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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

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
Materials Management

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.
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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.
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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.
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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
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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

Methods of vendor rating


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

Methods of vendor rating


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

Risks in Outsourcing
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

Risks in Outsourcing
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

Risks in Outsourcing
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

Risks in Outsourcing
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

Risks in Outsourcing
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

2008 Pearson Prentice Hall --Introduction to Operations and


Supply Chain Management, 2/e --Bozarth and Handfield, ISBN:

Chapter 10, Slide 158

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

2008 Pearson Prentice Hall --Introduction to Operations and


Supply Chain Management, 2/e --Bozarth and Handfield, ISBN:

Chapter 10, Slide 159

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

2008 Pearson Prentice Hall --Introduction to Operations and


Supply Chain Management, 2/e --Bozarth and Handfield, ISBN:

Chapter 10, Slide 160

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
2008 Pearson Prentice Hall --Introduction to Operations and
Supply Chain Management, 2/e --Bozarth and Handfield, ISBN:

Chapter 10, Slide 161

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

2008 Pearson Prentice Hall --Introduction to Operations and


Supply Chain Management, 2/e --Bozarth and Handfield, ISBN:

Chapter 10, Slide 162

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.

Reasons for Subcontracting


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.

Reasons for Subcontracting


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.

Reasons for Subcontracting


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.

Reasons for Subcontracting


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.

Reasons for Subcontracting


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

Factors affecting Subcontract

Factors affecting Subcontract

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

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

Budget Planning: Indicates a


budget planning document

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

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

Does not generally correspond to


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

Does not generally correspond to


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.

Corresponds to a task
step in the document

Sub-Process Reference: If the scenario references


another scenario in part, put the scenario number,
name, and the step numbers from that scenario
here

Corresponds to a task
step in the document

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)