is a very strong business case for being able to identify unique products using a technology that doesn’t require line of sight, no much manual work, a complete automation solution, near-perfect supply chain visibility and real time inventory tracking of every item in their supply chain or in warehouse at any moment of time. Background

Radio Frequency Identification (RFID) is a 60-year-old niche technology that is suddenly turning up on many companies’ short list of must-have operation tool. Descended from transponder technology created by the British for aircraft identification “Friend or Foe” during World War II, RFID uses radio waves to pass identity information between a product “tag” and a reader device. Manufacturers have used it for years to track high-value products through assembly, but high costs and proprietary technologies have thwarted broader applications.

Radio frequency identification (RFID) is one of the most rapidly growing segments of today’s automatic identification data collection (AIDC) industry. Applications that make use of RFID’s features and capabilities are demonstrating significant process improvements through implementing this technology. New production techniques, falling tag costs, voluminous requirements and open industry standards are bringing automated object recognition to a wider range of uses.

At the top of the application priority list are the oceanic flow of products through the retail and consumer packaged goods (CPG) supply chain and inventory tracking. RFID tags embed an integrated microchip and radio antenna in product labeling and packaging. In an EPC-RFID implementation, each tag stores a unique 64 or 96-bit Electronic Product Code that identifies the item both by type and individual serial number. Multiple tags can be read concurrently without the line-of-sight restrictions of optical bar code scanning systems.

An entire shipping container, pallet, case or shopping cart can be scanned in seconds by automated reading equipment. Industry experts view RFID as a complement to bar code technology—in many cases, such as tracking pallets, cartons, and cases in a warehouse, online real time inventory tracking & stock checking both technologies are used. RFID technology, in fact, overcomes certain limitations found in some bar code applications. Because it is not an optical technology like bar coding, no inherent line of sight is required between the reader and the tagged RFID object.

In addition, RFID transmits data wirelessly and is a “read-write” technology, so it can update or change the data encoded in the tag during the tracking cycle. RFID usage is steadily increasing. According to Allied Business Intelligence, annual shipment volume of RFID tags, or transponders, is expected to grow from 323 million in 2002 to several billion in 2007. The research suggests that despite this growth, RFID will not significantly displace bar codes but RFID will co-exist for some time and eventually will take over the bar code.

In fact, most of the RFID growth will come from emerging “smart label” technology in supply chain logistics, which combines the cost benefits of bar coding with the functionality of RFID. New printers combine the ability to print bar codes, human-readable text, and graphics on the surface of a “smart label” while encoding information on an RFID chip embedded in the label, hence the now-common term “smart label. RFID (Radio Frequency Identification) technology: What is RFID? RFID refers to the set of technologies that use radio waves for identifying objects or people.

A basic RFID system includes a radio frequency tag, a combination of a microchip and an antenna, which is also called a transponder, and a reader. The reader sends out electromagnetic waves, which are received by the tag’s antenna. The tag sends the data, which is usually a serial number stored on the tag, by transmitting radio waves back to the reader. RFID systems have gained popularity, and notoriety, in recent years. A driving force behind the rapid development of RFID technology has been the rise of pervasive commerce, sometimes dubbed the quiet revolution.

Pervasive commerce uses technologies such as tracking devices and smart labels embedded with transmitting sensors and intelligent readers to convey information about key areas where consumers live and work to data processing systems. To gather this data, retailers can choose from a range of options. RFID systems may be roughly grouped into four categories: EAS (Electronic Article Surveillance) systems: Generally used in retail stores to sense the presence or absence of an item. Products are tagged and large antenna readers are placed at each exit of the store to detect unauthorized removal of the item. Portable Data Capture systems: Characterized by the use of portable RFID readers, which enables this system to be used in variable settings. • Networked systems: Characterized by fixed position readers, which are connected directly to a centralized information management system, while transponders are positioned on people or moveable items. • Positioning systems: Used for automated location identification of tagged items or vehicles. • Also combination all the above system. Case : 3 Open Warehouse System Introduction: Management today is never the same what was yesterday.

And India, undoubtedly, has been one place that has witnessed radical changes in Management – be it Man Management, Money or Material Management. And it goes without saying that concept of “Lean” in all fields is the name of the game. Lean Organization, Reduced Vendor base, Shorter Production Cycle, Market Micro-segmentation and Skinned Distribution Points are all globally accepted jargons of the present day cost conscious world. The world’s largest combined cycle power plant on a single barge, and, India’s first and the only barge mounted power plant set up at Mangalore coast set up by GMR Group, a renowned name in Infrastructure Sector.

The plant had all the traditional elements of Lean concept – A lean human organization structure, lean operation cycle, a single-segment raw material supplier and a single segment market for its Power. Add to this was the Open Warehouse System, Where many companies today try to squeeze costs too hard in trying to meet its own requirements, GMR aggressively promoted Open Warehouse System to ensure Accessibility to Operation and Maintenance Teams – thereby provide Product Reliability to end customer – Supply Power on Demand. Traditional Hiccups: An oracle based ERP system put in place centrally integrating the entire Supply Chain Network.

In an Open Warehouse System, the conventional Window-Issue system is replaced by “Take and Post” system where each member can take material but is expected to record (t)his (trans-) action in the ERP system, the lone Warehouse member providing value adding services such as Accounting, Auto Replenishments and key MIS to Top Management. In any case, authorized Heads would approve all such recorded transactions the same day. As is for any other industry, non-manufacturing units in particular, Material Indents for B class materials to some extent, and particularly C Class materials have been the maximum.

Following is the indicative figures reflecting the phenomenon: |        MOVEMENT OF MATERIAL INDENTS | |APRIL ‘ 02 – SEPT’ 02 |SEPT’ 02 – MARCH ‘03 | |  |Number |value |Number |value | |A Class Items |6% |66% |4% |48% | |B Class Items |17% |26% |15% |23% | |C Class Items |77% |8% |81% |9% | |Total |100% |100% |100% |100% | Traditionally, this pattern holds true everywhere, one may say.

But troubled water begins here and trouble-shooting efforts stop there, as little effort is put on control of B and C class materials – control in the sense that efforts to ensure that ERP system is posted with right quantity of materials actually withdrawn. In other words, the system should always reflect realistic picture of current stock. You never know if/when any particular “B” or “C” class category is also “V” (Vital) or “E” (Essential) categorized. During the religious Annual Stock Taking ceremony, it was rightly observed that discrepancies in “B” and “C” class categorized materials was significantly very high, touching double digits! A Lo, the Open Warehouse System is deemed a complete failure? Back to traditional window-based issue system necessitated with rows and tiers reflecting clerical scenes? Re-Inventing Open Warehouse System

There were two fundamental issues to decide continuity of Open Warehouse System. One, Is missing inventory an advantageous exploitation of system in hand; and second, is physical discrepancies alone attributable to direct failure of Open Warehouse System. All O&M activities have been taken up against pre-approved O&M Schedule and pre-authorized Work Permits. An exhaustive review of the list of materials used against Work Permits during the year was carried out – And that was all that was required to be done to source missing materials and close each of the discrepancies observed. It was more than evident that advantageous exploitation of open warehouse system was not prevalent.

And to look at discrepancies as part of industrial practice, are we satisfied by merely writing off the discrepant inventories, as is done in several other industries across the globe by prescribing their own benchmarked limits or can we work upon collaborative efforts to eliminate the discrepancies. Teamwork Teamwork is the key to success for a successful and workable Open Warehouse System. This was simply true as everyone from the Team realized the hindrances in a window-based closed warehouse system and that would in one way or other affect the speed, morale and reliability of pro-activeness in their functioning. Everyone from the Team also realized that each of them have mutually shared goals & objectives and their own added esponsibilities to achieve them in unison. For an Open Warehouse System to function, each member must have Trust – what others say (Honest Open Communication) and do (without hidden agenda) Equality – among all – no black mouthing and no running down others idea; Act – to Learn, Experiment and Adapt new things Mutual Respect – appreciate others – not seeking rewards for the act of others Zero Indenting System [ZIS] Supply Chain Experts have devised ABC emphasizing on “A” categorized materials as a value-adding tool. If this holds good for Procurement or Consumption Control, then the utilization of this system to monitor & reflect realistic stock levels should be maximized.

Zero Indenting System was introduced to facilitate members to take certain materials from warehouse without going through hassles of recording each transaction every time into the ERP system. Manual Registers were established where members were requested to write down details of materials drawn {Material Code, Quantity, Cost Center}. The materials would be recorded in the ERP system by Warehouse periodically – this is a parallel of auto-replenishment model. This exercise was however limited to Materials identified as ZIS materials. Materials covered under ZIS: 1) All C Class Materials 2) All B Class Materials having history of more than one transaction per day. ZIS Materials |  |  | |  |Number |Value | |A Class Items – None |0 |0 | |B Class Items (>one event per day) |03% |08% | |C Class Items –All |79% |9% | |TOTAL |82% |17% | It is clear from the above table that by implementing ZIS, we are able to cover up a high 82% of the physical inventory and at the same time, inventory control norms are restricted (not relaxed) only to 17% of the value, the major portion still has to go through the routine conventional model.

The manual registers are auditable and periodic system updating is authorized by Maintenance Heads. In practice, the actual scope of ZIS can be made flexible based on System performance and the confidence levels of Maintenance Heads and the Warehouse. Perpetual Inventory Verifications [PIV] The successful establishment of Zero Indenting System was sufficient to boost the morale of every team member as it facilitated ease of working, but the probability of making the Open Warehouse System vulnerable still existed. To cement this, what was required was Perpetual Inventory verification. The Perpetual Inventory verification was introduced with following mandatory features: • Regular and continuous activity; Perpetual verification of ZIS Inventory by Warehouse towards stock updating; • Random selection of other Inventory System/Bin Location(s) to be verified; • Verifications of the entire Inventory, in periodical lots, without any exclusions; • Verification to continue even if entire inventory is verified the same fiscal year; • Verification Team should include a Non-Warehouse member • Accountability of verification results lies with Maintenance Heads; • Systematic verifications and elimination of discrepancies. The ZIS inventory was verified twice during a month, once every fortnight, to update consumptions in the system. The balance inventory was verified in parallel continuously. Accordingly, entire hundred percent physical inventories were verified over a span of two months with ZIS inventory verification a continuous affair. The above necessitated involvement of all team members without whom PIV or ZIS could not be possible.

What was most important was sharing of information. Information must include that includes bad news, if any. If the bad news remains hidden in the warehouse bins, then there can be no real improvements. What followed during the next so-called religious annual physical verification audit was Stock tally with no discrepancies. To drive home the point, this was followed by series of external stock audits by agencies such as Price Waterhouse and Lending Institutions. There were in all six external audits over the next one year – audit schedule and audit scope of selection both at random, covering high risk, medium risk and low risk inventory areas. There have been no discrepancies.

In summary, implementing the Open Warehouse System has been an excellent source of experience for each team member. The opportunity also saw the team to work together to drive home the point “With a little effort, we can indeed inculcate good team spirit even in an Open Warehouse” Case :4 Cost Reduction through business Partnerships Cost Reduction-A Key to Survival and Success: Cost reduction is the key word for success in today’s global competitive market scenario. It is the new economic mantra. Gone are the days; where the vendor can pass on the cost of his inefficiency, low productivity and bureaucratic way of functioning to the customer, as he used to often do in the old sellers market’s hay days.

Today’s customer has a wide choice in a Net connected global market, where one or the other market savvy vendor is ready to offer the required quality of products and services at competitive rates, often for strategic reasons of capturing the unconquered market. Perceiving Opportunities in Problems: The recent threat faced by Indian manufacturers in certain market segments from China (Indian toy industry) is the ground reality and learning lesson for Indian manufacturers. This reflects the industry’s inability to compete in today’s global environment. At the same time if the same threat is converted into opportunity by building up business partnerships with them, it will be fruitful to both the stakeholders’ – as evidenced by the risk taken by a few Indian industrialists.

In the present scenario, the production base of many Indian manufacturers will be shifting to China, which offers advantages of reduced cost and increased productivity. We should take this as a learning lesson; as a self- introspection to make the Indian industry cost effective i. e. ready to offer quality products and services at the right price and place. Slow / negative growth rate in certain key sectors like steel, cement, fertilizers, textiles, engineering, energy, light truck vehicles and the near death knell of SSIs have lead to closures, mergers, de-mergers, acquisitions and hiving off the prime Indian brands reflects the mirror on our inherent weaknesses. At the same time it provides an opportunity to carry out SWOT analysis, recognize our limitations and encash on our strengths.

Most of the successful Old Economy giant organizations; who could not quickly adapt to the changing environment are reported to be sick, slowly going to the death bed – mainly surviving on the oxygen of manpower reduction, VRS and downsizing, the medicines often prescribed by Western consultants. These are only the half-hearted short-term measures; which can serve as a shock treatment. But these measures alone definitely cannot turn the organization to its past glory; unless all facets of cost reduction are explored with heads and hearts together, with a vision of a dedicated team, wedded to the cause of improving an organization’s productivity and profitability in the overall interest of all stakeholders. Challenging and redefining the existing business objectives based on reengineering of business processes with a goal to rebuild the old, sleepy giant into a new energetic, vibrant organization is the need of the hour.

Cost reduction measures hence need to be explored in right earnest, not restricted to half-hearted cost saving measures of economizing just on administrative costs of conveyance, staff welfare, stationery and telephone, but should be backed up with harsh cost saving measures in all major cost areas. We will show the Way Shri Nani Palkhiwala often addresses, “Indians have the most fertile brains”. We have often excelled as individuals in respective fields – as individual islands of excellence, but always fail as a team, as we have more leaders than followers. But if we as Indians have to survive: • We will have to learn and work as a team; with increased productivity to share the common goal and vision. • Explore ways and means to reduce the cost to save our jobs and enjoy sustained life styles. Unlike the West, we will have to think of harvesting human capital, build the idle non-productive asset into a productive asset base by nurturing, motivating, investing and retaining the best human brains. These measures alone will help the industry to regain its health and competitive edge. There is no other alternative solution in the Indian scenario, with an ever increasing population as a continuous threat to the stability of the organisation, economy and society tself. Otherwise ever widening gaps in the life styles and income levels will lead us to social discord, disharmony and social unrest; as observed in a few under developed economies. Survival Strategy: • Clear shared vision. • Well set goals and objectives. Committed organisation aligned with the company’s goals and vision. • Global cost consciousness. • Well structured policies and procedures to back up the same and to deliver the said objectives at minimum costs. • Produce and market quality products and services at the right price, time and place as per the customer’s requirements. • Ensure that systems are in place to deliver the said objectives at minimum costs and that the key performance indices are identified and tracked with mapping of end results (e. g. data on repeat orders indicating brand/ customer loyalty, market share, cost of service etc. ) Need for Strategic Sourcing at Optimum Cost:

One of the major costs in any organisation is the procurement cost of materials, fabrication & services ranging from 40% to 70% of the total turnover. The next area as a fall out of the manufacturing activity in any organisation is scrap accounting, monitoring disposal & realisation. Optimization of cost benefits in the above- mentioned areas through strategic sourcing by establishing vendor chain management under each major category, is a key to achieve global competitiveness. The traditional Indian idea of sourcing from the cheapest source by way of quotations often required and insisted upon from the internal control point of view, has lost relevance due to the following reasons: • Quotations can be fabricated. Vested persons can share rates quoted by the lowest bidder to interested vendors (Author’s Query). • Lowest rates can be at the cost of quality. Therefore it is essential that the organisation should: • Develop a business partnership module and vendor chain relationship based on mutual trust and benefit. • Define corporate sourcing strategy in consultation with all stakeholders to achieve optimum cost benefit for required quantity and quality of materials at the right time and place. • Reduce inventory-carrying cost on one hand and avoid stock out situation on the other. Explore global sourcing initiatives. Internal Audit for Cost Cutting Measures:

Materials and Internal Audit (IA) both being staff functions can definitely play a complementary proactive role in providing cost effective solutions based on team efforts in the areas of: • Vendor selection and registration process. • Procurement policies, pricing methodology. • Making decisions. • Identifying non- moving inventory and how to avoid further building up of the same • Optimisation of scrap realisation. • Reviewing materials consumption based on input-output norms etc. The traditional definition of an internal audit: IA is an independent appraisal function established within an organisation to examine and evaluate its activities-financial or otherwise, as a service to an organisation. Traditional envisaged role: IA is a watchdog of the company to ensure compliance to the established systems and procedures.

In the good olden days IA was thus considered as the torchbearer of ethics and the moral guardian of business values. No doubt, auditors and especially the IA were always considered as bloodhound, management’s spy and hence an unwelcome guest. This situation did not help the organisational interests and over a span of time the IA function underwent a big change to meet current expectations and fulfill the role of an in-house consultant and management’s partner. Current definition of IA: IA is an independent, objective consulting activity designed to add value and improve an organisation’s operations. This revised definition reflects the paradigm shift in the role and focus of IA. IA is expected to bring in a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process. • It reflects the epoch making strides made by the IA profession to meet today’s international business requirements. • IA is a mindset. If we believe that we can improve quality, processes, procedures and systems to meet organisational objectives, we all play the role of internal auditors. • In a sense all line and staff managers thus play the role of IA, as the emphasis has shifted from What has gone wrong to Why and how. • The moot question is how to improve the processes by analysing and focusing on business risks by understanding the business needs and issues. IA helps to build a robust system, which operates efficiently and effectively by associating in system development and its review to meet the envisaged objectives within the set parameters. • The end result of IA is value addition. It causes and contributes to significant beneficial changes in improving the measures for efficiency, productivity, profitability and cost control by playing a collaborative and participative role. • Thus, today’s role of IA is not that of a spy or a detective- who is on a fault finding mission, but that of an in-house consultant, who not only diagnoses organisational health, but also helps the line managers in discharging their functions efficiently and effectively, by becoming their business partners. Business Partnership between Multi-Disciplinary Teams:

There is a success story achieved by one of the business organisations; based on team based business solutions in an effort to build bridges instead of walls, wherein the internal audit findings were used to provide cost effective solutions in the above-mentioned areas. • The organisation was able to save 10% of the procurement cost approximately valued @ Rs. 5 crores (to be on a lower side) by following the multi-disciplinary team approach. • Further, the organisation was able to realise better rates, value for scrap realisation compatible with the market trends and bring in the transparency in the area. This was achieved by taking an in-house consultant. Methodology: A multi-disciplinary team consisting of members from actual users (Production/ Exports, Materials, Quality Inspection, Stores, Security) was constituted with Head, Internal Audit as a team leader- (audit being an independent/unbiased functionary). • A common objective of cost reduction based on mutual trust and sustained business partnership (unless found detrimental to the organisational interests) was agreed upon by all the stakeholders. • Procurement activity was segregated based on three major categories: • Chemicals • Stores & Spares (common part numbers were worked out by the sub-committee of the actual users) • Packing Materials • Three individual teams were then constituted with IA as a team leader of all the three teams. • Actual consumption data for the last three years was collected, and used as a basis for better commercial bargaining. A common circular explaining the objective and rationale was then drafted under the joint signature of Head – Internal Audit, Head-Materials and the Head, Production – as users. • The circular focused on the need of establishing a sustainable business partnership with vendors based on mutual trust and transparent business transactions. • The quantum of likely future business was given for items they intended to deal in, with an assurance that once the rates/commercial terms were finalised and frozen, the business relationship would continue for at least a year, unless any unethical practice was detected. • As an assurance for transparency, all vendors were asked to share the basis of their price (whether based on cost plus/ market price/ or any other basis). An annexure detailing the questionnaire on cost data, their overheads and their in built profit margin was sought, based on the concept of transparency and sharing information as the business partner. • It was agreed that as a fair business practice, both the partners would share any upward/ downward impact of cost for major raw materials, based on actual data, once in a quarter. • All major vendors were jointly visited by the multi-disciplinary team to check the accuracy of the feedback received, ensure the genuineness of the manufacturing facilities and declaration on SSI, excise and ST status (Author’s Query). • Vendors were asked to declare if they were directly or indirectly related to any officials of the company and also the names and the style of all related business entities; to serve as future data bank (Author’s Query). All existing/ new interested vendors were asked to present themselves to the screening joint committee and offer their best current prices for the quality required by the users. • The practice of obtaining quotations and placing orders on the lowest bidder was replaced by the more transparent and open price fixation declaration policy on best rates offered by vendors based on economies of scale on quantities for the full year. • Vendors were asked to offer prices for the quality indented without compromising on the quality. • In order to safeguard against the monopolist tendency, two vendors were selected by the screening team for each major item, the decision on individual share was left to the Head, Materials. A clause declaring the company’s policy on business ethics was printed on the reverse of each purchase work order to make the vendors conscious of the same and bring in transparency in the system. End Result: Vendors thus were given their due share in the business partnership and assured of business for a year with a chance of continuing the relationship in the succeeding years provided it was mutually beneficial to both the parties and they offered the best rates. This in turn brought in user’s ownership, participative team approach, better rates and overall saving of 10% of the procurement cost and above all created an atmosphere of mutual trust and enhanced the company’s image and less of Investigative Role for an IA (Author’s Query). Scrap Realization: Another team success between IA and the user department was improvement in scrap identification, authorization, detailed classification/ segregation for better realisation and bringing in transparency in the entire operations. • Better realization of a few lakh rupees led to the improvement in the bottomline on one hand, system improvement on the other hand brought in the sustained benefits arising out of transparency, involvement of all stakeholders and encashing on the users’ ownership concept. Thought Process: • IA again in its traditional role highlighted the differential rates fetched for the same/similar items by two different units. Rates fetched by one of the units were always lower than the other. • Quantum of lower realization on an annual basis ran into a few lakhs of rupees.

The management then thought about improving the process by involving IA as a catalyst of thought process with the involvement of all users and owners. Methodology: • A multidisciplinary team was set up with the IA Head as a team leader. The team was drawn from Production, Stores, Quality Assurance, Security and Officials from Materials department who were directly involved with disposal. • Different items of scrap generated by both the units were studied with the help of industrial engineering and uniformly coded and classified. • Items were again classified under more categories with an aim to fetch better realisation. • Scrap yard too was accordingly redesigned to store increased categories in separate enclosures. All operating departments, which were generating the scrap were instructed to classify the scrap under each category correctly and ensure that the same was dumped in the correct bin. • All scrap was to be dumped in the enclosure with the permission of the departmental head. • The scrap was to be accompanied by a scrap generation slip giving the particulars of items and the approximate quantities. • A revised format for vendor registration was prepared based on the team’s feedback, on the concept of trust and business partnership and each vendor location was to be visited before its registration. • Bids rates were to be based on the current market rates as evidenced from newspapers, trade journals etc. and any rates below the current rates (above the tolerance limits) were to be rejected. A representative from the QC/ IE dept. was to remain present whilst the selected vendor was lifting the scrap and technical help was required, or else the security staff remaining present would certify the weight and the items moving out of the factory. • Scrap vendor’s access inside the factory was restricted to the scrap yard. • Vendor registration and appraisal process was to be done every year as detailed above. • The vendor was thus assured of the yearly off take at the prevailing rates without bidding at the quarterly bids as earlier. All these measures brought in increased revenues, openness in the system and the involvement of all. Conclusion

Cost reduction for competitive edge is the guru mantra, which we all should religiously implement in all walks of our life to meet global competitiveness. Let us bank on our own success stories to achieve these goals, as the art of living within one’s means is a part of our Indian tradition. Let us practice it in our professional life too, by implementing simple logical things with an overall cost consciousness to reach solutions in complex situations. Case : 5 Strategic Sourcing Introduction In today’s competitive business scenario, the market decides the price of the product and hence the profit of any organization depends on controlling the cost of operations. In most of the manufacturing organization, 60% to 70% of the cost is spending on the procurement function.

Hence, there is a significant opportunity in improving the bottom line through Strategic Sourcing “Strategic Sourcing is a comprehensive process aimed at obtaining maximum advantage on cost, technology, process and quality, by leveraging the company’s buying power” “Strategic Sourcing is a comprehensive process designed to pursue all value levers by leveraging a company’s buying power with select suppliers, conducting best price evaluations, sourcing globally and conducting company/supplier joint process improvements” The strategy is to shift the company’s focus from the current “transaction” oriented independent buying of goods and services to a “product” oriented strategic approach. The Strategic Sourcing approach is designed to: • drive reduction in total cost of acquisition of goods and services • drive a thorough understanding of both the supply market and internal company requirements • deliver significant earnings to bottom line • deliver improved value to all High Value Opportunities How can a company identify the highest impact cost reduction opportunities? To begin, they must understand what they buy and from whom they buy it. Thoroughly reviewing accounts payable history and mapping expenditures, can provide tremendous insight into corporate savings opportunities.

There are varieties of solutions to address • Increase customer leverage and buying power – By harnessing intra-company expenditures and selecting fewer suppliers in each buying category, companies can gain significant leverage. They can also deepen their advantage through inter-company aggregation and supplier rationalization. • Rationalizing product specifications – By developing processes that clearly define the need before translating that to a specification, companies can avoid unnecessary costs • Source more effectively – By engaging a large number of qualified suppliers during supplier selection and creating a more competitive negotiating environment. Improve financial controls and contract compliance – To achieve bottom line benefits, buyers need to buy against contracts easily and need to control spend activity through a procurement tool. • Doing Procurement Right – To extract the maximum value from procurement, companies need to understand their spend, select the best approach to source, procure each set of goods and services and continuously monitor performance. The Significant Steps So how can a company effectively achieve measurable and sustainable cost savings? They must address the entire procurement value chain from savings identification, to negotiation and must importantly, realization.

The THIRTEEN essential steps are described below: Step 1 – Assess the opportunities : A complete spend assessment will provide visibility in company’s needs, their total buying power and the degree to which they are leveraging that power Step 2 – Source for savings : An effective sourcing methodology will address product specification rationalization, recommend standard buying practices, use the most appropriate sourcing and negotiation strategy for the category and achieve the lowest total cost Step 3 – Turn Contracts : Enable buyers and suppliers turn contracts into commerce – to realize savings, they must not only connect users to contracts but also ensure that users can accurately and confidently buy against those contracts Step 4 – Management Tools : Transact through management tools to capture savings – by utilizing computerization, companies not only drive compliance against contracts but also streamline processes and increase control on spending Step 5 – Improvements : Manage continuous improvements – in order to maximize and sustain savings, companies need to drive improvements and manage suppliers Step 6 – Categorization Process : This involves a detailed analysis for all the purchases made by the company for the past one or two years and broadly classify the spend in few major sourcing groups (SG) Step 7 – Spend-profile each sourcing group : Each of the Sourcing Groups need to be clearly defined by identifying sub-groups, spend profile of each sub-group, cost drivers involved and the supply market behavior for each SG. Step 8 -Develop Strategy : Each SG is analyzed with respect to the supply market. For the sourcing group with low market complexity, buyer has a strong position compared to supplier and should exploit its buying power through the tools of volume concentration, best price evaluation and global sourcing.

Step 9 -Develop Supplier Profile : Develop a list of current and new suppliers and prepare profiles for later use. Define minimum requirements necessary to be met by any supplier and screen the preliminary supplier list. Establish qualification criteria to evaluate suppliers and to agree on shortlist of suppliers with whom to conduct negotiations. Request for Information and develop a comprehensive pre-qualification questionnaire (PQI) to seek detailed information from suppliers to develop their profiles. Step 10 – Implementation Methodology : For the competitive selection process, and request for quotation (RFQ) is prepared to obtain a detailed understanding of the supplier’s profile, scope of work/services, cost, specifications, alternatives etc.

Supplier development approach is generally recommended when the company is very confident of its key supplier with regards to their price, quality, delivery and reliability. Here, the company works together with their key suppliers towards joint process improvements, standardizing specifications and relationship restructuring. Step 11 – Competitive Supplier Selection : The responses to the RFQ issued, are thoroughly analyzed for price and non price factors. This price analysis forms the basis for subsequent negotiation strategies, enabling the team to drive the best overall agreement. The price analysis forms the basis for subsequent negotiation strategies, enabling the team to drive the best overall agreement.

Step 12 – Integrate the strategic agreements into operations : With strategic alliance agreements in place, it is of utmost importance to ensure the use of these agreements by all concerned throughout the company. Top management’s conviction and total support is a must for integrating the strategic sourcing agreements with the day to day operations of the company Step 13 – Benchmark to Improve : This step ensures that sourcing group strategies continue to be effective and the supplier capabilities, arrangements and the purchasing process remain the leading edge. Continuous benchmarking of external and internal factors is must to continue moving ahead on the success path. Categorization of Items CRITICALITY | |HIGH | |CRITICAL ITEMS | |STRATEGIC ITEMS | | | | | |RATE CONTRACTS | |STRATEGIC SOURCING | | | |CRITICALITY | |LOW | |GENERAL ITEMS | |BULK PURCHASE | |ITEMS | | | | | |REVERSE AUCTIONS | |INTERNET PURCHASE | | | |  | |LOW VALUE | |HIGH VALUE | | | Identify the various items of procurement and categorize them in the following FOUR quadrants based on the VALUE and CRITICALITY. The Sourcing Strategy would depend on the position of the group of items in the four quadrants as indicated. The high value and high critically would call for Strategic Sourcing while low value and high criticality would be covered by long term rate contracts. On the other hand, high value and low criticality (bulk items) can be covered through Internet, while the low value and low criticality items, are ideal for reverse auctions. 05 TIPS FOR SUCCESS

Strategic Sourcing is an important activity for which certain basic features are must to ensure its success and they are: • Total long term commitment from top management • Considerable involvement in terms of money and manpower • Empowering the strategic sourcing teams • Disciplined and consistent practice • Continuous monitoring and tracking the progress • Effective use of electronic tools like internet, e-mail etc. , for quick and effective communication. Action Plans • Rationalization of suppliers – weed off non performing suppliers and add best-in-class suppliers through continuous vendor rating process • Material cost reduction – increase share of business for performing suppliers and develop cost sheets.

Introduce two-bin and Kanban system, collect materials through milk runs to achieve JIT supplies • Supplier development – audit suppliers for process improvements and create capacity for increased demand, by introducing new suppliers. Introduce group buying and look for global buying opportunities including e-sourcing. Case : 6 Cost Reduction by Improvements in Packaging What is packaging? Packaging is defined as a science and an art; it’s more of an art when we are talking about consumer products and more of a science when we speak about industrial products. When we talk about cost improvement there are lot of conflicting requirements. A packaging designer is like a Jack of all trades.

One has to look at the requirements of a carpenter, from the angle of costing, the vendor who should be able to supply; then there is the manager or owner who looks at total profitability and product safety, the packers their own safety while packing. Then the ease and safety of unpacking at the other are concerned about end and being tamper-proof in between. Next is the transporter – he looks for convenience loading and unloading operations in terms of speed and time, and maybe not too concerned about damaging the insides. Also the geometry of the product affects the container. If a choice is given one may like a spherical container. But this may not be possible for a triangular part. Then comes the storage and handling at the warehouses, docks, airports while in transit. You need to communicate how the box is to be stored, which side is up and so on.

There is an international cargo marking accepted by all countries and this must be used on the box to help communication. There was a cargo – a goddess with four hands, a weapon in one hand, blessing from the other. These were packed in boxes but no arrow was put to show which side was top and which side to place it on. Naturally it was handled and stored roughly and some damages took place. The retailer wants aesthetics – it helps his turnover. If you fall in a love with a package, you do tend to buy the product. This is particularly true in supermarkets. There is no salesman to tell you that the packing may not look good but the product inside is good.

You just pick it up from the shelf as aesthetic packing attracts you. This is important for the retailers economy for he does not worry about what you pick as long as you buy something from his store. All these above aspects, which need to be considered in involve packing costs. You may dump the product inside with good thermocole packing and say it is protected. However, this is only one of the requirements – other aspects will also incur costs. The cost will depend on how much importance you give to safety, aesthetics, handling, storage, etc. Generally, 80% of the packing costs goes towards meeting customer convenience and requirements and the remaining 20% is used in other aspects of logistics.

If you consider lipsticks, the cost of the product much lower than the cost of packing. Many consumer products fall in this category. Regulations also have to be considered in packing. Wood is the cheapest and commonly available material but certain things cannot be packed in wooden boxes due to regulations. Eco-friendly, easy-to-dispose packing material must be used. You cant tax nature, you cant tax the environment. You have to conserve energy. Costs Involved in Packing Now let’s see what are the costs in packing. One is the primary cost, the material cost which is the major cost. Then is the cost of designing the packaging and capital cost for carrying out the process. Labour is recurring cost.

Indirect cost are overheads, insurance, R&D. When we talk about reducing cost it can be in any of these above components provided the performance is the same. Remember one thing – increasing the cost may not always improve the value. If you come to me for damage reduction or improvement in packaging, it’s not necessary that I may increase the packaging cost. For example, if in a wooden box, you are using the skids of dimension 4×3. The skid is the lowest component of the wooden box that touches the ground and it is like a shoe. It takes all the weight – 1 tonne, 5 tonnes, 10 tonnes. Now, if you increase the cross section along the height, it becomes stronger.

So I tell you to use 4×3 instead of 3×4 – there is no increase in cost, only a reorientation, but performance improves. Similarly in corrugated boxes you have 150 x 5 ply, which could be reduced to 130 x 5 ply if there is no need for weight bearing capacity. Then again, exports are generally preferred in white or silver coloured wood. You can use softwood instead of hardwood, which is heavier, as long as performance is not affected. So it is not always that improvements in packaging incur costs. In the process of reducing cost by value engineering, we try to separate unnecessary cost from necessary cost, without affecting the performance. The hidden problem needs to be defined. If a box breaks it could be a problem of wood, nail, thickness or design.

In some cases I have seen people use 1. 1-ply corrugated boxes. Now, beyond a certain ply, strength does not increase. So define what is the required strength and meet it – this is done in value engineering. There is some cost involved in standardizing. A 200 gms potato chips pack is made out of the polythene. It has certain dimensions, and the cost is say, 60 paise. What is the performance requirement for potato chips? One is compatibility between the food product and the plastic packaging material. Shelf life of a product, i. e. within how many days you can eat the product is another aspect. So normally there is an expiry date written on it.

Now if the shelf life is two months for potato chips, the marketing manager will be very happy because he will have two months time to sell the potato chips. But if you reduce the shelf life of the product to eight days, he will have to sell it within 8 days. Lesser shelf means reduced packaging costs. So see as far as possible that the shelf life requirement of the product is reduced in case of consumer products. Then there is the aspect of mach inability – it may have good compatibility and good shelf life but doesn’t work on the machine. Years ago somebody brought one product in India, paying a lot of money to a foreign consultant. It was a composite container for liquid products – edible oil or petrol oil.

Now that product simply could not be produced in India because of humid conditions. This was a problem ofmachinability. It was changed from LDP to HDP film. Next is the mechanical strength. A pouch used for potato chips should not break when dropped, the seal strength should be high, it should not tear, it should not puncture. Finally, you require aesthetic appeal for packing potato chips. So we need to decide the most important amongst all the above aspects i. e. , shelf life, appeal, machinability and compatibility. We could then have high density plastic or laminate aluminum or transparent plastic. These are all the alternatives in brainstorming.

Somebody talks about paper only. A cost index can also be worked out with appropriate weightage. The next possible alternative could be plastic and so on. So this is how we evaluate the performance of all the materials and determine their costs and rate them. One more requirement all over the world is to reduce the packaging weight as much as possible. Use expensive material, but reduce the weight. In the last two decades, Canada has reduced the packaging costs by 50%. Then there could be the latest alternatives like wrapping with stretch film. We have seen the stretch film in airlines – you get fruits wrapped in as per government regulation. lastic films, which are transparent. These wraps are is water proof, moisture proof, dust proof. Or you can have shrink film – shrink wrapping, where a product is put in a plastic bag and the plastic bag shrinks on to the products. This is done at a high temperature so you require a heating tunnel for shrink-wrapping. There is a relation between packaging cost and the damage done to a product. It’s a very important relation which we use in cost analysis. For different alternatives we determine the packaging cost and the percentage of damage through simulated laboratory testing for draw compression. Then we plot a graph of total cost of versus percentage damage.

This can be useful in determining the cost versus damage percentage when deciding on the best packing material. Certifying and Testing Materials IIP (Indian Institute of Packaging) is involved in many activities viz. certifying and testing materials. People use this certificate repeatedly for different purposes. That is why in all the certificates there is one clause stating that there is no legal binding on IIP to certifying this material. But now we have a different plan for certifying vendors. We will give inputs to the vendors. So if we certify that a corrugated box supplier is an IIP member, it means you can blindly take material from him. You will have no quality problems.

In order to ensure this we whether the vendor has got good manufacturing practices, good storing facilities, good layout, good machinery and good manpower requirement. We help in upgrading his information by conducting 2-3 programmes in a year. We now have about 100 certified members. We will allow them to use our brand for marketing their products after specifying some conditionalities. We have a team of experts on food technology, plastic technology etc. So if you have any problem please write to us. Even if our panel of experts cannot solve your problem, our associate members will help you. Total Life Cycle Management Like certification, another important emerging function is total life cycle management. Green packaging is one of the components of the total life cycle.

In the total life cycle, the environment is affected by using the resources for converting raw material into packaging material. This packaging material is then loaded into a container, transported and finally disposed. So how much energy is utilized, how much air is polluted because of all components and process in the life cycle is analysed. IIP is opening a cell where all these studies will be carried out. As far as the green revolution is concerned, we have done a national survey on environment friendliness that can be applicable to the packaging industry. And we have also come out with guidelines regarding which materials must be used in Europe and other developed countries, and at what cost. For environment friendly material, the tax is very less.

Germany is very strict, they will not accept any material if it is not environment friendly. Other countries accept wooden boxes, but the tax is higher. Because they have to either recycle the refuse, or reuse that material. The condition is that you do it at your cost or we will do it at your cost. So that way the indexes are worked out. So we give the guidelines – if you are sending to this country, your packaging materials are graded in these indices. Because of the MNCs, global trade, a number of trends are coming to India regarding environment friendliness. In Japan you cannot use cello tapes but only paper tapes. Paper is environment friendly while cello tape is not. Also corrugated boxes are permitted, not thermocole.

Now the entire electronic zone they get all guidelines from the importing countries and those guidelines are definitely adopted, so that way the green revolution is imposed on us. If I were to tell you, you will say no – first talk about the cost. It increases my cost if I use paper tape. If I say don’t use polythene, use only paper tape nobody will look at me. That is our national problem and my corporate problem. But when it is forced on them they will use it. Examples Now let’s consider an industrial product. A leading manufacturer of ceiling fans was using wooden boxes. Twenty five years ago they approached IIP and jointly we designed a corrugated box which was more expensive than a wooden box.

Though the packing cost increased, they did not mind changing over from the wooden box to the corrugated box. Also the customer found it more easy to handle a corrugated box. So there was customer acceptance. After a few years the same people came to us and we changed the packing material to thermocole – again the cost of packing went up but productivity and customer satisfaction increased, so sales went up. The fan manufacturer is Crompton Greaves. Another example is that of a consumer product. One kulfi seller in Chowpati in Mumbai was selling kulfi a leaf for Rs. 4/-. Then he was inspired by some packing material to make a nice cone from high impact thermocole. Now he was selling kulfi for Rs. and his sales also increased. Today he has a very popular kulfi shop in that area. I have not visited him but he has consulted us for the package design. Case : 7 Materials Management Profit Centre Introduction In the earlier years, Materials Management was treated as a Cost Centre, since Purchasing Department was spending money on materials while Stores was holding huge inventory of materials, blocking money and space. However, with the process of liberalization and opening up of global economy, there has been a drastic change in the business environment, resulting in manufacturing organizations exposed to intense competition in the market place.

Indian manufacturers have been working out various strategies to face the above challenges and to cut down manufacturing costs to remain competitive. Progressive Management have since recognized that Materials Management can provide opportunities to reduce manufacturing costs and can be treated as a Profit Centre. On an average, half the Sales income is spent on Materials. Suppose a firm is spending 50% of its volume on materials and the profits are 10% of sales volume. A 2% reduction in materials cost will boost the profits to 11% of sales or the profits will be increased by 10%. To achieve the same increase in profit through sales efforts, a 10% increase in sales volume will be necessary.

In other words, compared to sales volume, material cost has five times the average on profits. Organizations earn or loose large sums depending on how effective are their Materials Management. The cost savings which are possible in Purchasing are as follows: a) By obtaining materials at lower prices through: • Development of new sources • Price negotiations with vendors • Using modern techniques like cost-price analysis to determine the right or reasonable price for the materials b) By managing taxes payable c) By reducing the cost of packaging d) By optimizing the transportation costs e) By ensuring the right quality of materials f) By value analysis g) By import substitution Profitability

Till the last decade, the equation in business could be stated as Selling Price = Manufacturing Cost + Profit In view of the current competitive pressures in the market, the equation has changed to: Selling Price – Manufacturing Cost = Profit In the current situation, the Selling Price is determined by the market forces and as such, Profit can be ensured only by reducing the Manufacturing Cost. In most of the organizations, materials cost contribute to 60% of manufacturing cost and as such there is a significant importance to Materials Management. Materials Cost is divided into two segments: a) Unit price of the Materials b) Consumption for Production

The Purchase Department can control the prices by effective Negotiations. However, the question is, whether Materials Management can control the total cost, including the Consumption? Yes, it is possible, by controlling the issue from the Stores, based on the norms for Production. Now let us see how Materials Management can improve the PROFITABILITY of an organization – |Sales | |100. 0 | |100. 0 | |200. | | | |Materials | |70. 0 | |63. 0 | |126. 0 | | | |Inventory | |20. 0 | |10. 0 | |20. | | | |Interest @ 15% | |3. 0 | |1. 5 | |3. 0 | | | |Other expenses | |17. 0 | |17. 0 | |30. | | | |Manf. Costs | |90. 0 | |81. 5 | |159. 0 | | | |PBT | |10. 0 | |18. | |41. 0 | | | |% on Sales | |10. 0 | |18. 5 | |20. 5 | | | % Increase | |  | |85. 0 | |105. 0 | | | (All figures in Lakhs) It may be seen from the above table, that just by reducing the material cost by 10%, the Profit has increased by 85%. Similarly, by reducing the materials cost and other expenses, for increased Sales, the profit has increased by 105%. Inventory Management The importance of proper management of Materials need hardly be emphasized.

In any manufacturing industry, nearly 60% to 70% of the total funds employed are tied up in Current Assets, of which Inventory is the most significant component. In the cost structure of most of the products, materials constitute 50% of the total cost, again pointing to the need for the proper budgeting and control on cost of materials The objective of any commercial organization is to get the best mileage out of every rupee invested in the company. In other words, Management through their policies, decisions, coordination and control mechanisms must maximize the Return On Investment (ROI)                 Profits ROI= ——————— Capital Employed Profits = Sales – Manufacturing Cost Manf.

Cost = Labor (10%) + Materials (70%) + Overheads (20%) Overheads include Bank Interest Charges of Inventory held. Capital employed = Fixed Assets + Current Assets Current Assets = Cash (10%)+ Receivables (20%) + Inventory (70%) From the above, it is clear that ROI can be maximized either by increasing Profit Margin or by reducing the Capital Employed or by both. In the current market situation, Sales Price cannot be increased (rather there is a demand to reduce it) and as such Profit can be increased only by reducing the Material Costs. On the other hand, the opportunity to reduce the Overheads and Capital Employed is more by Inventory Reduction.

It is thus evident that the ROI can be maximized by either reducing the material cost or reducing the current assets by way of inventory of materials or can be optimized by increasing profits and reducing capital employed. It is evident that the Materials Manager can make a direct contribution in increasing Profitability in the following ways: a) By deciding inventory norms rationally and through control systems. Inventory Turnover can be maximized which in turn will maximize current Assets Turnover and ROI b) By proper planning and control of Spare parts, capacity utilization can be increased which will increase the turnover of Fixed Assets and consequently increase ROI ) By developing dependable sources and purchasing quality materials at competitive prices, materials cost per rupee of sales can be brought down which will increase Profit Margin and in turn ROI d) By developing proper systems and control on issue of materials, the consumption can be minimized, resulting in reducing the materials cost, which will increase the Profit Margin and also ROI Let us now see the financial position of three companies – A, B, C, and how the ROI has improved by controlling the Inventory (all figures in lakhs) |Items | |A | |B | |C | | |Assets | |5. 00 | |5. 00 | |5. 00 | | | |Inventory | |8. 00 | |6. 00 | |4. 0 | | | |Cash/Credit | |1. 00 | |1. 00 | |1. 00 | | | |Borrowing | |3. 00 | |2. 00 | |1. 0 | | | |Sales | |20. 00 | |20. 00 | |20. 00 | | | |Operation Costs | |18. 00 | |17. 50 | |17. 0 | | | |Interest @ 15% | |0. 45 | |0. 30 | |0. 15 | | | |PBT | |1. 55 | |2. 0 | |2. 85 | | | |ROI % | |11. 00 | |18. 30 | |28. 50 | | |

Realizing the effect of materials on the functioning of any organization, all areas connected with receiving, buying, stocking, issue of materials, are being brought under the name of “Materials Management” as one function in the organization. We can define Materials Management as “the function responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide a predetermined service to the customer at a minimum cost. ” Material Planning and Inventory Control is the most important function of Materials Management and it forms the nerve centre in any organization. Case :8 Paradigm Shift in Procurement Practices of Tata Steel- Traditional purchase to Strategic sourcing Introduction

Today the procurement function of most of the high-technology companies encompasses every effort and interaction that goes into planning, sourcing, making and delivering a final product. It is not confined to activities such as floating enquiries, receiving bids and placing orders. Since material cost accounts for over 50 per cent of the total cost of production of steel, efficient functioning of material management has received greater attention and sourcing has been identified as one of the thrust areas for improvement in most of the steel manufacturing companies. 2 Recent Changes in Procurement Practices Worldwide Organizations have become very much concerned about the purchasing activities as these have a direct bottom-line impact on the business profit of the company.

To handle these activities in a more systematic and structured way many companies all over the world are following a process called ‘strategic sourcing’. Through strategic sourcing, organizations are achieving a substantial amount of savings through the adoption of different techno-commercial, cost-effective measures and leveraging the knowledge and capab’iVil’ies 0 Vr>e suppers
o can o^w ^e >aost quality products and services. Strategic sourcing has been defined as ‘a disciplined, systematic process for reducing the total procurement coste o externally purchased materials, products and services while maintaining or improving. levels of quality, service and technology/Today the focus is on Total Cost of Ownership (TCO) not the purchase price.

TCO is a structured approach to properly understand the (a) different costs involved so as to get a holistic approach towards the overall costs and (b) the technical aspects of the commodity. 3 Procurement Division of Tata Steel: Formation of Strategic Sourcing Prior to strategic sourcing, the procurement division of Tata Steel was a typical purchase organization driven by transactions and negotiations focused on price reduction only, with limited knowledge about the commodity and its end use in the process of steel-making. Over the years, this division has changed itself from a transactional unit to a knowledge-based buying organization through the evolution processes it has undergone over the last five years (see Figure”! ).

After the introduction of strategic sourcing in 1999, the key service of the division has been identified as fulfilment of a customer’s requirement through knowledge-based sourcing of different commodities, as well as services, related directly or indirectly to steel-making processes. The differences between a standard negotiation process and a strategic sourcing process have been shown broadly in Figure2. [pic] Figure 1: Evolution of Procurement Organization at Tata Steel                             [pic] Flg. 2: Difference in Negotiation Approach with the Introduction of Strategic sourcing 3. 1 Strategic Sourcing Approach Tata Steel’s approach is based on the principle that strategic procurement is an exercise beyond cost reduction.

Commodities used for steel-making processes and their allied services are being selected and prioritized for study using strategic sourcing tools, before their annual procurement, depending upon their annual purchase value and criticality of application. After the selection of the commodities, a Commodity Competence Team (CCT) is formed which is a cross-functional team wherein people from different departments such as User/Operation, Research and Development, Quality Control, MRO, Supply Management and Finance come together to formulate sourcing strategies for a commodity purely on a techno-commercial basis. After the formation of the CCT, the commodity studies are carried out based on different technical and commercial parameters as shown in Figure 3. The steps followed for commodity studies have been shown in Figure 4. [pic] 3. 2 Strategic Sourcing Levers

Strategic sourcing requires the application and interpretation of sophisticated strategic sourcing tools and techniques. Tata Steel follows a variety of sourcing strategies, as shown in Figure 5, with multifarious objectiveswhich are mentioned below: • Decrease specific consumption and specific cost of commodities on life-cycle costing basis. • Source consistent quality products. • Ensure continuous supply of materials. • To increase the productivity of blast furnaces or steel-Melting shops by decreasing the down time through the use of improved quality, cost-effective materials, wherever applicable. 4 Implementation of Strategic Sourcing Levers-TCO approach Total Refractory Management of Cast House Refractories for a High-capacity Blast Furnace at Tata Steel 4. 1. 1 Objective Molten iron and slag produced in the blast furnace are removed and separated in the cast house. Molten metal, produced in the blast Furnace, comes out from the taphole and falls into the trough and after passing through it finally enters the torpedo ladle which is used for the transportation of hot metal from the blast furnace to the steel-melting shop. Amongst the many factors responsible for ensuring high productivity from blast furnaces, efficient cast house practices are quite important and the quality of cast house refractories (i. e. aphole clay and trough castable/mix) is a critical[ parameter. So the basic objectives of this study are: • Problem-free blast furnace operation, • Increase in productivity of the furnace, • Decrease in specific consumption (kg/tonne of hot metal) as well as specific cost (Rs/thm throughput) by studying different techno-commercial aspects of cast house refractories. 4. 1. 2 Total Refractory Management Concept To ensure the quality of refractories, proper service and the life of cast house runners which are directly related to the hot metal production and also to decrease the total cost of ownership on a life-cycle costing basis, a strategic decision was taken to go for ‘total refractory management’.

In the total refractory management of cast house troughs for high-capacity blast furnaces, the supplier is responsible for the supply of the entire refractory material for all the locations of cast house troughs, initial installation, regular supervision, maintenance of troughs through casting till guaranteed throughput hot metal is achieved and the supply of all kinds of equipments required for installation and maintenance of cast houses. 4. 1. 3 Vendor Selection through comparative assessment A comparative analysis of the suppliers was carried out based on parameters, which includes total throughput commitment of hot metal, throughput of hot metal committed in between two repairs, total down time of trough runners, a reference list of a supplier’s customers, quality of refractories to be used and life-cycle cost of refractories in terms of Rs/ tonne of hot metal (Rs/thm). 4. 1. 4 Reduction of Life-cycle cost A reduction of the total life-cycle cost. f refractoriness, in terms of Rs/thm, has been done by proper selection of material, optimization of its amount to achieve the guaranteed throughput and finally by knowledge-based negotiation. 4. 1. 5 Benefit to Tata Steel • Reduced down time of the trough runners leading to higher rate of production. • Reduced specific consumption of refractory in terms of kg/thm. • Reduced overall cost of ownership due to higher campaign life of refractories and also due to higher rate of production, as the productivity of the blast furnace largely depends on the quality of refractories used at the cast house. [pic] Figure 5: Different Sourcing Levers Applied for Procurement of High Value and Critical Commodities 4. 2 Procurement of Aluminium 4. 2. 1 Objective

Different forms of aluminium (notch bar, cube and aluminium wire) are used at different stages of steel-making to kill the oxygen in the slag, and hot metal as well as to achieve the desired chemistry. The basic objective of this study was to decrease the specific cost of aluminium, in terms of Rs/ tonne of crude steel (Rs/tcs), by decreasing the specific consumption of aluminium in terms of kg/tcs through the application of various levers of strategic sourcing. 4. 2. 2 Product Substitution The use of aluminium wire, replacing the aluminium notch Bar and cube has provided a substantial amount of benefit in terms of reduced specific consumption and cost due to the following reasons: • Aluminium wire deep penetration-up to bottom part of the ladle. • Better stirring and faster deoxidation. Higher recovery of aluminium due to less vaporization loss. • Reduces the specific cost of aluminium in terms of Rs/tcs due to the much higher recovery of aluminium. 4. 2. 3 Benefit to Tata Steel Decrease of specific cost of aluminium by six to eight per cent due to the decrease of specific consumption. 4. 3 Commodity Study on Desulphurization Compound 4. 3. 1 Objective of the Study The desulphurizing compounds (DS) are used to remove sulphur (S) from hot metal. These compounds are basically a mechanical mixture of two major components—CaC2 and CaO. Worldwide, the current trend in the steel industry is towards lower cost and higher quality products.

The study focused on the entire desulphurization process along with the specification of the DS compounds to find out the scope for bringing down the total procurement cost of the DS compounds without affecting the quality of steel, as well as without increasing the overall cost of the desulphurization process. 4. 3. 2 Development of Cost Effective Improved Quality new DS Compound-Changes in Specification: A limerichDS compound was developed after conducting a series of successful trials, replacing the carbide-rich compound. The newly developed compound has been used continuously over the last four years, replacing a high-cost calcium-carbide-rich compound. The trial results were analysed based on the following factors: Comparison of per cent success rate in terms of achieving the target S of hot metal-Carbide-rich compound vs lime-rich compound. • Specific consumption, kg/tonne of hot metal. • I njection time-Flow rate of new compound. The success of the Lime-rich compound over the carbide-rich compound is due to the following factors: • Theoretically, lime can remove more S than calcium carbide. • The amount of highly reactive soft burnt lime is more in the new compound. 4. 3. 3 Benefit toTata Steel The lower specific cost of the DS compound in terms of Rs/tonne of hot metal has reduced the total procurement value of DS compounds by 25 per cent. 4. 4 Procurement of Graphite Electrodes on Life Cycle Costing Basis

The graphite electrodes are used in ladle furnaces to maintain the required melting temperature of steel. Continuous development of the operational efficiency of ladle furnaces requires graphite electrodes of very high quality with an emphasis on better consumption norms and least electromechanical problems. The commodity study on graphite electrodes had the following basic objectives: 1. To use consistent high-quality electrodes to decrease the specific consumption of electrodes in terms of kg/tcs as well as electromechanical problems as far as possible. 2. To increase the availability/turnaround time of ladle furnaces by increasing the length of UHP-grade electrodes. 3.

To decrease the life-cycle cost of graphite electrodes in terms of Rs/ tcs through knowledge-based negotiation. 4. 4. 1 Procurement Strategies: To fulfil the above mentioned objectives the following procurement strategies were adopted. • A knowledge-based negotiation was conducted based on the cost model developed, (dentirymg the major cost drivers and a comprehensive analysis of the key players of graphite electrodes in India as well as abroad. • Formulation and incorporation of performance guarantee clauses. • Change in specification. 4. 4. 2 Performance Guarantee Clause The different parameters which influence the erosion of graphite electrodes during their operation at high temperatures, i. e. 16501700oC, were studied thoroughly.

A strong correlation was observed when the actual specific consumption of graphite electrode (kg/ton of crude steel), obtained during operation, was plotted against the corresponding specific power consumption (kwh/ ton of crude steel). The correlation coefficient, i. e. R2 value, was more than. 4. 4. 3 Benefit to Tata Steel The commodity study on graphite electrodes has resulted in a savings of almost 20 per cent of their annual procurement value due to the adoption of the following strategies: a. Knowledge-based negotiation. b. incorporation of performance guarantee clauses. c. Life-cycle costing analysis of products sourced from different vendors-performance-based procurement 5. Conclusion The strategic sourcing methodology in Tata Steel utilizes a phased management process, cross-functional teams and a set of analytical tools. Value is created by better buying decisions because buying decisions have become business decisions. The structured methodology of strategic sourcing activities in Tata Steel helps to lower the total cost of procurement of different commodities, considering both the tangible and intangible benefits, by studying and analysing the techno-commercial aspects mainly on a life-cycle costing basis wherever possible and this has helped Tata Steel to become one of the lowest-cost producers of steel in the world.

With the implementation of strategic sourcing principles in most of the high-value and critical commodities, before their procurement, the steel company is achieving not only a substantial amount of savings but also strengthening the ties with suppliers offering the best quality products and services. Case : 9 Inventory performance Measurement & Organizational Issues Out of various theories of inventory performance measurement suggested in literature and research papers whether the one chosen by an organization is producing desired result or not can only be ascertained if certain performance parameters are fixed and the same are evaluated on periodic basis. Inventory Performance measurement is a necessity as it would indicate as to how good or bad is the inventory management being carried out by an organization.

It would also give opportunity to compare various performance indicators with same of the benchmark company in similar industry. Key indicators may be classified as under: 1. 1 Financial indicators • Inventory Investment inventory investment is basically the expenses met for acquisition of inventory. Whereas higher investment in inventory may improve Fill Rate ie fraction or percentage of demand that is actually met, the downside is that it may block more funds which is not available for alternate application. To check if there is right amount of stock inventory one way is to compare the value of current inventory to an “ideal inventory investment. ” To calculate the value of “right” amount of inventory. equires first to separate the inventory items with (i) recurring demand items and (ii) sporadic usage items. • Recurring Usage Items Recurring usage products are used on a regular basis. Typically these items: • Have had usage in at least eight of the last twelve months. • Have had usage in at least four continuous months in the last twelve months (This condition identifies seasonal items that are only used during certain times of the year). Replenishment of these items is normally based on safety stock quantities, order points, line points, and standard order quantities: • Safety Stock Quantity: The “insurance” inventory maintained in stock to protect from stock outs resulting from unexpected customer demand or vendor hipment delays. • Order Point: The Safety Stock Quantity plus predicted demand during the anticipated lead time. • Line Point: The Order Point plus predicted demand during the supplier review or order cycle; the normal length of time between typical replenishment orders with the supplier. • Standard Order Quantity: Is the minimum quantity that can be ordered once . Replenishment orders are typically placed with a supplier when the Replenishment Position (On Hand – Committed on Current Outgoing Orders + On Current Incoming Replenishment Orders) of an item is between its Order Point and Line Point: Figure 1(a) Estimation of ideal inventory investment

Stock receipts for these replenishment orders will normally be received when the replenishment position is somewhere between a point equal to the Line Point – |Line point | |  | |  | | | |Quantity | |Demand during order cycle | |Order issued | | | |Order point | |Demand during | |anticipated lead time | |  | | | |Safety Stock | |Safety Stock | |  | | | Figure 1(b) Estimation of ideal inventory investment |Line point | |  | |  | | |Quantity | |Demand during order cycle | |Stock Received | | | |Order point | |Demand during | |anticipated lead time | |  | | | |Safety Stock | |Safety Stock | |  | | | Anticipated Lead Time Demand and the Safety Stock quantity:

For example, if a product is ordered when its replenishment position is just below the line point, shipment would be received when the available stock quantity equals the Line Point minus Anticipated Lead Time Demand. But if the product is not ordered until the replenishment position equals the Order Point, the receipt would probably arrive when the available inventory equals the Safety Stock. Therefore it can be estimated that the “average” quantity on hand at the time of stock receipt will be the average of the Line Point – Anticipated Lead Time Usage and the Safety Stock quantity. The stock receipt of products with recurring usage will normally be equal to the specified Standard Order Quantity (SOQ) of the product.

The average quantity of this SOQ on hand during the time it takes to consume the entire SOQ will be equal to half the SOQ: Therefore the ideal average on hand quantity of an item with recurring usage should be equal to the average quantity on hand at the time of stock receipt plus half the SOQ: [(Line Point – Anticipated Lead Time Usage) + Safety Stock]/2 + SOQ/2 Ideal average on hand quantity of each item with recurring usage can be multiplied with its average cost and compare it with the current inventory value of the product to determine whether there is currently over stocking or under stocking. Sporadic Usage Items In many organizations more than 50% of stocked products have sporadic usage ie, they are not required on a regular, predictable basis. Like recurring items, the average or ideal value of sporadic inventory items should be some average of the normal quantity on hand, perhaps the target stock level divided by two. But because sporadic usage items are not consumed on a predictable basis, it is very difficult to calculate an “average” investment for these items.

Therefore the “ideal” value of sporadic inventory items is equal to the target stock level quantity times the average cost. It’s true that because we will occasionally use some of the stock of some sporadic items, the value of the target inventory will overstate the average value of some items. But this is considered the most accurate method to determine the ideal value of sporadic inventory items. Unfortunately the value of the inventory of a sporadic inventory item will often exceed the value of the target stock level. This is because a vendor package quantity of a product may have to be ordered when replenishing stock. And the vendor package quantity may not have any relationship to the normal customer order quantity.

Because sporadic inventory is not used on a recurring basis, careful monitoring of the value of any amount of sporadic inventory in excess of the target stock level, particularly for those items with a high unit cost is needed. Planned excess of sporadic inventory items equals (Target Stock Level – Normal Order Quantity) + Vendor Package Quantity Here one of the goals should be to minimize the value of this planned excess. If a sporadic inventory item has a high planned excess value the following may be considered. • Ordering an amount of the product close to the normal order quantity, even if a higher price per unit is to be paid. • Discontinuing the product from stock inventory and ordering it only as necessary to fill specific requirements. • Sharing one vendor package quantity among several stocking locations. Saving the carrying cost of excess inventory of one sporadic inventory item may more than compensate from the reduced profit on the resulting use. One of the best inventory metrics involves comparing the value of current inventory to the sum of the values of the ideal stock level for each product. If the values are not close to one another, inventory planning is not proper and the replenishment recommendations are not being followed. Comparing actual inventory with the “ideal” will lead to actions that can bring improved profitability. • Inventory Carrying Cost (IC) Inventory carrying cost are those costs associated with the amount of inventory stored. Lower inventory cost is desirable and reflects better inventory management. This includes all the costs tabulated below: |Table . Various cost elements of Inventory carrying cost | |Category of |Explanation |Example | |Cost | | | |Capital costs |Opportunity cost of capital, |Inventory | | |reflects the true cost involved |investment | |Inventory |Ad-valorem taxes and fire and |Taxes | |service costs |theft insurance paid towards | | | |value of inventory. |Insurance | |Storage space |Cost of space either owned, |Owned/ | |costs |leased or rented |Public/rented | |Inventory risk |Risk cost incurred due to the following: | | |Cost |Holding inventory beyond their useful life. | | |Shipping and handling |Obsolescence | | |Loss in weight or spillage. |Damage | | |Transshipment from one warehouse to another |Shrinkage Relocation | Case : 10 E waste Management Definition of e-waste : Electronic waste, popularly known as ‘e-waste’ can be defined as electronic equipments / products connects with power plug, batteries which have become obsolete due to: advancement in technology changes in fashion, style and status nearing the end of their useful life. Classification of e-waste :

E-waste encompasses ever growing range of obsolete electronic devices such as computers, servers, main frames, monitors, TVs & display devices, telecommunication devices such as cellular phones & pagers, calculators, audio and video devices, printers, scanners, copiers and fax machines besides refrigerators, air conditioners, washing machines, and microwave ovens, e-waste also covers recording devices such as DVDs, CDs, floppies, tapes, printing cartridges, military electronic waste, automobile catalytic converters, electronic components such as chips, processors, mother boards, printed circuit boards, industrial electronics such as sensors, alarms, sirens, security devices, automobile electronic devices. Indian Scenario :

There is an estimate that the total obsolete computers originating from government offices, business houses, industries and household is of the order of 2 million nos. Manufactures and assemblers in a single calendar year, estimated to produce around 1200 tons of electronic scrap. It should be noted that obsolence rate of personal computers (PC) is one in every two years. The consumers finds it convenient to buy a new computer rather than upgrade the old one due to the changing configuration, technology and the attractive offers of the manufacturers. Due to the lack of governmental legislations on e-waste, standards for disposal, proper mechanism for handling these toxic hi-tech products, mostly end up in landfills or partly recycled in a unhygienic conditions and partly thrown into waste streams.

Computer waste is generated from the individual households; the government, public and private sectors; computer retailers; manufacturers; foreign embassies; secondary markets of old PCs. Of these, the biggest source of PC scrap are foreign countries that export huge computer waste in the form of reusable components. Electronic waste or e-waste is one of the rapidly growing environmental problems of the world. In India, the electronic waste management assumes greater significance not only due to the generation of our own waste but also dumping ofe-waste particularly computer waste from the developed countries. With extensively using computers and electronic equipments and people dumping old electronic goods for new ones, the amount

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