MODULE IV Outsourcing, Subcontracting, issue & Receipt procedures, accounting, material safety & security, Management of surplus, obsolete

& scrape, purchasing planning, legal aspects. Out SourcingIt is contacting out a business process to a 3rd party. Two organizations enter into a contractual agreement involving exchange of services & payment. Almost every organization outsources in some way. The non core processes could be done more cost effectively with specialized tools and special trained personals. Out sourcing takes many forms. We have information technology outsourcing, business process outsourcing ( Human Resource Outsourcing, Finance & accounting outsourcing , Claims processing outsourcing etc. ) Out sourcing have 4 stages 1. Strategic thinking- develop organizations philosophy about the role of outsourcing in its activities 2. Evaluation & selection- decide on the appropriate Outsourcing project & potential location for the work and the service providers 3. Contract development - work out legal, pricing and service level agreements 4. Outsourcing governance- to refine the relationship between the client & service providers The success depends on 3 factors executive level support in the clients organization, communication & clients ability to manage service Providers . The main advantages are 1. Cost savings The cost associated with an in house employee is always higher than the cost of an outside provider 2. Quality services As their reputation is at state, the service providers provide excellent services than the in house employee 3. Access to specialized skills To beat competition, the service providers would build up specialized skills in their area of operation. 4. Contractual obligation liability of service provider is higher 5. Staffing issues All complications associated with recruiting staff for many non core functions are eliminated. 6. Risk mitigation many a times even non core functions become critical and would required skilled interventions. Service providers, because of their larger talent poor & experience are in a better position to counter any such ricks 7. Capacity management Sometime to meet a deadline additional employees are necessary Disadvantages 1) Linguistic barrier

2) Social responsibility unemployment 3) Company knowledge service providers will have a better knowing about the company 4) Staff turn over Subcontracting It is a contractual agreement between an organization and an independent firm that does a work or service according to specific terms and conditions. The activity was once done internally and now for cost effectiveness its been given to some other firm is called outsourcing. If the organization never performed the activity internally, they cannot outsource it. When the activity has been never done initially and is always done externally to improve the organization performance its subcontracting. Types of Subcontractors Subcontractors relationship are categorized into 3 different types 1) Capacity Subcontractors 2) Competence Subcontractors 3) Outsourcing Subcontractors 1). Capacity SC To meet Demand fluctuations, which creates excess capacity. Unfilled orders and long delivery times, a network of Subcontractors act as a buffer and smoother out the cycle. 2). Competence SC Sometimes a firm needs access to processes, m/c, Skills, know how etc, which are not easily available within the firm 3). Outsourcing SC. When a firm chooses to focus on its core activities, it outsources the other activities that previously were conducted in house. Stores Accounting Material costing is important in terms of the valuation of the cost of material consumed by the production department and the estimation of the value of material held in stock. The factors that are to be included in the building up of the cost of material received are material price, freight charges, insurance and taxes. Price may be stated as net price, price with discount, free on board, etc. For costing purpose, we have to work out the actual cost incurred by taking price quoted by the Supplier subtract the discounts and add other expenses. The other expenses are customs duties, freight charges, insurances and packing charges The prepare of store accounting is to know 1) The cost of material consumed 2) Levels of wastage produced 3) Value of material unique in stock The main methods are 1) FIFO 2) LIFO

3) Any cost system 4) Market value system 5) Standard cost method For ascertaining the above following factors are taken into account o o o o o o material price freight charges insurance duties tax packaging charges etc. o First in first out system- when the material is issued it is assumed that the one which came first is going out. Hence the rate pertaining to the first in is applied. To the stock latest price is applied. When there are several price changes this system becomes complex o Last in first out at the time of issue. When the material is issued latest entrant is assumed to be going out. Hence latest prices is applied to the issue. And receipt price is applied to stock o Average cost system: an average is established with price of each item in every shipment taken into account. Total items received and price paid for these items is calculated. And average price for each item from this lot is calculated and applied to the issue and stock. o Market value system: while issuing current market price is applied. Stock value is calculated at receipt price o Standard cost method: based on price trend a standard price is fixed for a particular period and this price is applied

Receipt of stores The receipt of stores will mean receipt of all materials against Purchase Orders or stores received against local purchases, gifts, aids etc. All these receipts shall be dealt with in the manner stipulated hereinafter. Functions of the Receipt Section The receipt section shall be located in a suitable place where all incoming supplies shall be received, packing opened, checked and inspected before its storage or use. The functions of the receipt section can be broadly summarized as follows. o Clear and receive Parcels, Packages, Consignments and all other materials coming in by Rail, Road, Sea, Air, Post, Courier or any other mode. (The SPO of the lab is to decide whether the clearance of import cargo is to remain in Purchase wing or otherwise till competent manpower is available in stores.) o Check the materials received and arrange for its inspection. o Notify the indentor and Purchase section about the arrival of the materials by the next day.

o Unpack the packages, parcels & consignments and facilitate its inspection by the Inspecting Officer. o Intimate the supplier about the excess, shortage, damage, rejected or defective supplies. o Maintain the following registers. Consignment Clearance Register Daily receipt register Register for Samples. Register for Gifts. Register for discrepancies. Register for despatch. Centralized register for local Purchase (Consumables).

o Raise Stores Receipt Voucher ( SRV) for all receipts. o Arrange packing and despatch of outgoing consignments like samples, rejected materials etc. and forward the dispatch documents to the consignee. o Arrange Local collection of stores from the vendor as per the terms of the order. o Maintain and render up to date account of advances taken for clearance of consignments including its adjustment. o Arrange open delivery of consignments wherever required. o Lodge necessary claims for non-delivery, shortage or damage wherever required. o Ensure clearance of consignment immediately so as to avoid payment of demurrage/ wharfage. o Keep all weighing balances calibrated

Receipt system Stores receive materials from various sources. Some of them are internal and some are external. Receipt system is specific to the source. When materials arrive from an external source following system handles the receipts. Purchase function raises a PO on the source of supply a copy is sent to the stores. Stores are now advised about the order. When the supplier on whom the order is placed supplies the goods he sends goods dispatch note, giving information about carrier, value of the goods, date of dispatch etc. to the receiving stores. The carrier sends a document called consignment note. These documents enable the store to make arrangement for receipt of the consignment.[handling equipment, space etc.] When the consignment arrives at the receiving section it is checked against the documents already received with respect to the consignment. General condition of the goods also is checked. When internal departments send material to stores a material return note, transfer note or scrap report is enclosed.

Issue Of Stores The following procedure shall be adopted while issuing materials from stores. o Issue of stores shall be made in proper issue slip. o Issue slip shall be prepared in triplicate by each division/ section separately for each category of stores as outlined in the annexure for (a) Stores Purchased out of revenue grant and (b) Stores purchased out of capital Grant to ensure quick issue and easy accounting. o Stores purchased out of revenue grants will be issued on pink issue slip and capital items will be issued in White issue slip. o Stores shall be drawn by an issue slip signed by a person not below the rank of an officer of the division/ section and countersigned by the Head of the Division/ Project Leader. Director of the lab/ Instt may however authorize a person not below the rank of Group C in administration and Group II in Technical to draw stores. o All stores purchased out of capital funds shall normally be issued to the official indenting the equipment. Each lab shall decide about the mode of maintaining inventory whether on Personal Inventory basis (PI) or Divisional inventory basis (DI) and get it duly approved by the Management Council of the lab before adoption. Any change to the policy thereafter shall have to be approved by the MC. o No store shall be issued to the guest/ casual workers who are not on regular establishment unless duly authorised by the Director. But it must be ensured that the items issued to such officials will be taken back at the time of his/her leaving the organization. o The description of store to be given on the issue slip shall be completed as given in stock ledger/ Bill/ Challan/ Bin Card etc. and shall invariably include identification number, make, type of machine / instrument in case of articles of capital nature. o All issue slips for items needed for a Project and are made from stores shall bear the project number. The stores shall at the end of every month send a report indicating cost price (under FIFO method) of such issues to the accounts for debiting that project. o All issues shall be scrutinized and authorised by the Dy. SPO (Stores) / SPO before actual issues are made by the stores assistant and in his absence by the senior most stores assistant. In case of any excess demand the issue may be curtailed where necessary. o In order to enable the store keeper to post the ledgers, raise indent for new procurement etc. issue timings for issue of materials from store be fixed in each lab. o Issue slips having mutilations and over writings or incomplete in any respect shall not be accepted for issue of materials and returned to the indentor forth with. o Stores shall not ordinarily be issued in bulk quantities and the project Leader/ HoDs shall ensure that minimum quantities of such materials 18 are permitted to be drawn by them to avoid accumulations, wastage or likely misuse of such articles. Whenever any quantity above the normal consumption is requisitioned, PL/ HoDs may record reasons for such specific requirement.

o Where the date of expiry is indicated on the package, endeavors shall be made to use such materials before the expiry date. In case it is not possible to use the same before the expiry date, the same may be disposed off in the best interest of the council. o In order to control the issue/ consumption of stores like soap, duster, towels etc to officers & other staff the same shall be issued strictly in accordance with the scale which has to be laid down by the lab/ Instt. o Issue of some items purchased out of revenue funds like Tube lights, Bulbs, batteries, tyres & tubes, chokes, electric line testers, umbrellas, briefcases, computer cartridges, Floppy disks, CDROMs, CD-RW, brass civil engineering items etc. Need to be regulated either by insisting the issue of a fresh one in exchange of the old one or fixing time limit/ fixing quantity of issue as may be decided by the Director. o The issue slip books shall be kept in safe custody by all drawees and shall be used by him only .Fresh issue slip books will only be issued after it is personally verified by the Dy. SPO (Store) that the all the issue slips of the book is consumed Issue system From the stores material is issued for internal consumption and some times issued to outside parties for processing. o Issue to consuming department: Material is issued to consuming departments against a material requisition slip which is duly authorized and made with reference to a work order for production. Quantity needed for production is mentioned in the work order and stores employees are not authorized to issue excess quantity. Hence an automatic control is exercised on consumption. The work order mentioned above is raised based on the bill of materials for production. o Issue to outside parties for processing: procedure is same but a more rigid control is exercised Purchasing The purchasing can be defined as the process of buying and procuring the materials, parts, components, equipments, spare parts, tools and supporting items required by industries or any organization to deliver its products as per customer requirements at the competitive rates and of good quality Objectives of Purchasing The primary objectives of purchasing are to buy materials of proper quantity and quality in proper time and at the cheapest cost. Apart from this, there are other objectives, which are described as follows. (i) Support operational requirements: For supply to production system and maintain it buying all required materials as per Bill of Material (BOM), supporting systems and service items. It also helps in design and product development. Since in industries continuity in

production is always critical, therefore, to ensure the flow of materials the following things are essential. (1) (2) (3) Purchase of materials of right quantity Delivery of all materials at right time Delivery of materials at right place

(ii) Effective and efficient purchasing system: Investment in the materials should be minimum and full utilization of them is necessary. Proper classification and inventory control helps in material productivity. In order to do purchasing efficiently, the following points must be followed: (1) (2) (3) (4) Selecting the proper purchasing staff Expenditure on purchase process must be limited to budget allocation Training the employees Making proper decisions of purchases

(iii) Source of supply: The main objective of the purchasing department is to select, develop and maintain the supply of materials. The selection of proper source of supply is always necessary to achieve this. It involves (1) Purchasing proper items at lower price (2) Purchasing from the right source (3) Materials of proper specifications and quality are purchased To develop better relationship with supplier and select reliable and high quality sources of supply is the objective to do purchasing effectively. To maintain standard of materials and its suitability of use and to eliminate the waste, the sources of supply should have high performance in delivering goods of high reputation. (iv) Develop strong relationship with other functional groups and departments: The other functional groups are marketing, manufacturing, store, engineering, office and finance. The purchasing department should develop close relationship with them and communicate to avoid complaints and buying sub-standard materials at highest prices. Improper deliveries and untimely supply should not be there. (v) To meet the objectives and goals of the organization: To develop and maintain the competitive position of the enterprise in the market the purchasing department should work to meet the objectives and goals of the company and establish its reputation. It must follow the directives of management. With the new concept of materials planning and Just In Time (JIT), the organization has the objective of keeping just sufficient inventory to maintain the production. Supply should also be just sufficient and more frequent to reduce

the cost of inventory carrying and large storage. But at the same time, it should also be ensured that just in time supply would not have shortage or stock out. (vi) Purchase strategies: It is necessary that the purchasing department should integrate purchasing strategies to develop and support organizational strategies. To procure the materials of consistent quality at the lowest cost must be the prime strategy of every company, which is also the prime objective of purchase department. But sometimes due to improper selection and training of purchase personnel and not participating in the corporate planning process this strategy may not be fulfilled. Therefore, the purchasing department should actively participate in corporate planning process and do the following things. (1) Observe the material prices, shortages and suppliers and monitor this to meet companies objectives. (2) To support companies strategies, identify critical materials and services required particularly when new product is developed. (3) To develop supply plans as per enterprises planning. Functions of Purchasing As per the objectives of purchasing which is to purchase right quality of materials at right time and right quantity at the economic price is the responsibility of purchase department. In order to fulfill these objectives, the functions of the purchase department can be summarized as follows: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) To receive purchase requirements and requisitions from various departments To select the materials to be purchased on priority To select the source of supply To decide the purchasing policy and procedures To prepare specifications and obtain tenders and quotations of materials To purchase the proper quantity at proper time To purchase good quality of materials at cheapest rate To get deliveries at proper place within the prescribed time To check and inspect the materials To make the prompt payments and co-operate

Procedures of Purchasing The procedures for purchasing describes the operating methods and instructions in a written form as Manual or Journals of purchasing to be followed as per the policy of purchasing to carry out duties and tasks of buying various materials of the organization needed for production or otherwise. This procedure is the best practice to be followed and

identified through bench marking comparisons with leading firms. Procedures are information followed for successful purchasing strategies. There is no standard method describing this procedure but it will be guide to the new employees, purchasing persons, reference and clarification for experience personnel and a routine method to be followed. Time to time management must review and evaluate the procedure of purchasing to suite the changes and development needed. Since procedures of purchasing are the functions carried out by purchasing persons. They can be stated as follows: o Need for purchasing. o Full description of accurate specifications, properties, quality and quantity requirements of materials requisitioned. o Collection of purchase requisitions. o Selection of sources of supply and negotiations. o Determination of prices and availability of quantity required. o Analysis of order quantity and time. o Order placement and follow up o Receipt of materials, Checking and inspection o Supply and storage of materials. o Record keeping.

Purchasing Procedure The procedure describes the sequence of steps leading to the completion of an identified specific task. 1. Recognition of the need: The initiation of procedure starts with the recognition of the need by the needy section. The demand is lodged with the purchase department in the prescribed Purchase Requisition Form forwarded by the authorized person either directly or through the Stores Department. 2. The Selection of the supplier: The process of selection of supplier involves two basic aspects: searching for all possible sources and short listing out of the identified sources. 3. Placing the order: Once the supplier is selected the next step is to place the purchase order. Purchase order is a letter sent to the supplier asking to supply the said material. 4. Follow-up of the order: the follow-up procedure tries to see that the purchase order is confirmed by the supplier and the delivery is promised. It is also necessary to review the outstanding orders at regular intervals and to communicate with the supplier in case of need. 5. Receiving and inspection of the materials: The receiving department receives the materials supplied by the vendor. The quantity are verified and tallied with the purchase order. 6. Payment of the invoice: When the goods are received in satisfactory condition, the invoice is checked before it is approved for the payment. 7. Maintenance of the records: Maintenance of the records is an important part and parcel of the efficient purchase function. 8. Maintenance of vendor relations: The quantum and frequency of the transactions with the same key suppliers provide a platform for the purchase department to establish and maintain good relations with them

Vendor Rating: Vendors are monitored and evaluated periodically for their performance. Objective: To help the buyer in future source selection To provide the buyer with information, helpful in subsequent negotiations. To provide the buyer with important information which he can act upon for any corrective measure. Vendors can be rated on the basis of various characteristics: 1.Timely delivery 2. Adherence to quality 3. Price 4. Other factors such as a. Meet emergency orders b. Supplying useful market information c. Willingness to try out new designs. Methods: 1. Categorical plan 2. Weighted point plan Categorical plan: o This is a subjective method. o Managers of concerned department prepare a list of factor important from their point of view/use. o Each of the major supplier is evaluated against each evaluators list of factors. o Evaluation is done in terms of : o Good / Superb o Satisfactory / Favourable o Poor / Unfavorable Weighted point plan: The buyer decides on o Factors important for the evaluation o Weightages for each of the factor o The vendors performance in respect of each factor. The Vendor Rating is proposed to be done Based on three criteria: o Quality performance of vendor: Based on Quality of Products produced during period under consideration

o Delivery Performance of Vendor: Based on supply performance of vendor against orders within delivery Period o Service & System performance of vendor: Based on General Performance Such as reassessment, Updating infrastructure etc. and maintenance of Quality control systems. What is the CEI Method? The CEI (Customer Experience Innovation) Method is a means of improving existing business processes or designing new business processes to align with customer needs. The CEI Method is the practical method for Outside-In thinking. What does it achieve? The CEI Method achieves greater customer alignment - thereby focusing the organization on its reason for existing. Through greater alignment, the experience is improved for the customer and operational costs are decreased by the elimination of redundant activities. In short we simultaneously reduce costs, improve revenue and enhance the service to the customer winning the so-called BPM Triple Crown. How does it work? It works by focusing each process on a specific Successful Customer Outcome to be achieved, and by designing the process from the outside perspective of the organization to the inside perspective of the organization, hence the term commonly used Outside-In. By the systematic analysis of three key components inherent to every process, organizations can achieve greater customer alignment. The three key components are Moments of Truth (customer interactions / touch points), Breakpoints (internal processes and hand-offs) and Business Rules (decision points). We aim to eliminate or improve these three key components to bring them into alignment with the Successful Customer Outcome. Obsolete, surplus and scrap management. Obsolete items are good in all respect but have no useful role in the company due to changes that have occurred in the course of time. They have economic worth in the market. Surplus items are those that have accumulated due to faulty planning, forecasting and purchasing. Hence a usage value is associated with these items. Scrap is wastage generated due to processes like turning, boring drilling etc. and also due to bad manufacturing. it is said that in India nearly Rs. 2500 crores are tied up as obsolete, surplus and scrap items. Causes for their generation o Changes in product design obsoletion

o Rationalization initiative for variety reduction leads to surplus or obsolete items o Cannibalization parts of one idle machine are fitted on another machine needed urgently during maintenance, results into obsoletion of parts and at times even scrap o Faulty planning and forecasting leads to excess procurement, surplus generation. o Faulty purchase practices sub-optimization in buying to utilize available discounts and transportation economy, surplus and obsolete stocks are generated. o Other causes parts kept aside for insurance claims, bad storage system, bad material handling, bad manufacturing and badly maintained machines are other causes for spoilage and scrap. Surplus- Quantity more than stock Obsolete - No longer usable Obsolescence- No longer required but in usable condition Salvage - Saving material for utilization Reclamation - Bringing back to original condition Reasons for Generation of Scrap o Change in Design, Method or Product o Mistakes in procurement o Wrong planning decisions o Wasteful processes in production o Inevitable waste during the adjustment of the equipment o Overall absence of efficiency
Scrap Management

Procedure for Scrap Disposal Reuse Return to supplier Sale to another Company Sale to Dealer Salvaging Meaning Saving for advantageous use. Salvage Operation Collecting, Storing, Sorting

Ascertain, Restoring, Reviewing Direct to Buyer from Shop-floor Steps for disposal Reclamation Meaning Brining back to original condition Reclamation Operation Knowledge of discarded material Determining what can be reclaimed? Deciding Method Calculation of Cost Determination of Economic aspect Operating as Manufacturer