PROCUREMENT PROCUREMENT AND MANUFACTURING

Objective: To learn the contemporary practices followed in manufacturing units with special
reference to procurement and inventory management.

Details of Manufacturing Unit visited:

Name of Company Jayahind Industries (Force Motors)
Address Mumbai- Pune Road, Akurdi, Pune- 35
Contact Details 020-27473981 Extn: 844
Official Interacted with Mr. A. R. Kulkarni
Designation of official Dy. Manager (Purchase)
Areas of Manufacturing Unit visited Machine Room
Stores

Jayahind Industries manufactures Aluminum Die Castings that are used in automobiles. Their
major buyers are:
- Ford
- General Motors
- Mahindra
- Swaraj Mazda
- Honda
- Force
- Man
- Fiat
- Hindustan Motors

Procurement of Raw Materials:

OBSERVATIONS:
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At Jayahind Industries, the following raw materials are used for manufacturing Die Castings:-
- Aluminum
- Fuel
- Consumables
- Packaging Material
- Spares

Procurement is the acquisition of goods or commodities by a company, organization, institution,

or a person. This simply means the purchase of goods from suppliers at the lowest possible cost.
The best way to do this is to let the suppliers compete with each other so that the expenses of the
buyer are kept at a minimum.

At Jaya hind Industries, procurement of raw material usually involves a bidding process in which
the bidders or sellers quote their prices and the buyer accepts the lowest possible bid. This is the
most efficient and cost effective method of procuring.

The process of procurement usually begins when the procurer starts to search the market for
bidders. After identifying the suppliers, a request for bids, proposals, quotes, and information can
be made. However, direct contact with bidders can also be made instead of advertising the above
requests.

After selecting the suitable bidders, a quality check is conducted in order to confirm the
suitability of the goods in question. The next step would be negotiation of the terms, conditions,
quality, and delivery schedules. Logistics and payment are the next two important processes that
determine the safe delivery and the payoff of goods.

Procurement of Spare Parts/ Components:

OBSERVATIONS:

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Jayahind Industries uses Cold Chamber Die Casting machines to produce their castings. The
machines are procured from buyers who give quotations and the most competitively priced
machine is bought.

Various types of Inventories:

THEORY:

The term ‘inventory’ means any stock of direct or indirect material (raw or finished items or
both) stocked in order to meet the expected and unexpected demand in the future.

Inventory, by convention, generally refers to items that contribute to or become part of an

enterprises output.

OBSERVATIONS:

In Jayahind Industries the following types of inventory were observed:

a) Raw Material Inventory:

Raw materials obtained from suppliers that are used in the production process.

b) Work-in-progress Inventory:
This consists of semi-finished parts, components, sub-assemblies or modules that have
been inducted into the production process but not finished.

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c) Replacement Parts Inventory:

Maintenance parts meant to replace other parts in machinery or equipment.

In simple terms, inventory is an idle resource of an enterprise comprising physical stock of goods
that is kept by an enterprise for future purposes.
Jayahind Industries uses the ABC analysis for inventory categorization.

A.B.C. analysis is a selective technique of controlling different items of inventory. In actual

practice, thousands of items are included in business as inventories. But all these items are not
equally important. According to this technique, only those items of inventory are paid more
attention which is significant for business. According to this technique, all items are classified
into 3 categories A.B. and C. In ‘A’ category those items are taken which are very precious and
their quantity or number is small.
(ii) In ‘B’ category those items are reserved which are less costly than the items of category ‘A’
but their number is greater.
(iii) In category ‘C’ all those items are included which are low priced but their number is highest.
The rate of use of items of category ‘A’ is the highest and that of category ‘C’ is the lowest. In a
manufacturing organisation, the items of inventory can be classified as under:-
Example:-

Class Number of items in % as per their

terms of their % value

A 15 70

B 30 20

C 55 10

100 100

Thus, the number of items of category ‘A’ is 15% but their value is 70% of total inventory.
Therefore, inventory management can be made more effective by concentrating control on this
category. Efforts are made to minimize investment items of this category. The % of number of
items in category ‘B’ is 30 but their value is 20%. Therefore this category will be paid less

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attention. The items in category ‘C’ are 55% but their value is just 10% of total. Therefore,
management need not spend much time for control of this class of inventory because very little
investment is made in them. These items are purchased in bulk quantity once in 2-3 years. The
management must be aware that these items may be less important in terms of value but their
non-availability can break down the production process. Therefore, these items should be
available in time.

Advantages of ABC Analysis

(1) A close and strict control is facilitated on the most important items which constitute a major
portion of overall inventory valuation or overall material consumption & due to this, costs
associated with inventories maybe reduced.

(2) The investment in inventory can be regulated in proper manner & optimum utilization of
available funds can be assured.

(3) A strict control on inventory items in this manner help in maintaining a high inventory
turnover rates.
Aluminum, for Jayahind Industries, is an A class material.
The observation about Jayahind’s inventory system is as follows:

ALUMINUM 3 DAYS INVENTORY

FUEL EVERYDAY INVENTORY
CONSUMABLES 30 DAYS INVENTORY
PACKING MATERIAL 7 DAYS INVENTORY
SPARES 30 DAYS INVENTORY

Inventory Control Systems:

JIT- JUST IN TIME:
JIT, or just in time, inventory is a inventory management strategy that is aimed at monitoring the
inventory process in such a manner as to minimize the costs associated with inventory control
and maintenance. To a great degree, a just-in-time inventory process relies on the efficient

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monitoring of the usage of materials in the production of goods and ordering replacement goods
that arrive shortly before they are needed. This simple strategy helps to prevent incurring the
costs associated with carrying large inventories of raw materials at any given point in time.

PERIODIC INVENTORY:

Periodic inventory is a method wherein any inventory sold is physically counted at the end of an
accounting period, deducted from the beginning inventory plus inventory purchases, and the
difference moved to the cost-of-goods-sold (COGS) account. A complete physical counting
under a periodic inventory system is usually done at specific times of the year, such as quarterly
or annually, depending on the business.
This is a simple method, but it does not allow the business to maintain accurate information
regarding inventory problems or shortages.

MRP- MATERIALS REQUIREMENT PLANNING

The main objective of MRP is to manage dependent demand items. These are the raw materials
and unfinished goods used in the manufacturing process. Raw materials must be kept as
inventory stock. As they are used, stock must be replenished through re-ordering. MRP fulfills
three mains functions:

1. MRP makes sure that dependent demand items on kept in stock.

2. MRP maintains the optimal level of inventory that is most cost effective for a company.
3. MRP is used to purchase new stock, deliver finished products, and plan the daily
manufacturing processes.

MRP has several benefits as well as drawbacks. As for benefits, MRP helps managers with the
following:

• Keep inventory levels to a cost-effective minimum

• Keeps track of inventory that is used
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• Tracks the amount of material that is required

• Set safety stock levels for emergencies
• Determine the best lot sizes to fulfill orders
• Set up production times among the separate manufacturing stages
• Plan for future needs of raw materials

However, MRP also has its share of drawbacks. They are:

• Information used as input must be accurate. Inaccurate information can result in

misplanning, overstock, understock, or lack of appropriate resources.
• The master schedule must be accurate in order to provide appropriate lengths of time for
production.
• MRP systems can be costly and time-consuming to set up.
• There may be problems with employees who, before MRP, were not disciplined in their
record keeping. Also, some departments may hoard raw materials for their own use.

VENDOR RATING:
Vendor rating is the result of a formal vendor evaluation system. Vendors or suppliers are given
standing, status, or title according to their attainment of some level of performance, such as
delivery, lead time, quality, price, or some combination of variables. The motivation for the
establishment of such a rating system is part of the effort of manufacturers and service firms to
ensure that the desired characteristics of a purchased product or service is built in and not
determined later by some after-the-fact indicator. The vendor rating may take the form of a
hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in
between the two.

OBSERVATIONS:
Jayahind Industries uses the following criteria for rating vendors:
Pricing Factors-
a) Competitive Pricing

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b) Price Stability
c) Price Accuracy
Quality Factors-
a) Compliance with purchase order
b) Conformity to the specifications
c) Reliability
d) Warranty
e) State of the art products/ services
Delivery Factors-
a) Time
b) Quantity
c) Lead Time
d) Packaging
e) Documentation
Service Factors-
a)

Vendor ratings systems provide a process for measuring those factors that add value to the buying
firm through value addition or decreased cost. The process will continually evolve and the criteria
will change to meet current issues and concerns.

INVENTORY COSTS:
The total turnover of Jayahind Industries the last year was Rs. 190 crores.
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Of it, the inventory costs (raw material and finished goods) came up to artound 10 crores.

Organization for purchasing function:

OBSERVATIONS:
The hierarchy of the Purchase Department in Jayahind is as follows:

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