Adarsh Materials Inventory Management

Operation Management
Materials & Inventory Management
G.Purandaran
M.Tech (I.I.T-Madras)
PGDM (I.I.M-Bangalore)
Scope of POM
A Production System Model
Operations Management Definition

Operations management is defined as:
the design,
operation, and
improvement of the systems
that create and deliver
the firms primary products and
services.
Operations Decision Making

Marketplace
Corporate Strategy
Finance Strategy
Operations Strategy
Marketing Strategy
Operations Management
People
Materials &
Customers
Plants
Parts
Processes
Planning and Control
Input
Products &
Services
Output
The Transformation Process (value adding)
Process Analysis
and Design
Operations Management Overview

Process Control
and Improvement
Operations
Strategy
Process
Analysis
Job Design
Manufacturing
Facility Layout
Services
Waiting Line Analysis
and Simulation
Quality
Management
Statistical
Process Control
Supply Chain
Management
Supply Chain
Strategy
Just in Time
Planning for Production
Consulting
and
Reengineering
Capacity Management
Aggregate
Planning
Inventory Control
Materials Requirement
Planning
Project
Management
PRODUCTION AND
OPERATIONS
MANAGEMENT
Module : 1
SCOPE OF MATERIALS
MANAGEMENT
Definition of Materials
Management
Business Definition for: Materials
Management
An approach for
Planning,
Organizing, and
Controlling
all those activities principally
concerned with the flow of materials
into an organization.
Flow of Material
Scope of MM
The scope of materials management
varies greatly from company to
company and may include:
Materials planning and control,
Production planning,
Purchasing,
Inventory control and stores,
In-plant materials movement, and
Waste management.
Objective of material
Primary
management
Right price
High turnover
Low procurement &
storage cost
Continuity of supply
Consistency in quality
Good supplier relations
Development of
personnel
Good information
Objective of material
management
Secondary
Forecasting
Inter-departmental harmony
Product improvement
Standardization
Make or buy decision
New materials & products
Favorable reciprocal
relationships
Interface of Materials Management

with other Functions
Interface
Interface
Interface
Interface
control
with
with
with
with
Marketing
Production
Finance
Inspection and quality
Materials Management
.
COST and Materials Management
Various Construction Materials
Process of Material
Management
..
.
..
Material planning
Purchasing
Store Keeping
Inventory Control
Receiving, Inspection and

Despatching
Value Analysis, Standardization

and Variety Reduction
Materials Handling & Traffic

Variety
Disposal of Scrap and Surplus,

Material Preservation
AIM OF MATERIAL
MANAGEMENT
To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost
Integrated Materials Management

The various activities represent thesefour
functions:
1.Planning and control functions are:
inventory management,
production planning and scheduling.
2.Purchasing functions are:

buying, subcontracting, value analysis and follow ups.
3.Value analysis and

4.Physical distribution functions are:
receiving ,
packaging,
shipping,
transportation and storage, making it theIntegrated
Basis for forming Organization

Materials Management provides an integrated systems
approach to the co-ordination of the materials activities
and the control of total material costs.
Obviously, the MM organization is derived from its
fundamental objectives.
Since Materials management function ranges from
receiving the material requisition to placement of purchase
orders and then on the other hand to receiving the material
and making it available to the users , a commonly seen
organization of materials management is divided
into an integrated sections as :
Purchasing
Stores
Inspection
Traffic
PRODUCTION AND
OPERATIONS
MANAGEMENT
Module : 2
MATERIALS
CODIFICATION
Material Identification
Material Identification is a systematic approach to identify:
particular grade of material for reverse engineering,
alteration or repair of the existing assets or products,
non-traceable material and
use of substitute material.
The initial stage in Material identification involves:
identifying the source of material ( stray, batch mix-up)
product application( tensile, compression, fatigue),
form of material ( casting, forgings, rolled, extruded,
welded),
shape of material ( plate, sheet, pipe, solid, preformed)
followed by
chemical analysis, surface and core hardness, tensile
test, case depth evaluation, microstructure condition.
Classification of Materials
Metals
Ceramics
Polymers
Composites
Classification of Construction Material

Material Type Details
Example
Bulk materials Materials that are delivered in mass Sand,Gravel,Topsoil,Cement,

and are deposited in a container.
Concrete
Bagged
Materials delivered in bags for ease of Cement
materials
handling and controlled use.
Palleted
Bagged materials that are placed in Cement, Doors
materials
pallets for delivery
Packaged
Materials that are packaged together to Pipes,Tiles,Electrical Fitting
materials
prevent damage during transportation

and deterioration when they are stored.
Classes of Materials
Metals
Iron and Steels

Aluminum and Alloys
Copper and Alloys
Nickel and Alloys
Titanium and Alloys
Ceramics and
Glasses
Alumina
Magnesia
Silica
Silicon Carbide
Silicon Nitride
Cement and
Concrete
Polymers
PE
PMMA
Nylon (PA)
PS
PU
PVC
PET
PEEK
EP
NR
Composites
GFRP
CFRP
Classes of Property
Economic
Price and availability

Recyclability
General Physical
Density
Mechanical
Modulus
Yield and tensile strength
Hardness
Fracture toughness
Fatigue strength
Creep strength
Damping
Thermal
Thermal conductivity
Specific heat
Thermal expansion coefficient
Electrical and Magnetic
Resistivity
Dielectric constant
Magnetic permeability
Environmental Interaction
Oxidation
Corrosion
Wear
Production
Ease of Manufacture
Joining
Finishing
Aesthetic
Color
Texture
Feel
Metals
Metals are typically split into ferrous
(iron containing) and non-ferrous
Most widely used metals are alloys
except for aluminum and precious
metals
Metals are in general are good thermal
and electrical conductors. Many metals
are relatively strong and ductile at room
temperature, and many maintain good
strength even at high temperature.
Steel
Aluminum
SuperAlloys
A superalloy, or highperformance alloy, is an
alloy able to withstand
extreme temperatures
that would destroy
conventional metals like
steel and aluminum.
Superalloys exhibit
excellent mechanical
strength and creep
resistance at high
temperatures, good
surface stability, and
corrosion and oxidation
resistance.
Objectives of Codification
Bringing all items together.

Enable putting up of any future item in its proper place.
Classify an item according to its characteristics.
Give an unique code number to each item to avoid
duplication and ambiguity.
Reveal excessive variety and promote standardization
and variety reduction.
Establish a common language for the identification of an
item.
Fix essential parameters for specifying an item.
Specify item as per national and international standards.
Enable data processing and analysis.
34
Basis of codification
Who will be the user?
To what use is the codification going
to be put?
What kind/degree of mechanization
will be needed to use the codification
system?
35
Codification by Group
Classification
Based on shape of items
1. Wire
2. Tubing
3. Rod
4. Bar
5. Sheet
6. strip
Methods of coding of
materials
Alphabetical method
Numerical method
Alphabetical-cum-Numerical
method
37
Alphabetical method
In this method first alphabet letters
are used for codification of
each category of materials.
For example:
steel wire is coded as SW or
steam coal is coded as SC etc.
38
Alphabetical-cumNumerical method
In this method, a combination of these two
methods is used for coding of materials.
For example, a steel wire of gauge 4mm
quality A stored in rack/bin No.22, is given
the code number SW4A/22. Such a method
gives exact information than any of the
above two methods.
39
Numerical method
This method is used where materials accounting is to
be mechanized by use of punched cards or
computers.
For numerical coding a list is prepared for various
departments and allotting to each of them a suitable
number.
The first two digits of the code number represent
the department for which the materials are meant and
other two digits state the

name of material as mentioned in the standard list or
materials manual.
For example, if code is 2341 it means

Material No.41 [copper wire] is
to be used in Department No.23.
40
Codification of Raw-Material
1 9 99 99
Raw-Material
Generic Group
e.g. Magnesite, Alumina
Sub-Generic Group
e.g.Fused Mag, Fire clay
Running Serial No.

e.g. 01
Codification of Generic Item

2 99 99 999
Item Type
e.g. Stores
Generic Group (00-70)

e.g. Bearing, Switchgear
Sub-Generic Group
e.g. Ball Bearing
Running Serial No.

e.g. 201
Codification of Drawing/ Part

No. Item
2 99 99 999
Item Type
e.g. Stores, Service
Generic Group (80-98)

e.g. Casting, Fabricated
Sub-Generic Group
e.g. Equipment Code
Running Serial No.

e.g. 001
Codification of Capital
Equipment
2 99 99 999
Item Type
e.g. Stores
Generic Group (99)

e.g. Capital Equipment
Equipment Class
e.g. Mixer, Press
Running Serial No.

e.g. 001
Codification of Service Items

3 9 99 999
Service Item
Type of Service
e.g.Transportation, AMC
Sub-Group
e.g. Truck Load, Trailor
Running Serial No.

e.g. 001
Codification of Secondary
Products
4 9 99 99
Secondary Products
Major Group
Mining Pdt, Metal Scrap
Sub-Group
e.g. Clay, Ferrous Scrap
Running Serial No.

e.g. 01
Advantages of Codification
It enables systematic grouping of similar items and avoids
confusion caused by long description of items since
standardization of names is achieved through codification,
it serves as the starting point of simplification and
standardization. It helps in avoiding duplication of items
and results
47
Standardization
It is the Process of establishing
basic specification for a set of
commonly used characteristics of
size, shape and performance for
products.
Simplification
It is closely related concept
or process which refers to:
the reduction in the number
of different sizes and shapes
of items produced or stocked
Simplification
It is defined as the elimination of
superfluous varieties , sizes,
dimensions, features etc., making
the design, assembly or product
simpler, less complex and less
difficult to use
Variety Reduction
The process of standardization
logically
leads to simplification and variety
reduction
Variety reduction defined as a form
of
standardization consisting of the
reduction
of the number of types of
Inventory
Inventoryorstockrefe
rs to the goods and
materials that
abusinessholds for the
ultimate purpose of
resale (or repair).
INVENTORY
TYPES OF INVENTORY
Work in
process
Vendors
Raw
Materials
Work in
process
Work in
process
Finished Customers
goods
CLASSIFICATION OF
INVENTORY
ABC Classification(consumption) (25/80+15/15+70/05)

XYZ Classification(value stored) (High,Medium,Low)
HML Classification(unit-value stored) (High,Medium,Low)
VED Classification(spare parts mainly)
(Vital,Essential,Des)
FSN Classification(consumption) (Fast, Slow, Non)
SOS Classification(agriculture) (Seasonal, Non)
SDF Classification(availability) (Scarce, Difficult,
Easy)
GOLF Classification (source of supply) Govt, Ordinarily
available, Local and Foreign)
13
ABC Classification
A Items: very tight control, complete
and accurate records, frequent review.
B Items: less tightly controlled, good
records, regular review.
C Items: simplest controls possible,
minimal records, large inventories,
periodic review and reorder.
14
16
ABC
.
FSN
* Based on the consumption pattern to
combat obsolete items.
* Classification depends on the pattern of
issues from stores.
F Fast moving
S Slow moving
N Non Moving
27
VED Classification
Items are classified as to how:

Vital,
Essential, and or
Desirable they are in the total scheme
of things.
In case of electricity appliances example
Essential items are wire , switch etc
Desirable items are decorative fittings, lamp
shades etc.
Inventory Control and Management
Working capital-Inventory
Working capital typically means the
firms holding of current or short-term
assets such as cash, receivables,
inventory and marketable securities.
These items are also referred to as
circulating capital
Corporate
executives
devote
a
considerable amount of attention to
the management of working capital.
Operating cycle of a typical

company
.
Purchase
resources
Pay for
Resources
purchases
Inventory conversion
period
Receive
Cash
Sell
Product
On credit
Receivable
Conversion period
Cash conversion
cycle
Payable
Deferral period
Operating
cycle
Time & Money Concepts in

Working Capital Cycle
Each component of working capital

(namely inventory, receivables and
payables)
has
two
dimensions
........TIME ......... and MONEY, when it
comes to managing working capital
TIME IS MONEY
You can get money to move faster

around the cycle or reduce the amount of
money tied up. Then, business will generate
more cash or it will need to borrow less
money to fund working capital.
As a consequence, you could reduce the
cost of bank interest or you'll have
additional free money available to support
additional sales growth or investment.
Similarly, if you can negotiate improved
terms with suppliers e.g. get longer credit
or an increased credit limit, you effectively
create free finance to help fund future sales.
If you
Then ......
Collect receivables (debtors)

faster
You release cash from the

cycle
Collect receivables (debtors)

slower
Your receivables soak up

cash
Get better credit (in terms

of duration or amount) from
suppliers
Shift inventory (stocks)
faster
You increase
resources
Move inventory
slower
You consume more cash
(stocks)
your
You free up cash
cash
PRODUCTION AND
OPERATIONS
MANAGEMENT
Module : 3
STORES MANAGEMENT
AND MATERIALS
HANDLING
Nature of Stores
Store as building where inventories are kept.
Storage is the function of receiving, storing, and
issuing materials.
Stores ensures ready accessibility of major
materials there-by efficient service to users.
Minimisation of stores cost, and continuous supply
is the prime function of stores.
Stores layout is a
fundamental factor in
determining the efficient performance of stores
department.
A satisfactory storage system compromises

between the use of space and the use of time.
Random location means that items can be stored
in any storage position which is available.
Keeping stock on one side of the aisle in which
case the layout is called comb type .
Stores manual is a written statement of policies,
and procedures.
Stock Verification
Periodic, continuous and low point inventory
are three ways of stock verification.
Verification of stock when the stock is the
lowest is known as low point inventory
verification.
Periodic stock verification is taken once in a
year.
Classification and Codification

Classification
and
codification
enables
reduction in sizes, and varieties.
Principles of Classification and Codification
Consistency, coverage of entire range of items,
mutually
exclusive
code
and
easily
understandable
are
the
principles
of
classification and codification.
II. Materials Handling

Materials handling is the art and science of
moving, packing and storing of substances in
any form.
Objectives of Materials Handling

1.
2.
3.
4.
5.
6.
7.
Lower unit materials handling cost

Reduction in mfg cycle time
Better control of the flow of materials
Better working conditions
Better quality
Enhanced storage capacity
Higher productivity
Selection and Design of Handling

System
Selection and design of the materials handling
system should be done along with the
development of the layout, as each one affects
the other.
Materials Handling Costs

Materials handling costs include cost of owning
and maintaining equipment and cost of
operating the system.
Factors affecting the selection of

Materials Handling Equipment
1. Production problem
2. Capabilities of the handling equipment available
3. Human element involved
Types of Materials Handling

Systems
Types of material handling systems:
a. Equipment oriented systems
b. Material oriented systems
c. Methods oriented systems
d. Functions oriented systems
Selection and Design of

Handling System
Selection and design of the materials handling
system should be done along with the
development of the layout, as each one affects
the other.
Types of Materials Handling

Equipment
1.
2.
3.
4.
5.
Conveyers
Cranes, Elevators and Hoists
Industrial Trucks
Auxiliary Equipments
Miscellaneous Handling Equipments
Conveyor
.
Cranes
.
Towing Tractor
.
Material Safety and Security

.
What does the RADIATION

Symbol look like?
All radioactive
materials and radiation
generating devices
must be labeled with
the universal symbol for
radiation
Only authorized
individuals who are
properly trained should
handle materials or
devices with this
radiation symbol
What is Radiation?
Radiation is energy emitted from a substance. There
are two types of radiation: ionizing and non-ionizing.
Everyday examples of non-ionizing radiation are
Microwaves used to cook food

Radio waves
Television
Light
Ionizing Radiation means alpha particles (), beta (),

gamma () and X-rays (among others) that are capable
of producing ions. These types of energy can cause
chemical changes to living things. Large exposures to
ionizing radiation may damage cells or tissues. Real-life
examples of ionizing radiation are X-ray machines and
radioisotopes used in biomedical research.
What is Contamination?
Contamination is radioactive material in a location
where it is not desired
Lab bench, door knobs, telephone, computer,
offices, etc.
Loose Contamination, like dust, can be easily removed
Fixed contamination is embedded in the materials
surface and is more difficult to remove.
PRODUCTION AND
OPERATIONS
MANAGEMENT
Module : 4A
MANAGEMENT OF
OBSOLETE and SCRAP
MATERIALS
SCRAP
MANAGEMENT
What is scrap and what is scrap

management ?
Scrap - Waste that either has no economic value or only

the value of its basic material content recoverable
through recycling
Scrap management - Manufacturers do not intend or plan to

make scrap, but depending on the industry and the product, scrap
is produced. But depending on the type of scrap, it may be recycled back into the production process or sold as a revenue
generating product or simply non-recyclable and the enterprise
has to pay for an outside contractor to dispose of the product.
89
Definitions
No longer
usable
Quantity
more than
stock
Surplus
Obsolete
Obsolescence
Salvage
Reclamation
No longer
required
but in
usable
condition
Bringing
back to
original
condition
Saving
material
for
utilization
90
Scrap Yard
It is a place where receiving or handling scrap is
done
91
Categories Of Scrap
Ferrous Scrap
Pharmaceuticals waste
Electronic / Metal
Biological waste
Scrap are of 3 categories : Ferrous, Metal , Non

metallic i.e., waste
92
Few other types of waste
93
Classification of Wastes according to their Properties
Types of waste
Biodegradable
Paper
Wood
Fruits
Nonbiodegradable
Plastics
Old machines
Cans
94
Classification of waste according to their Effects

on Human Health and the Environment
Types of waste
Hazardous
Unsafe to
use
commercially,
industrially,
agriculturally or
Non
Hazardous
Safe to use
commercially,
industrially,
agriculturally or
economically
95
Sources of Wastes
Household
Industries
96
Sources of Wastes
Agriculture
Fishery
97
Responsibility of Scrap Disposal
Primary
Responsibility
Purchase Department
Secondary
Responsibility
Operations Department
Maintenance Department
Stores Department
98
Reasons for Generation of Scrap
Change in Design, Method or Product

Mistakes in procurement
Wrong planning decisions
Wasteful processes in production
Inevitable waste during the adjustment of
the equipment
Overall absence of efficiency
99
Scrap Management
Prevention
Minimization
Reuse
Recycling
Disposal
100
Procedure for Scrap Disposal

Reuse
Return to supplier
Sale to another
Company
Sale to Dealer
101
Types of Contract
Fixed Price
Varying Price
Specific Bids
Ab initio Negotiation
("from the beginning)
102
Salvaging
Meaning Saving for advantageous use.
Salvage Operation
1.Collecting, Storing, Sorting
2.Ascertain, Restoring, Reviewing
3.Direct to Buyer from Shop-floor
4.Steps for disposal
103
Reclamation
Meaning Brining back to original
condition
Reclamation Operation
1. Knowledge of discarded material
2. Determining what can be reclaimed?
3. Deciding Method
4. Calculation of Cost
5. Determination of Economic aspect
6. Operating as Manufacturer
104
Non-Hazardous Waste
Gunny bags
Cardamom residue
Wooden scrap
Metal scrap
Plastic
Biological sludge
Corrugated boxes
105
Scrap Control & Minimization
Solvent recovery in production

Addition of used acid layer in equalization tank
Preparation of low grade perfumes
Biological sludge as manure
Treated water for gardening
Separation of waste
Use of compost manure
Old paper as filler in packing
Use of paper bags
Recycling of waste paper
106
Solvent
recovery in production
107
Addition of used acid layer

in equalization tank
108
Preparation of low grade perfumes
109
Biological Sludge as Manure
110
Treated Water from ETP to Gardening
03/04/15
Welingkar college, Matunga
111
Separation of Waste
112
Compost Manure
113
Old paper as Filler in packing
114
Use of Paper Bags
115
SAVE EARTH TO SAVE YOURSELF

116
PRODUCTION AND
OPERATIONS
MANAGEMENT
Module 4B
PURCHASE
MANAGEMENT
Purchasing is the act of buying an item at a

price.
Purchasing objective: Buying raw materials of
the right qualities, in the right-quality at the
right time, at the right price, and from the right
source.
Purchase Organisation
Purchasing Cycle
1.
2.
Purchasing cycle comprising of eight steps.

Recognition of Need
Recognition of need : Identifying an item that is officially
brought to the attention of purchasing department.
Description of Requirement
Purchase requisition should give accurate information for
ordering recognised product.
3. Selection of Source
Registered suppliers who are approved by the
company.
Buying from single supplier helps develop long-term
relationship and reduces the risk and interruption in the
supply.
4.
5.
6.
7.
8.
Buying from multiple suppliers may not help in

maintaining quality and helps get material at
competitive prices.
Determination of Price and Availability
Placing the Order
Order Acknowledgement
Follow Up and Expediting
Checking The Invoice and Approval
Purchasing Policies
Ancillary Development
Make or buy
Speculative buying
Vendor Rating
Vendor Rating: It is the process of rating a
supplier based on some rating technique.
Rating Techniques
1. Categorical Plan
2. The Weighted Point Plan
Weighted point plan: The performance factors
to be evaluated by giving weights.
3. Critical Incidents Method
Critical Incidents Method: It is based on buyervendor relationship.
4. Checklist System
Value Analysis
Value analysis is also known as value
engineering.
Value analysis is applicable to all aspects of
manufacturing processes.
Vendor rating
Vendor Rating ?
A vendor is any person or company that sells goods or
services to someone else in the economic production chain.
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.
It may take the form of a hierarchical ranking from poor to
excellent and whatever rankings the firm chooses to insert in
between the two.
Cont.
For some firms, it may come in the form of some
sort of award system or as some variation of
certification.
It is a direct result of the widespread
implementation of the just-in-time concept.
Objectives
To help the buyer in future selection
To provide buyer with the information
helpful in subsequent negotiation
To provide the buyer with the
important information which he can
act upon any corrective measure
Advantage of vendor rating

Helping minimize subjectivity in judgment and
make it possible to consider all relevant criteria
in assessing suppliers.
Providing feedback from all areas in one
package.
Facilitating better communication with vendors.
Providing overall control of the vendor base.
Requiring specific action to correct identified
performance weaknesses.
Establishing continuous review standards for
vendors, thus ensuring continuous
improvement of vendor performance.
Disadvantage of vendor
rating
Inexperience with Products and
Services
Unfamiliarity With Corporate
Operations
Resistance Within Company
Threat to Security
How vendors are rated

Vendors are rated on the basis of various
characteristics:
Time delivery
Quality
Price
Others actors such as
1.Supplying useful market information
2.Meet emergency order
Methods of vendor rating

Categorical plan:
This is a very subjective method.
Mangers from concerned department prepare list
of factors important from their views
Each of the major supplier is evaluated against
each evaluators list of factors evaluation is done
in the terms of
1. Good
2. Satisfactory
3. poor

Weighted point plan
the buyer decides on
1.Factor important form evaluation
2.Weightages for each factor
3.The vendor performance in respect of each
factor

Cost ratio plan:
Under this method, the vendor rating is done on the basis of various
costs incurred for procuring the materials from various suppliers.
The cost ratios are ascertained for the different rating variables such
as quality, price, timely delivery etc.
The cost ratio is calculated in percentage on the basis of total
individual cost and total value of purchase
example
The total delivery cost is Rs5000 and the total
purchases are Rs 1,00,000 then delivery cost
ratio will be
5,000 / 1,00,000 x 100 = 10%
Example
Operations
Management
Outsourcing as a Supply
Chain Strategy
Outsourcing
Outsourcing can replace entire
purchasing, information systems,
marketing, finance, and operations
department
Applicable to firms throughout the
world
Making the right decision may be the
difference between success and
failure
What is Outsourcing?
Procuring from external suppliers service
or products the firms used to provide for
itself
Offshoring is moving processes to a
foreign country but retaining control
Firms that outsource are called clients, the
actual work is done by the outsourcing
provider
Extension of the long-standing practice of
subcontracting
What is Outsourcing?
Outsourcing has become a major
strategy as firms move toward
specialization
Increasing expertise
Reduced cost of reliable transportation
Rapid deployment of telecommunications
and computers
the Internet
Examples of Outsourcing
Call centers in French Angola
Legal and finance service in the Philippines
EDS handling information
technology for Nextel
IBM providing travel and
payroll for P&G
Solectron producing
IBM computers
Types of Outsourcing
Common processes outsourced are
Purchasing
Logistics
Finance/accounting
Customer relations
R&D
Operations
Sales/marketing
Training
Service management
Human resources
Legal processes
Outsourcing implies a legally binding

contract
Theory of Comparative
Advantage
If an external outsourcing provider can
perform activities more productively than
the client firm, the outsourcing provider
should do the work
of the
s
s
le
d
r
a
g
es re
This appli hical location
geograp
Risks in Outsourcing
Outsourcing can be risky
As many as half of all outsourcing
agreements fail because of inappropriate
planning and analysis
Erratic power grids, government difficulties,
inexperienced managers, and unmotivated
labor can create problems
Failure to achieve unrealistic goals
sometimes create the impression of failure
Outsourcing
Process
Examples of
Possible Risks
Identify non-core
competencies
Can be incorrectly identified as a

non-core competency
Identify non-core
activities that should be
outsourced
Just because the activity is not a

core competence for your firm
does not mean an outsource
provider is more competent and
efficient
Identify impact on
existing facilities,
capacity, and logistics
May fail to understand the

change in resources and talents
needed internally
Table S11.1
Outsourcing
Process
Examples of
Possible Risks
Establish goals and

draft outsourcing
agreement
specifications
Goals can be set so high that

failure is certain
Identify and select

outsource provider
Can select the wrong outsource

provider
Negotiate goals and

measures of
outsourcing
performance
Can misinterpret measures and

goals, how they are measured,
and what they mean
Table S11.1
Outsourcing
Process
Examples of
Possible Risks
Monitor and control

current outsourcing
program
May be unable to control product

development, schedules, and
quality
Evaluate and give

feedback to outsource
provider
May have non-responsive

provider (i.e., one that ignores
feedback)
Evaluate international
political and currency
risks
Countys currency may be

unstable, a country may be
politically unstable, or cultural
and language differences may
inhibit successful operations
Table S11.1
Outsourcing
Process
Examples of
Possible Risks
Evaluate coordination
needed for shipping and
distribution
May not understand the timing

necessary to manage flows to
different facilities and markets
Table S11.1
Outsourcing brings other issues:
Employment
Changes in facilities and processes
needed to receive components in a
different state of assembly
Vastly expanded logistics issues
Methodologies for
Outsourcing
Evaluating Multiple Criteria with
Factor Rating
Break-even Analysis
Rating International
Risk Factors
Nine factors rated 0-3, 0 is no risk, 3 is high risk
Risk Factor
England
Mexico
Spain Canada
Economic: Labor cost/ laws
Economic: Capital availability
Economic: Infrastructure
Culture: Language
Culture: Social norms
Migration: Uncontrolled
Politics: Ideology
Politics: Instability
Politics: Legalities
Total risk rating scores
11
10
Table S11.2
Rating Outsourcing Providers

Seven factors rated 1-5 and an importance weight
Outsourcing Providers
Factor
(criterion)
Importance
Weight
BIM
(U.S.)
S.P.C.
(India)
Telco
(Israel)
1. Can reduce operating costs
.2
2. Can reduce capital investment
.2
3. Skilled personnel
.2
4. Can improve quality
.1
5. Can gain access to

technology not in company
.1
6. Can create additional capacity
.1
7. Aligns with policy/

philosophy/culture
.1
Total and Averages
1.0
3.9
3.3
3.8
Table S11.3
Advantages of
Outsourcing
Cost savings
Gaining outside experience
Improving operations and service
Focusing on core competencies
Gaining outside technologies
Other advantages
Disadvantages of
Outsourcing
Increased transportation costs
Loss of control
Creating future competition
Negative impact on employees
Longer-term
impact
The Sourcing Decision

Sourcing decisions are high-level, often
strategic decisions that address:
What will use resources within the firm
What will be provided by supply chain partners
Insourcing
The use of resources within the firm
to provide products or services
Outsourcing
The use of supply chain partners
to provide products or services
2008 Pearson Prentice Hall --Introduction to Operations and
Supply Chain Management, 2/e --Bozarth and Handfield, ISBN:
Make-or-Buy
Decision
Chapter 10, Slide 157
Advantages and Disadvantages

of Insourcing
Advantages
Disadvantages
High degree of
control
Ability to oversee
the
entire program
Economies of scale
and/or scope
Required strategic
flexibility
Required high
investment
Loss of access to
superior products
and services offered
by potential
suppliers

Advantages and Disadvantages

of Outsourcing
Advantages
Disadvantages
High strategic
flexibility
Low investment risk
Improved cash flow
Access to state-of-theart products and
services
Possibility of choosing
a bad supplier
Loss of control over
the process and core
technologies
Communication and
coordination
challenges
Hollowing out of the
corporation

Factors Affecting the Decision

to Insource or Outsource
Favors
Insourcing
Favors
Outsourcing
Environmental uncertainty
low
high
Competition in the supplier market
low
high
Ability to monitor supplier performance
low
high
Relationship of product/service to
buying firms core competencies
high
low
Factor

Total Cost Analysis

A process by which a firm seeks to
identify and quantify all of the major costs
associated with various sourcing options
Direct costs
Costs that are tied directly to the level of
operations or supply chain activities
Indirect costs
Costs that are not tied directly to the level of
operations or supply chain activity
Insourcing and
Outsourcing Costs
Insourcing
Outsourcing
Direct
costs
Direct material
Direct labor
Freight costs
Variable overhead
Price (from invoice)

Freight costs
Indirect
costs
Supervision
Administrative support
Supplies
Maintenance costs
Equipment depreciation
Utilities
Building lease
Fixed overhead
Purchasing
Receiving
Quality control

PRODUCTION AND
OPERATIONS
MANAGEMENT
Module : 5
SUBCONTRACTING
Subcontracts
Abusiness practicewheremain
contractorhiresadditionalindividuals
orcompaniescalledsubcontractorst
o help complete aproject. The main
contractor is still inchargeand must
oversee hires to ensure project
isexecutedandcompletedas
specified incontract.
164
Reasons for Subcontracting

One way in which an entrepreneur can save money
is by hiring contractors.
Here are five reasons to use a subcontractor.
It is usually much cheaper to outsource work rather
than hiring an employee.
With an employee, a business owner must pay
heavy taxes and a full-time salary.
On the other hand, a contractor only gets paid for
the work they complete.
Not only that, a contractor is responsible for paying
the taxes associated with compensation.
Of course, one must pay a contractor a higher wage
to compensate for the lack of benefits.

Employees are what make a company;
employees cannot do everything.
In reality, there will come a time when a
business must outsource some of their
tasks.
When outsourcing tasks, a business owner
will usually have to call on a contractor.
In reality, unless a business is large, the
employees will not know how to do every
complex job that the business requires.

A lot of times a contractor does not
have to be on site.
With an employee, a business owner
must provide space and tools for the
employee to complete the job.
A contractor usually uses his or her
own tools for the job, and often does
the job from his or her home or office.

Flexibility is one of the biggest reasons
companies love to bring on contractors.
When a business needs a new website
or extra help at tax time, the business
can quickly find a solid contractor to
complete the job.
Then, when the contractor completes
the task, the company can move on to
other projects without having an
employee on the payroll.

A subcontractor is going to, in most
cases, offer a superior service.
Most independent contractors have been
working in their field for years and have
improved tremendously upon their skills.
Whatever a business hires a contractor
for, they are most likely going to get a
well-qualified contractor to complete the
task.

In reality, businesses, be it large or small,
love to use contractors.
While there are some benefits to having
full-time employees, there are also
benefits to using a contractor.
In the end, most business owners enjoy a
mix of both contractors and employees.
With this, a company can bring on help
for critical projects while still keeping the
most qualified employees on the payroll
Factors affecting Subcontract
Types of Subcontract
Domestic subcontractor:A subcontractor who
contracts with the main contractor to supply or fix any
materials or goods or execute work forming part of
the main contract. Essentially this contractor is
employed by the main contractor.
Nominated subcontractor:Certain contracts permit
the architect or supervising officer to reserve the right
of the final selection and approval of subcontractors.
The main contractor is permitted to make a profit
from the use of nominated subcontractors on site, but
must provide "attendance" (usually the provision of
water, power, restrooms, and other services to enable
the nominated subcontractor to do his job).
Types of Subcontract
In effect the appointment of nominated
subcontractors establishes a direct contractual
relationship between the client and the
subcontractor.
Named subcontractors:Effectively the same as
a domestic subcontractor - A subcontractor who
contracts with the main contractor to supply or fix
any materials or goods or execute work forming
part of the main contract. Essentially this
contractor is employed by the main contractor.
Subcontracting (External)
with Quality Management
SAP Best Practices for Chemicals
Purpose, Benefits, and Key Process

Steps
Purpose
The purpose of to describe business processes related to external subcontracting.

Benefits
In-time consumption of components provided to Vendor
Two Production version provided for order type- one for in-house production and
other for external operation
Key Process Steps
External Subcontracting in Procurement with QM
External Subcontracting in Process Order
Create Purchase Order

Approval of Purchase Order (Optional)
Stock Transfer for Subcontractor with Delivery
Processing Deliveries and Picking
Stock Transfer for Subcontractor without Delivery
Goods Receipt for Subcontract Order (without WM)
Results Recording
Record Usage Decision
Invoice Verification
Create Planned Independent Requirement

Material Requirements Planning at Plant Level
Evaluation of the Stock/Requirement List
Initial Stock Posting
Create Process Order
Release Process Order
Create PO for External Processing with Material Number
Create Outbound Delivery Request
Post Goods Issue to Subcontractor Transfer Stock
Posting In-time Consumption of Components
Receiving a Subcontract Purchase Order Goods Receipt
Results Recording
Record Usage Decision
Process Order Confirmation
Enter Invoice
Release Blocked Invoices
Required SAP Applications

and Company Roles
Required SAP Applications

SAP ECC 6.00 enhancement package 5
Company Roles
External Subcontracting in Procurement with QM
External Subcontracting in Process Order
Warehouse Clerk
Strategic Planner
Engineering Specialist
Production Planner
Purchaser
Warehouse Clerk
Purchaser (Chemicals)
Shop Floor Specialist
Shop Floor Specialist
Purchaser
Quality Specialist
Purchasing Manager
Accounts Payable Accountant
Quality Specialist
Accounts Payable Accountant
Process Flow Diagram
Accounts
Payable
Accountant
Quality
Specialist
Warehous
e Clerk
Purchaser Chemicals
Purchase Purchas
r
er
Manager
Subcontracting (External) with Quality Management

Create
Purchase
Order
Approval of
Purchase
Order
(Optional)
Stock
Transfer for
Subcontracto
r without
Delivery
Stock
Transfer for
Subcontracto
r with
Delivery
Processing
Deliveries
and Picking
Goods
Receipt for
Subcontract
Order
(without WM)
Record
Usage
Decision
Results
Recording
Invoice
Verification
Process Flow Diagram
Strategi
c
Planner
Material
Requirement
s Planning at
Plant Level
Engineer
ing
Specialis
t
Quality Account
Specialis
s
t
Payable
Purchase
r
Shop
Producti
floor
on
Specialis
Planner
t
Warehouse Clerk
Create
Planned
Independent
Requirement
Produc
tion
Planne
r
Subcontracting (External) with Quality Management
Initial Stock
Posting
Evaluation of
the
Stock/Requir
ement List
Pick
Confirmation
(Optional)
Generate
Transfer
Order
(Optional)
Confirm
Transfer
Order
(Optional)
Post Goods
Issue to
Subcontracto
r Transfer
Stock
Receiving a
Subcontract
Purchase
Order
Goods
Receipt
Posting Intime
Consumption
of
Components
Stock
Overview
(Optional)
Create
Process
Order
Process
Order
Confirmation
Release
Process
Order
Create PO for
External
Processing
with Material
Number
(Purchasing
Manager)
Release
Purchase
Order
(Optional)
(Purchaser
Chemicals)
Create
Outbound
Delivery
Request
(Accountant)
Enter Invoice
(Manager)
Release
Blocked
Invoices
Results
Recording
Record
Usage
Decision
Derivation
Monitor
(Optional)
Business View - 1
Business Benefits
No process time for

buyer
Buyer
Sub-Contractor
Plan requirements
Supply material to
the Subcontractor
Generate material
request
automatically
Increased
transperancy
Assign source of
supply
Create purchase
order and update
contract
Create and
validate sales
order (Job Order)
Reduced
purchasing process
cycle time
Third Party
Vendor
Provide material
(components) to
the subcontractor
Process material
Business Benefits
Increased customer
satisfaction
Business View - 2
Business Benefits
Buyer
Sub-Contractor
Send out shipping

notification
Increased
customer
satisfaction
Confirm goods
receipt
Adjust under and

over consumption
Create invoice
Reduced
transaction cost
Verify and release

invoice
Check and release

payment
Third Party
Vendor
Business Benefits
Subcontracting (External) with Quality

Management
CH-6210 (GranuSAP, 100 Lb)
Purchse order
Delivery of
components
Company Code
1000
Plant 1000
Vendor: S-9000
(subcontractor)
Goods delivery
Invoice
Purchase order for

components with
delivery address to
subcontractor
Delivery to
subcontractor
Invoice
Vendor: S-1003
Legend
<Function>
Symbol
Description
Usage Comments
Band: Identifies a user role, such as Accounts

Payable Clerk or Sales Representative. This band
can also identify an organization unit or group,
rather than a specific role.
Role band contains

tasks common to that
role.
The other process flow symbols in this table go

into these rows. You have as many rows as
required to cover all of the roles in the scenario.
External
to SAP
External Events: Contains events that start or end

the scenario, or influence the course of events in
the scenario.
Business
Activity / Event
Symbol
Diagram
Connection
SubProcess
Reference
Process
Decision
Usage Comments
To next / From last Diagram: Leads

to the next / previous page of the
Diagram
Flow chart continues on the next /

previous page
Hardcopy / Document: Identifies a

printed document, report, or form
Does not correspond to a task

step in a document; instead, it is
used to reflect a document
generated by a task step; this
shape does not have any
outgoing flow lines
Financial Actuals: Indicates a

financial posting document

outgoing flow lines
Budget Planning: Indicates a

budget planning document

outgoing flow lines
Manual Process: Covers a task

that is manually done
Does not generally correspond to

a task step in a document;
instead, it is used to reflect a task
that is manually performed, such
as unloading a truck in the
warehouse, which affects the
process flow.
Existing Version / Data: This block

covers data that feeds in from an
external process

a task step in a document;
instead, this shape reflects data
coming from an external source;
this step does not have any
incoming flow lines
System Pass / Fail Decision: This

block covers an automatic
decision made by the software

a task step in the document;
instead it is used to reflect an
automatic decision by the system
that is made after a step has been
executed.
Hardcopy /
Document
Flow line (solid): Line indicates the normal

sequence of steps and direction of flow in the
scenario.
Flow line (dashed): Line indicates flow to
infrequently-used or conditional tasks in a
scenario. Line can also lead to documents
involved in the process flow.
Connects two tasks in

a scenario process or
a non-step event
Business Activity / Event: Identifies an action that

either leads into or out of the scenario, or an
outside Process that happens during the scenario
Does not correspond

to a task step in the
document
Unit Process: Identifies a task that is covered in a

step-by-step manner in the scenario
Corresponds to a task
step in the document
Financial
Actuals
Budget
Planning
Unit Process
Process
Reference
Description
Process Reference: If the scenario references

another scenario in total, put the scenario number
and name here.
Sub-Process Reference: If the scenario references

another scenario in part, put the scenario number,
name, and the step numbers from that scenario
here
Process Decision: Identifies a decision / branching

point, signifying a choice to be made by the end
user. Lines represent different choices emerging
from different parts of the diamond.
Does not usually

correspond to a task
step in the document;
Reflects a choice to
be made after step
execution
Manual
Process
Existing
Version /
Data
System
Pass/Fail
Decision
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THANK YOU
Prof.G.Purandaran
M.Tech (I.I.T-Madras)
PGDM (I.I.M-Bangalore)

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Operation Management

Materials & Inventory Management

A Production System Model

Operations Management Definition

Operations Decision Making

Planning and Control

The Transformation Process (value adding)

Operations Management Overview

Interface of Materials Management

COST and Materials Management

Various Construction Materials

Receiving, Inspection and

Value Analysis, Standardization

Materials Handling & Traffic

Disposal of Scrap and Surplus,

Integrated Materials Management

2.Purchasing functions are:

3.Value analysis and

Basis for forming Organization

Classification of Construction Material

Bulk materials Materials that are delivered in mass Sand,Gravel,Topsoil,Cement,

Materials delivered in bags for ease of Cement

handling and controlled use.

Bagged materials that are placed in Cement, Doors

pallets for delivery

Materials that are packaged together to Pipes,Tiles,Electrical Fitting

prevent damage during transportation

Iron and Steels

Price and availability

Electrical and Magnetic

Bringing all items together.

other two digits state the

For example, if code is 2341 it means

Running Serial No.

Codification of Generic Item

Generic Group (00-70)

Running Serial No.

Codification of Drawing/ Part

Generic Group (80-98)

Running Serial No.

Generic Group (99)

Running Serial No.

Codification of Service Items

Running Serial No.

Running Serial No.

ABC Classification(consumption) (25/80+15/15+70/05)

Items are classified as to how:

Inventory Control and Management

Operating cycle of a typical

Time & Money Concepts in

Each component of working capital

You can get money to move faster

Collect receivables (debtors)

You release cash from the

Collect receivables (debtors)

Your receivables soak up

Get better credit (in terms

You consume more cash

You free up cash

A satisfactory storage system compromises

Classification and Codification

II. Materials Handling

Objectives of Materials Handling

Lower unit materials handling cost