Procurement Management

1. I. What do you mean by MRP System?

Material Requirements Planning (MRP) is a computer-based production planning and inventory control system. MRP is concerned with both production scheduling and inventory control. It is a material control system that attempts to keep adequate inventory levels to assure that required materials are available when needed. MRP is applicable in situations of multiple items with complex bills of materials. MRP is not useful for job shops or for continuous processes that are tightly linked. The major objectives of an MRP system are to simultaneously: 1. Ensure the availability of materials, components, and products for planned production and for customer delivery, 2. Maintain the lowest possible level of inventory, 3. Plan manufacturing activities, delivery schedules, and purchasing activities. "Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want products to be available in a shorter time than it takes to make them. This means that some level of planning is required." Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below:

If company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may be unable to meet contract obligations to supply products on time.

If a company purchases excessive quantities of an item, money is wasted - the excess quantity ties up cash while it remains as stock and may never even be used at all.

Beginning production of an order at the wrong time can cause customer deadlines to be missed.

MRP is especially suited to manufacturing settings where the demand of many of the components and subassemblies depend on the demands of items that face external demands. Demand for end items is independent. In contrast, demand for components used to manufacture end items depend on the demands for the end items. The distinctions between independent and dependent demands are important in classifying inventory items and in developing systems to manage items within each demand classification. MRP systems were developed to cope better with dependent demand items.

II.

What are the basics for a MRP System?

The three major inputs of an MRP system are the master production schedule, the product structure records, and the inventory status records. Without these basic inputs the MRP system cannot function. The demand for end items is scheduled over a number of time periods and recorded on a master production schedule (MPS). The master production schedule expresses how much of each item is wanted and when it is wanted. The MPS is developed from forecasts and rm customer orders for end items, safety stock requirements, and internal orders. MRP takes the master schedule for end items and translates it into individual time-phased component requirements. The product structure records, also known as bill of material records (BOM), contain information on every item or assembly required to produce end items. Information on each item, such as part number, description, quantity per assembly, next higher assembly, lead times, and quantity per end item, must be available. The inventory status records contain the status of all items in inventory, including on hand inventory and scheduled receipts. These records must be kept up to date, with each receipt, disbursement, or withdrawal documented to maintain record integrity. MRP will determine from the master production schedule and the product structure records the gross component requirements; the gross component requirements will be reduced by the available inventory as indicated in the inventory status records.

III.

4 units of component B & 2 units of component C are required to produce A. 2 units of component D & 1 unit of component E are required to manufacture 1 unit of component B. 3 units of component D & 2 units of component F are required to manufacture 1 unit of component C. a) Draw the tree diagram of BOM for the product A. b) To produce 100 units of product (A) what are the requirements of component B C D E F?

a) Bill of Materials is a product data structure which captures the end-products, its assemblies, their quantities and relationships. The structure of a parts list determines the accessibility of the parts information by various departments in a company. It also helps to determine the level of burden put on the computational device in searching for product information. In many companies the BOM is structured for the convenience of individual departments. This, however, engenders problems in other departments. In Figure 1.1, a product named Product (A) is shown graphically with the summarized products structure and the amount of all items that are needed to make the parent products are enclosed in brackets. Level: 0 Level: 1 Component (B) - 4 Component (C) - 2 Product (A)

Level: 2 Component (D) - 2 Component (E) - 1 Component (D) - 3 Component (F) - 2

Figure 1.1 Product structure for Product (A)

b)

Component
B C D E F Total

Quantity (1 unit)
(1 x 4) = 4 (1 x 2) = 2 (4 x 2) + (2 x 3) = 14 (4 x 1) = 4 (2 x 2) = 4 28

Quantity (100 units)

4x100 = 400 2x100 = 200 14x100 = 1400 4x100 = 400 4x100 = 400 2800

Table 1.1 contains a bill of materials for Product (A) in which the total usage of each item is collected into a single list for the product. This kind of list is convenient for the master production schedule.

2.

I.

What do you mean by an E-Procurement System?

E-Procurement System E-procurement systems, applications designed to allow businesses use the Internet in order to acquire the necessary goods and services, are not all created equal. The term itself is quite broad and actually includes several varieties of applications. Part of a successful implementation involves choosing the appropriate application. In general, there are three main categories of e-procurement systems. One type focuses on improving the transactions and the decision-making capabilities of the company. Businesses may deal with hundreds of transactions weekly, but these applications simplify the process and help foster stronger relationships between buyers and suppliers. The second category of e-procurement systems involves managing assets. Systems in this category provide inventory management, maintenance scheduling, in-house

product availability, as well as other similar services. These applications are useful for businesses that need to keep a close idea on the quality of their direct materials in stock. Finally, the last category includes systems designed to optimize a company's production operations. Many of these applications deal with the entire production cycle, including the procurement of materials when the inventory runs low, the management of supplier contracts, and the production scheduling. Because of the differences between the systems, it is important for companies to choose the one that is most appropriate for their industry. However, the decision isn't as difficult as one might at first think. Businesses involved with manufacturing, such as automobile makers, would be more likely to use systems from the third category. Those types of applications would allow them to maintain a specific amount of direct materials in their inventory but they also need to have a system which helps them plan and forecast their production. On the other hand, companies that deal with repair and/or maintenance, such as automotive repair shops, would be more likely to use e-procurement systems from the second category. Since they need to keep track not only of their inventory of car parts, but also of helping them set repair schedules. Regardless of the type of e-procurement system a company chooses, the company can expect to receive similar benefits including saving money on purchases, improving the timeliness of the purchasing process, and eliminating waste. In addition to these benefits, companies can also improve the efficiency of their supply chain. Supply chains essentially include every business, manufacturer, and distributer that supplies the goods and services necessary to create a product, so any improvement in the speed of those transactions is obviously beneficial. Additionally, using e-procurement to enhance supply chain relationships can make it easier for accounting departments to track and keep a record of payments and invoices. E-procurement systems don't automatically boost supply chain efficiency, however. The company must select a system that has the capabilities necessary to achieve those benefits first. For example, the system must include applications to assist with contract management, including storing pricing information, maintaining sales terms, and helping negotiations. By having all of this information in one place, the purchasing process is expedited. Another offering that must be included in the

application is the ability to easily compare suppliers so that the best one can be chosen to meet that company's particular needs. After all, choosing the right supplier depends on more than just price; it also involves product availability, customer service, industry reputation, and quality. Despite the differences in e-procurement applications, the bottom line is that a company must choose one that works for its industry and one that will help make its supply chain more efficient if the system implementation is to truly be successful.

II.

Explain the drivers of E-Procurement?

Drivers of E-procurement Most organizations suffer inefficiencies when using the traditional procurement process. The procurement process consists of sourcing (negotiating prices), procurement (raising and fulfilling orders), and payment (collecting invoices and arranging payment). E-procurement streamlines all three parts of the process and offers: Improved management information across all areas of purchasing Instant access to catalogs and products Improved transparency and interoperability Standardized and streamlined purchasing practices Budget visibility and control Supplier bills paid on time Reduction in paperwork and duplicated records Centrally-managed contracts Faster procurement Improved methods of spending and performance measurement and analysis Lower overhead and marketing costs for vendors

III.

In an E-Procurement implementation project what limitations you would expect?

Buyer-Side Challenges The following are some of the challenges an implementation team will likely encounter within their organization. Lack of Knowledge about the Supplier Community It is frequently the case that a buying organization knows little about its suppliers beyond the largest 20%, and all too frequent that a supplier does not even know very much about their top 20%. The starting point to address this challenge is to create a starting list of the critical suppliers that constitute the top 80% of spend, create an appropriate RFI to collect the

information, analyze the situation, and create a staged action plan to enable groups of the suppliers in phases, according to criticality and capabilities. Too Many Suppliers to Engage It is the smallest invoices that are often the most expensive to process. This problem can often be alleviated by reducing the number of suppliers, but it is only a partial remedy and stop-gap fix. The solution is to enable a technology platform that cost-effectively and productively automates manual processes in a way that allows a large number of suppliers to be on boarded at low cost and effort to both parties. No Time, Money, or Expertise to Manage an Enablement Program Although a common ailment of much technology related efforts, it presents a double whammy challenge in supplier enablement since the project has to succeed in both the buying organization and the supplier organization to be a success. The key to success is to make sure sufficient funds are allocated up front, the project is properly scoped and the resources committed, and the right expertise brought-in and contracted up front. Lack of Internal Commitment & Communication Another common ailment of many technology related efforts, it also presents a significant challenge if the company is not committed to the program internally. The most successful programs are those that are introduced by the company's most senior procurement executives and enforced across all internal departments. Furthermore, all employees on the project should understand how the effort will help achieve business goals, how other business functions interacting with the suppliers will benefit, and how the program is being managed. Lack of External Commitment & Communication Even if a company goes to great effort to organize itself internally, commits appropriate resources to the project, and effectively communicates the effort to all employees impacted by the project, the initiative can, and will, still fail if external execution is poor. A company needs to be sure to effectively communicate its electronic trading and enablement strategy to its suppliers with a compelling business case using written, electronic, telephone, and inperson messages and communications. The supplier needs to understand the process, and the value it enables. Fear of Imposing Too Great a Cost on Suppliers A technology change always comes at a cost in terms of time, effort, and often dollars. Some companies will be concerned about the cost of the change for their suppliers, especially for those that are strategic or low volume. The key is to select a platform that can be incorporated by a supplier with little change and no cost, such as web-based portal interface, as a starting point, but one that can be more tightly integrated into the supplier's solution suite as time goes on.

Supplier-Side Challenges The following are some of the challenges an implementation team will likely encounter within their suppliers' organizations. Overwhelming Complexity Many suppliers are not very technical. Given that computer-to-computer information exchange is difficult even for large companies, it is quite easy for a supplier to be overwhelmed by a new technology solution. The key is to provide a supplier with a solution that accommodates their level of technological sophistication. Lack of Money & Technical Resources While a major supplier is likely to have the capacity and business volume incentive to make a significant investment in the necessary infrastructure to deploy and maximally utilize a supplier enablement solution, a smaller supplier is unlikely to have the capacity, resources, or know how to take advantage of a sophisticated solution. No Visibility of Return on Investment Many suppliers believe that the benefits of a supplier enablement solution are restricted to the buyer. Although research has demonstrated that electronic transactions lower transaction costs, reduce error, and shorten cycle times, the greatest benefits are derived only by those companies that integrate the process into their standard business processes and e-Procurement and ERP systems. The key is to provide a supplier with a solution that they can easily integrate into their systems and processes.

IV.

If your organization decides to buy an E-Procurement System what are the factors that you would consider?

Selection Criteria for E-Procurement Solutions Cost Availability Functionality Value Added Service System Integration Scalability Security Ease of use Vendor Consideration System Interoperability

3.

I.

Explain the differences between Re-Order Level (ROL) & Periodic Review System (PRS)

Reorder Level
The reorder point for replenishment of stock occurs when the level of inventory drops down to zero. In view of instantaneous replenishment of stock the level of inventory jumps to the original level from zero level.

In real life situations one never encounters a zero lead time. There is always a time lag from the date of placing an order for material and the date on which materials are received. As a result the reorder point is always higher than zero, and if the firm places the order when the inventory reaches the reorder point, the new goods will arrive before the firm runs out of goods to sell. The decision on how much stock to hold is generally referred to as the order point problem, that is, how low should the inventory be depleted before it is reordered.

The two factors that determine the appropriate order point are the delivery time stock which is the Inventory needed during the lead time (i.e., the difference between the order date and the receipt of the inventory ordered) and the safety stock which is the minimum level of inventory that is held as a protection against shortages due to fluctuations in demand.

Reorder level = Average daily usage rate x lead-time in days

From the above formula it can be easily deduced that an order for replenishment of materials be made when the level of inventory is just adequate to meet the needs of production during lead-time.

Reorder point = S x L + J (S x R x L) Where S = Usage in units L = Lead time in days R = Average number of units per order J = Stock out acceptance factor The stock-out acceptance factor, `F', depends on the stock-out percentage rate specified and the probability distribution of usage (which is assumed to follow a Poisson distribution)

Periodic Review System

A system for placing orders of varying sizes at regular intervals to replenish inventory up to a specified or target level. A periodic inventory review system sets a specific re-order period, but the re-order quantity can vary according to need. The quantity re-ordered is calculated by subtracting existing inventory and on-order inventory from the target level. In the order point system, an order is placed when the quantity on hand falls to a predetermined level called the order point. The quantity ordered is usually predetermined on some basis such as the economic-order quantity. The interval between orders varies depending on the demand during any particular cycle. Using the periodic review system, the quantity on hand of a particular item is determined at specified, fixed-time intervals, and an order is placed. Figure 11.8 illustrates this system. Figure shows that the review intervals (t1, t2, and t3) are equal and that Q1, Q2 and Q3 are not necessarily the same. Thus the review period is fixed, and the order quantity is allowed to vary. The quantity on hand plus the quantity ordered must be sufficient to last until the next shipment is received. That is, the quantity on hand plus the quantity ordered must equal the sum of the demand during the lead time plus the demand during the review period plus the safety stock. Target Level or Maximum-Level Inventory The quantity equal to the demand during the lead time plus the demand during the review period plus safety stock is called the target level or maximum-level inventory:

T=D(R+L) + SS Where; T = target (maximum) inventory level D = demand per unit of time L = lead-time duration R = review period duration SS = safety stock

II.

Explain Economic Order Quantity (EOQ) & Economic Batch Quantity (EBQ)

Economic Batch Quantity (EBQ) Economic batch quantity (EBQ), also called "optimal batch quantity" or economic production quantity, is a measure used to determine the quantity of units that can be produced at minimum average costs in a given batch or production run. Economic Production Quantity model (also known as the EPQ model) is an extension of the Economic Order Quantity model. The Economic Batch Quantity model, or production lot-size model, is similar to the EOQ model in that we are attempting to calculate an optimum for the batch quantity we have to produce. In working with this EBQ model, we also make use of a number of assumptions. The demand (D) is known and constant within a certain period of time The unit cost of the inventory item (U) is constant The annual holding-cost per unit (Ch) is constant The setup-cost per batch (C) is constant The production time (tp) is known and constant We are dealing with one kind of product There is no interaction with other products The aspect of time does not play a role, just the setup time does The setup cost is constant and does not act upon the batch quantity.

Variables K = setup cost D = demand rate F = holding cost T = cycle length P = production rate

Formula

Economic Order Quantity (EOQ) The economic order quantity (EOQ) is a model that is used to calculate the optimal quantity that can be purchased or produced to minimize the cost of both the carrying inventory and the processing of purchase orders or production set-ups. Formula Following is the formula for the economic order quantity (EOQ) model:

Where Q = optimal order quantity D = units of annual demand S = cost incurred to place a single order or setup H = carrying cost per unit This formula is derived from the following cost function: Total cost = purchase cost + ordering cost + holding cost Limitations of the economic order quantity model: It is necessary for the application of EOQ order that the demands remain constant throughout the year. It is also necessary that the inventory be delivered in full when the inventory levels reach zero. Underlying assumption of the EOQ model Following are the underlying assumptions for the EOQ model. Without these assumptions, the EOQ model cannot work to its optimal potential. The cost of the ordering remains constant. The demand rate for the year is known and evenly spread throughout the year. The lead time is not fluctuating (lead time is the latency time it takes a process to initiate and complete). No cash or settlement discounts are available, and the purchase price is constant for every item. The optimal plan is calculated for only one product. There is no delay in the replenishment of the stock, and the order is delivered in the quantity that was demanded, i.e. in whole batch.

III.

Manager of a soft drink bottling plant needs to decide how long a production run for each type of drink should be. Demand for each type of drink is reasonably constant at 90,000 per month (1 month = 160 hours). The bottling lines fill at a rate of 4000 bottles per hour, but taken an hour to change over between different drinks. The cost of each changeover has been calculated at USD 500 per hour. Each bottle produced is valued at USD 2. Inventory carrying cost is 5% of this value per month. What should be the length of each run?

EOQ =

EOQ =

EOQ = 32,361.59

4. I. Explain the role of Purchasing Management in a

manufacturing organization.
The Purchasing Management plays a pivotal role in procurement, vendor development, and negotiation. The management plans, organizes, directs, controls, and evaluates the purchasing activities of the company. To operate costeffectively the company requires competitive prices commensurate with the technical and service requirements, and the security required by the business. The role is to manage and operate this process, in particular developing processes to capture and control expenditure and linking with suppliers, both current and potential, to ensure that best prices and quality is achieved. The Purchasing Management develops purchasing policies and procedures and controls the purchasing department budget. Relationship Management Manages day-to-day functioning of purchasing group. Reviews purchase orders to ensure adherence to quality and procedures. Ensures that re-ordering of stock is carried out on a daily basis as required to maintain adequate stock levels of parts for production. Understands assembly process thoroughly to ensure that the material is delivered just in time. Participates in the creation of forecasts, and relates those to production programs and stock required for the daily production round. Represents purchasing in discussions and strategies aimed at improving overall integration of purchasing, assets, and accounts payable. Liaise with Technical department when creating new products or in matters relating to product specification. Participate in the development of specifications for equipment, products, or substitute materials. Reviewing the technical specifications for accuracy and completeness. Manages the creation and maintenance of Equipment Bill of Materials. Overseeing the technical and QA requirements on all items (materials, components, and parts) to ensure that purchased items meet design requirements.

Managing the shipping, handling and storage requirements on components to ensure high quality items are received and issued to the appropriate departments. Standardizing and managing the evaluation of replacement items for obsolete parts and component acceptability. Support & Coordinating with the various Departments for Procurement of Common Raw Materials & Packaging Materials. Coordinate with various departments for smooth functioning of departmental activity, particularly with Accounting department. Rate contracts/tendering /market surveys and data bank of prices for ready reckoning and instant estimations. Prepares, monitors and controls department business plans / budgets

Supplier Management and Vendor Sourcing and Analysis Undertakes Vendor Analysis & Development of new Vendors. Identifies early suppliers for company components, concepts, and production programs. Manages vendor documentation program, ensuring that a tracking system is in place and maintained. Works closely with potential production suppliers to ensure effective support. Searches on a worldwide basis for technology suppliers, technology partners, and future potential suppliers for the company and keeping up with market trends. Proactive and acts on initiative to maintain a supplier base and when necessary source alternative suppliers to ensure that the required material products remain in constant stock as required. Proactively ensures all suppliers adhere to agreed service levels and to have contingencies plans of supply for all core product ranges. Develops and implements appropriate long and short term strategic and tactical initiatives in order to achieve specific buying, sourcing targets. Supports the Product Design Group with supplier negotiations, supplier timing plans, and cost forecasts to achieve the most cost effective component delivery. Negotiates and executes contracts with the vendors as per requirement of quality, cost and delivery. Maintains data of all the prices approved as a record and keeps track of changes in prices frequently and updates.

Reviews purchase orders to ensure adherence to quality and procedures. Oversees the purchase orders to Vendors and order acknowledgements from the Vendors. Follows up with Vendor for delivery and to get the material at the right time and required quantity at required locations. Follow through on outstanding back orders. Maintains effective record keeping on all purchase orders and supplier confirmations. Coordinates with accounts for payment of suppliers and resolve issues if any. Reviews and processes claims against suppliers. When necessary, to develop a sub-contractor base whether local or direct to market level and to set-up on-site, sub-contractor QA and process improvement activity.

Cost Reductions and Efficiency Improvements Evaluates cost and quality of goods or services. Monitors International Trends in Raw Material for effective negotiations. Continuously tries to reduce outgoing funds while not compromising on product quality. Obtains best prices for imports from carriers. Cost Cutting through negotiation with suppliers (domestic/foreign). Negotiation and pricing of current and new products. Streamlining production, identifying and eliminating inefficiencies. When necessary, Just-In-Time purchases to minimize inventory cost. Updating and revising existing purchasing procedures to introduce cost cutting measures. Balancing regional and global approaches. Accurately monitoring and forecasting stock levels. Researching and identifying new products and suppliers. Always seeking reliable vendors or suppliers to provide quality goods at reasonable prices. Precise monitoring of quantity and timing of deliveries. Ensuring relationships with existing suppliers are kept manageable and in the best interests of the business - be this through initiating commercial negotiations, implementing improvement programs and making certain quality, cost and delivery are guaranteed.

Maximizing the supply chain efficiencies for all accountable suppliers and accounting for the in and outbound supply chain for the business against agreed service and targets. Highlighting purchasing opportunities where identified. Managing and developing a solid relationship with suppliers to reduce costs and improve quality including on-time deliveries. Plans material as per the requirement of assembly processes to support improvement in the production flow. Overseeing continuous improvement initiatives to drive process optimization. Developing and managing obsolescence programs, including the strategic direction for components and materials.

Team Relationship Provide leadership to the team. Supervise and motivate the team. Develop and train staff to ensure that they meet required performance standards. Support in execution of Service Contracts. Liaise with support staff as appropriate. Provide guidance to staff in handling employee inquiries and to ensure that matters are resolved. Demonstrate credibility to win the confidence and support of the top management, suppliers and partners. Interact with suppliers, customers, customers' agencies (Artwork Houses etc.), and agents, suppliers and prime producers supplying all group companies. Provide assistance to all departments as required. Deal effectively with executive, technical and operational and sub-contract personnel.

II.

Describe how a Purchasing Manager can contribute towards increasing profits in the Supply Chain effectively?

An industrial enterprise is primarily meant for converting raw materials into finished products. The wheels of industry will not move unless materials of the right type are bought in right quantities and made available at right time. Needless it is to say that is buying function which is responsible for supply of materials to the factory. As is well known, more than 50% of the total cost is contributed by a single element called materials. It is proved that a one percent saving in material cost is equivalent to nearly 10 percent increase in turnover. Saving in the cost of materials is achieved mainly through efficient buying. So a purchasing manager can contribute towards increasing profits by focusing on these 6R to effectively manage supply chain.

The very first issue in PM is the selection of proper SOURCE. Allocation factors are dependent upon the source. A source is proper only if it can satisfy the customer as regards other factors.

Another issue in purchasing management is right quality. The manager must properly define the quality requirements. Whether quality will be costly. But in many of cases,

cheaper goods prove out to be costly in the long run. Thus what is the quality of inputs desired must be clear in the mind of the purchase manager. This description then should be clearly mentioned in the purchase order. Further once the delivery is received it should be properly checked the actual material the specified materials. Another issue in purchasing management is right quantity. The issue of quantity generally relates with the decision as to how much to purchase. This is more of a mathematical question. By using different models regarding inventory control, the optimum order quantity has to be decided. The other issue in purchasing management is right price. Price is the major factor for a purchase decision. For most of the people, price comes first than even quality. The equation used in this concern is:VALUE = QUALITY/PRICE This is both a mathematical formula and an axiomatic truth. It implies that the value & quality do have a positive relationship while value & price share an inverse relationship. It means to say that the lower the price, the more the value, and viceversa. Another issue in purchasing management is right time. Delivery schedules are a veryvery important part of effective purchasing. All purchasing orders should be made and implemented in such a way that these are made available in time when needed. Timing is very crucial for every part of human activity and purchasing is not an exception. The last issue in purchasing management is right place. Right place means right place of delivery. Every purchase contract, in addition to time of delivery, must clearly state the place of delivery and such other terms like free delivery or ex-factory delivery

5. I. Explain the rationale underlying Volume Consolidation. What are the risks associated with using a single supplier for an item?
Volume Consolidation Consolidating volume with limited number of suppliers increases the share of buyer in suppliers business. This way it can leverage its purchasing power with a few suppliers and get better prices in return for purchasing higher volumes of product. Supplier benefits due to economies of scale. Assured of a volume of purchases, supplier is more willing to invest in process or capacity improvements. Estimated savings in purchase price and other elements range from 5% to 15%. If a typical firms spends 60% of its revenue on purchased items, a saving of10% through volume consolidation can deliver Rs 6 million improvement on revenue of Rs100 million to the bottom line.

Single Source Supply Risks Screen supplier rigorously. Develop strict selection procedures. Develop preferred or certified suppliers. When risks justify use more than one supplier (but still a few, two?). In case of a single source, have a contingency plan.

II.

What are the benefits a Purchasing Manager will desire using supplier operation integration as a Procurement strategy?

Supplier Operational Integration Primary objective is to cut cost, reduce waste and develop a relationship that allows both buyers and sellers to achieve mutual improvements. Sharing sales and ordering information. Redesigning processes to improve efficiency.

 Achieving zero defects at suppliers. Vendor managed inventory. Reducing TCO.

III.

How can a Purchasing Manager use ABC Analysis to control the purchasing function?

ABC Analysis ABC analysis is an important tool in hand of purchase manager who has to handle thousands and lakhs of items of any manufacturing units as per scale. Purchase manager can ask for ABC analysis for items for the unit and can put greater control or do more value analysis for the items which are categorized A , other categories are B and C . These categories can be made by analyzing annual consumption of items in terms of volume and cost done in descending order and calculating the % contribution of items on total cost. Results would throw items which taken in account would constitute 7080% of the total value , these items would fall in category A , Balance which contributes to 25% would be put into Category B where as balance items can be classified into category C . Importance of these Categories; Category (A) items: Frequently ordered items with minimum of stock .Weekly control statements. Centralized purchasing and storage for any manufacturing unit. Material planning runs should accurately predict the quantity to be procured. Reduce the lead time for such items. Eg. Bearings in any light engineering unit. To be handled by senior procurement executive. Category (B) items: These items are moderately controlled and orders issued would be maximizing up to four or five. Periodic follow up and estimates done on annual consumption. Category (C) items: These items can be stocked for larger period and can be ordered in bulk with one or two purchase order. Controls are least for such items and can be handled by junior executives. Though most of the items which may fall in category C are of low volume and low cost but sometimes become critical if not monitored. For Eg. Belts in any light engineering unit. Stock out situation can occur if stocks are not monitored. For such instance one should have a general vendor which can supply these items on a sort notice even though one has to pay some premium for such service.