adarsh materials inventory management

Operation ManagementMaterials & Inventory Management

G.PurandaranM.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 firm’s primary products and services.

Operations Decision Making

People Plants Parts Processes

Planning and Control

Materials &Customers

Products &Services

Input Output

Operations Management

Marketing StrategyFinance Strategy

Marketplace

Corporate Strategy

Operations Strategy

The Transformation Process (value adding)

QualityManagement

StatisticalProcess Control

Just in Time

Materials Requirement Planning

Inventory Control

AggregatePlanning

Operations Management - Overview

ProjectManagement

Supply Chain Management

Process Analysisand Design

Process Controland Improvement

Waiting Line Analysis and Simulation

Services

Manufacturing

OperationsStrategy

Facility Layout

Consulting andReengineering

Process Analysis

Job Design

Capacity Management

Planning for Production

Supply ChainStrategy

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.

Primary•Right price•High turnover•Low procurement & storage cost•Continuity of supply•Consistency in quality•Good supplier relations•Development of personnel•Good information system

Objective of material management

Secondary•Forecasting•Inter-departmental harmony•Product improvement•Standardization•Make or buy decision•New materials & products•Favorable reciprocal relationships

Objective of material management

Interface of Materials Management with other Functions

• Interface with Marketing • Interface with Production• Interface with Finance• Interface with Inspection and quality control

Materials Management

COST and Materials Management

Materials Management

Various Construction Materials

Process of Material Management

Materials Handling & Traffic Variety

.. . . .

Purchasing

Store Keeping

Inventory Control

Receiving, Inspection and Despatching

Value Analysis, Standardization and Variety Reduction

Disposal of Scrap and Surplus, Material Preservation

.. . . .

Material planning

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 these four 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 the Integrated 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

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.

Metals

Polymers Ceramics

Composites

Classification of Materials

Classification of Construction Material

Material Type Details Example

Bulk materials Materials that are delivered in mass

and are deposited in a container.

Sand,Gravel,Topsoil,Cement,

Concrete

Bagged

materials

Materials delivered in bags for ease of

handling and controlled use.

Cement

Palleted

materials

Bagged materials that are placed in

pallets for delivery

Cement, Doors

Packaged

materials

Materials that are packaged together to

prevent damage during transportation

and deterioration when they are stored.

Pipes,Tiles,Electrical Fitting

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 PropertyEconomic 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

Production Ease of Manufacture

Joining

Finishing

Aesthetic Color

Texture

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.

Aluminum

SuperAlloys• A superalloy, or high-

performance 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.

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?

Codification by Group Classification

• Based on ‘shape’ of items1. Wire2. Tubing3. Rod4. Bar5. Sheet6. strip

Methods of coding of materialsMethods of coding of materials

• Alphabetical method• Numerical method• Alphabetical-cum-Numerical method

Alphabetical methodAlphabetical methodIn 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.

Alphabetical-cum-Numerical 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.

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.

Codification of Raw-MaterialCodification of Raw-Material

Raw-Material

1 9 99 99

Generic Groupe.g. Magnesite, Alumina

Sub-Generic Groupe.g.Fused Mag, Fire clay

Running Serial No.e.g. 01

Codification of Generic ItemCodification of Generic Item

Item Typee.g. Stores

2 99 99 999

Generic Group (00-70)e.g. Bearing, Switchgear

Sub-Generic Groupe.g. Ball Bearing

Codification of Drawing/ Part No. ItemCodification of Drawing/ Part No. Item

Item Typee.g. Stores, Service

2 99 99 999

Generic Group (80-98)e.g. Casting, Fabricated

Sub-Generic Groupe.g. Equipment Code

Codification of Capital EquipmentCodification of Capital Equipment

Item Typee.g. Stores

2 99 99 999

Generic Group (99)e.g. Capital Equipment

Equipment Classe.g. Mixer, Press

Codification of Service ItemsCodification of Service Items

Service Item

3 9 99 999

Type of Service

e.g.Transportation, AMC

Sub-Group

e.g. Truck Load, Trailor

Codification of Secondary ProductsCodification of Secondary Products

Secondary Products

4 9 99 99

Major Group

Mining Pdt, Metal Scrap

Sub-Group

e.g. Clay, Ferrous Scrap

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

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

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

Simplification

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 products, or materials or part within a definite range to lesser number which is adequate to meet prevailing needs at a given time.

Inventory

• Inventory or stock refers to the goods and materials that a business holds for the ultimate purpose of resale (or repair).

INVENTORY

TYPES OF INVENTORY…

Work inprocess

Finishedgoods

RawMaterials

Vendors Customers

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)

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.

* 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

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

Inventory Control and Management

Working capital-Inventory

• Working capital typically means the firm’s 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

Payable Deferral period

Inventory conversionperiod

Cash conversioncycle

Operating cycle

Pay forResourcespurchases

Receive CashPurchase

resources

SellProductOn credit

Receivable Conversion period

Time & Money Concepts in Time & Money Concepts in Working Capital CycleWorking Capital Cycle

Each component of working capital (namely Each component of working capital (namely inventory, receivables and payables) has two inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY, when dimensions ........TIME ......... and MONEY, when it comes to managing working capital it comes to managing working capital

TIME IS MONEYTIME IS MONEY

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

If youIf you ThenThen ...... ......

Collect receivables (debtors) Collect receivables (debtors) fasterfaster

You release cash from the You release cash from the cyclecycle

Collect receivables (debtors) Collect receivables (debtors) slowerslower

Your receivables soak up Your receivables soak up cashcash

Get better credit (in terms Get better credit (in terms of duration or amount) from of duration or amount) from supplierssuppliers

You increase your cash You increase your cash resourcesresources

Shift inventory (stocks) Shift inventory (stocks) fasterfaster

You free up cashYou free up cash

Move inventory (stocks) Move inventory (stocks) slowerslower

You consume more cashYou consume more cash

MANAGEMENT

Module : 3STORES 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 Handling1. Lower unit materials handling cost2. Reduction in mfg cycle time 3. Better control of the flow of materials4. Better working conditions5. Better quality 6. Enhanced storage capacity7. 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 Equipment1. Production problem2. Capabilities of the handling equipment

available3. Human element involved

Types of Materials Handling Systems

Types of material handling systems: a. Equipment oriented systemsb. Material oriented systemsc. Methods oriented systemsd. 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. Conveyers

2. Cranes, Elevators and Hoists

3. Industrial Trucks

4. Auxiliary Equipments

5. 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 (α), beta (β), gamma (γ) 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 material’s surface and is more difficult to remove.

MANAGEMENT

Module : 4AMANAGEMENT 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 re-cycled 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.

Definitions

Surplus Obsolete ObsolescenceSalvage Reclamation

Quantity more than stock

No longer usable

No longer required but in usable condition

Saving material for utilization

Bringing back to original condition

Scrap Yard

• It is a place where receiving or handling scrap is done

Categories Of Scrap

Ferrous Scrap

Biological waste Pharmaceuticals waste

Electronic / Metal

Scrap are of 3 categories : Ferrous, Metal , Non metallic i.e., waste

Few other types of waste…

Types of waste

Non-biodegradable

Biodegradable

Classification of Wastes according to their Properties

WoodFruits

Plastics

Old machinesCans

Types of waste

HazardousNonHazardous

Classification of waste according to their Effects on Human Health and the Environment

Unsafe to use commercially, industrially, agriculturally or economically

Safe to use commercially, industrially, agriculturally or economically

Sources of Wastes

Household

Industries

Sources of Wastes

Agriculture

Fishery

Responsibility of Scrap Disposal

Primary ResponsibilityPurchase Department

Secondary ResponsibilityOperations Department

Maintenance DepartmentStores Department

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

Scrap Management

Prevention

Minimization

Recycling

Disposal

Procedure for Scrap Disposal

• Reuse

• Return to supplier

• Sale to another Company

• Sale to Dealer

Types of Contract

Fixed Price

Varying Price

Specific Bids

Ab initio Negotiation("from the beginning“)

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

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 Manufacturer104

Non-Hazardous Waste

• Gunny bags• Cardamom residue• Wooden scrap• Metal scrap• Plastic• Biological sludge• Corrugated boxes

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

Solvent recovery in production

Addition of used acid layer in equalization tank

Preparation of low grade perfumes

Biological Sludge as Manure

04/19/23 Welingkar college, Matunga 111

Treated Water from ETP to Gardening

Separation of Waste

Compost Manure

Old paper as Filler in packing

Use of Paper Bags

SAVE EARTH TO SAVE YOURSELF

MANAGEMENT

Module 4BPURCHASE

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

Purchasing cycle comprising of eight steps.1. Recognition of Need

Recognition of need : Identifying an item that is officially brought to the attention of purchasing department.

2. Description of RequirementPurchase 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.

Buying from multiple suppliers may not help in maintaining quality and helps get material at competitive prices.

4. Determination of Price and Availability

5. Placing the Order

6. Order Acknowledgement

7. Follow Up and Expediting

8. 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 buyer-vendor 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 as1.Supplying useful market information2.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 viewsEach of the major supplier is evaluated against

each evaluator’s 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 ManagementOperations Management Outsourcing as a Supply Outsourcing as a Supply Chain StrategyChain Strategy

OutsourcingOutsourcing

Outsourcing can replace entire Outsourcing can replace entire purchasing, information systems, purchasing, information systems, marketing, finance, and operations marketing, finance, and operations departmentdepartment

Applicable to firms throughout the Applicable to firms throughout the worldworld

Making the right decision may be the Making the right decision may be the difference between success and difference between success and failurefailure

What is Outsourcing?What is Outsourcing?

Procuring from external suppliers service Procuring from external suppliers service or products the firms used to provide for or products the firms used to provide for itselfitself

Offshoring is moving processes to a Offshoring is moving processes to a foreign country but retaining controlforeign country but retaining control

Firms that outsource are called clients, the Firms that outsource are called clients, the actual work is done by the outsourcing actual work is done by the outsourcing providerprovider

Extension of the long-standing practice of Extension of the long-standing practice of subcontractingsubcontracting

What is Outsourcing?What is Outsourcing? Outsourcing has become a major Outsourcing has become a major

strategy as firms move toward strategy as firms move toward specializationspecialization Increasing expertiseIncreasing expertise

Reduced cost of reliable transportationReduced cost of reliable transportation

Rapid deployment of telecommunications Rapid deployment of telecommunications and computers and computers – the Internet– the Internet

Examples of OutsourcingExamples of Outsourcing

Call centers in French AngolaCall centers in French Angola

Legal and finance service in the PhilippinesLegal and finance service in the Philippines

EDS handling information EDS handling information technology for Nexteltechnology for Nextel

IBM providing travel and IBM providing travel and payroll for P&Gpayroll for P&G

Solectron producing Solectron producing IBM computersIBM computers

Types of OutsourcingTypes of Outsourcing Common processes outsourced areCommon processes outsourced are

PurchasingPurchasing

LogisticsLogistics

R&DR&D

OperationsOperations

Service managementService management

Human resourcesHuman resources

Finance/accountingFinance/accounting

Customer relationsCustomer relations

Sales/marketingSales/marketing

TrainingTraining

Legal processesLegal processes

Outsourcing implies a legally binding Outsourcing implies a legally binding contractcontract

Theory of Comparative AdvantageTheory of Comparative Advantage

If an external outsourcing provider can If an external outsourcing provider can perform activities more productively than perform activities more productively than the client firm, the outsourcing provider the client firm, the outsourcing provider

should do the workshould do the work

This applies regardless of the

geographical location

Risks in OutsourcingRisks in Outsourcing Outsourcing can be riskyOutsourcing can be risky

As many as half of all outsourcing As many as half of all outsourcing agreements fail because of inappropriate agreements fail because of inappropriate planning and analysisplanning and analysis

Erratic power grids, government difficulties, Erratic power grids, government difficulties, inexperienced managers, and unmotivated inexperienced managers, and unmotivated labor can create problemslabor can create problems

Failure to achieve unrealistic goals Failure to achieve unrealistic goals sometimes create the impression of failuresometimes create the impression of failure

Risks in OutsourcingRisks in Outsourcing

Table S11.1Table S11.1

OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks

Identify non-core Identify non-core competenciescompetencies

Can be incorrectly identified as a Can be incorrectly identified as a non-core competencynon-core competency

Identify non-core Identify non-core activities that should be activities that should be outsourcedoutsourced

Just because the activity is not a Just because the activity is not a core competence for your firm core competence for your firm does not mean an outsource does not mean an outsource provider is more competent and provider is more competent and efficientefficient

Identify impact on Identify impact on existing facilities, existing facilities, capacity, and logisticscapacity, and logistics

May fail to understand the May fail to understand the change in resources and talents change in resources and talents needed internallyneeded internally

Establish goals and Establish goals and draft outsourcing draft outsourcing agreement agreement specificationsspecifications

Goals can be set so high that Goals can be set so high that failure is certainfailure is certain

Identify and select Identify and select outsource provideroutsource provider

Can select the wrong outsource Can select the wrong outsource providerprovider

Negotiate goals and Negotiate goals and measures of measures of outsourcing outsourcing performanceperformance

Can misinterpret measures and Can misinterpret measures and goals, how they are measured, goals, how they are measured, and what they meanand what they mean

Monitor and control Monitor and control current outsourcing current outsourcing programprogram

May be unable to control May be unable to control product development, product development, schedules, and qualityschedules, and quality

Evaluate and give Evaluate and give feedback to outsource feedback to outsource providerprovider

May have non-responsive May have non-responsive provider (i.e., one that ignores provider (i.e., one that ignores feedback)feedback)

Evaluate international Evaluate international political and currency political and currency risksrisks

County’s currency may be County’s currency may be unstable, a country may be unstable, a country may be politically unstable, or cultural politically unstable, or cultural and language differences may and language differences may inhibit successful operationsinhibit successful operations

Evaluate coordination Evaluate coordination needed for shipping and needed for shipping and distributiondistribution

May not understand the timing May not understand the timing necessary to manage flows to necessary to manage flows to different facilities and marketsdifferent facilities and markets

EmploymentEmployment

Changes in facilities and processes Changes in facilities and processes needed to receive components in a needed to receive components in a different state of assemblydifferent state of assembly

Vastly expanded logistics issuesVastly expanded logistics issues

Outsourcing brings other issues:Outsourcing brings other issues:

Methodologies for OutsourcingMethodologies for Outsourcing

Evaluating Multiple Criteria with Evaluating Multiple Criteria with Factor RatingFactor Rating

Break-even AnalysisBreak-even Analysis

Rating International Rating International Risk FactorsRisk Factors

Nine factors rated 0-3, 0 is no risk, 3 is high riskNine factors rated 0-3, 0 is no risk, 3 is high risk

Risk FactorRisk Factor EnglandEngland MexicoMexico SpainSpain CanadaCanada

Economic: Labor cost/ lawsEconomic: Labor cost/ laws 11 00 22 11

Economic: Capital availabilityEconomic: Capital availability 00 22 11 00

Economic: InfrastructureEconomic: Infrastructure 00 22 22 00

Culture: LanguageCulture: Language 00 00 00 00

Culture: Social normsCulture: Social norms 22 00 11 22

Migration: UncontrolledMigration: Uncontrolled 00 22 00 00

Politics: IdeologyPolitics: Ideology 22 00 11 22

Politics: InstabilityPolitics: Instability 00 11 22 22

Politics: LegalitiesPolitics: Legalities 33 00 22 33

Total risk rating scoresTotal risk rating scores 88 77 1111 1010

Rating Outsourcing ProvidersRating Outsourcing Providers

Seven factors rated 1-5 and an importance weightSeven factors rated 1-5 and an importance weight

Outsourcing ProvidersOutsourcing Providers

FactorFactor(criterion)(criterion)

Importance Importance WeightWeight

BIM BIM (U.S.)(U.S.)

S.P.C. S.P.C. (India)(India)

Telco Telco (Israel)(Israel)

1.1. Can reduce operating costsCan reduce operating costs .2.2 33 33 55

2.2. Can reduce capital investmentCan reduce capital investment .2.2 44 33 33

3.3. Skilled personnelSkilled personnel .2.2 55 44 33

4.4. Can improve qualityCan improve quality .1.1 44 55 22

5.5. Can gain access to Can gain access to technology not in companytechnology not in company

.1.1 55 33 55

6.6. Can create additional capacityCan create additional capacity .1.1 44 22 44

7.7. Aligns with policy/ Aligns with policy/ philosophy/culturephilosophy/culture

.1.1 22 33 55

Total and AveragesTotal and Averages 1.01.0 3.93.9 3.33.3 3.83.8

Advantages of OutsourcingAdvantages of Outsourcing

Cost savingsCost savings

Gaining outside experienceGaining outside experience

Improving operations and serviceImproving operations and service

Focusing on core competenciesFocusing on core competencies

Gaining outside technologiesGaining outside technologies

Other advantagesOther advantages

Disadvantages of OutsourcingDisadvantages of Outsourcing

Increased transportation costsIncreased transportation costs

Loss of controlLoss of control

Creating future competitionCreating future competition

Negative impact on employeesNegative impact on employees

Longer-term Longer-term impactimpact

Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Chapter 10, Slide 157

• 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

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

The Sourcing Decision

Make-or-Buy Decision

Advantages and Disadvantages of Insourcing

Advantages• High degree of control• Ability to oversee the

entire program• Economies of scale

and/or scope

Disadvantages• Required strategic

flexibility• Required high

investment• Loss of access to

superior products and services offered by potential suppliers

Advantages and Disadvantages of Outsourcing

Advantages• High strategic flexibility• Low investment risk• Improved cash flow• Access to state-of-the-art

products and services

Disadvantages• 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

Environmental uncertainty low high

Competition in the supplier market low high

Ability to monitor supplier performance low high

Relationship of product/service to high low buying firm’s core competencies

FactorFavors

InsourcingFavors

Outsourcing

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

•Direct material•Direct labor•Freight costs•Variable overhead

•Price (from invoice)•Freight costs

•Supervision•Administrative support•Supplies•Maintenance costs•Equipment depreciation•Utilities•Building lease•Fixed overhead

•Purchasing•Receiving•Quality control

Insourcing Outsourcing

Directcosts

Indirectcosts

MANAGEMENT

Module : 5SUBCONTRACTING

• A business practice where main contractor hires additional individuals or companies called subcontractors to help complete a project. The main contractor is still in charge and must oversee hires to ensure project is executed and completed as specified in contract.

Subcontracts

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.

• 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

•Engineering Specialist

•Purchaser

•Purchaser (Chemicals)

•Shop Floor Specialist

•Quality Specialist

•Accounts Payable Accountant

•Strategic Planner

•Production Planner

•Warehouse Clerk

•Shop Floor Specialist

•Purchaser

•Purchasing Manager•Accounts Payable Accountant•Quality Specialist

Process Flow DiagramSubcontracting (External) with Quality Management

Create Purchase

Approval of Purchase

Order (Optional)

Stock Transfer for

Subcontractor without Delivery

Stock Transfer for

Subcontractor with

Delivery

Processing Deliveries

and Picking

Goods Receipt for

Subcontract Order

(without WM)War

st Results

Recording

Record Usage

Decision

nt Invoice

Verification

Process Flow DiagramSubcontracting (External) with Quality Management

Create Planned

Independent Requirement

Material Requirements Planning at Plant Level

Evaluation of the

Stock/Requirement List

Initial Stock Posting

Create Process

Release Process

Create PO for External

Processing with Material

Number

(Purchasing Manager)Release

Purchase Order

(Optional)

(Purchaser Chemicals)

Create Outbound Delivery Request

Pick Confirmation

(Optional)

Generate Transfer

Order (Optional)

Confirm Transfer

Order (Optional)

Post Goods Issue to

Subcontractor Transfer

StockStock

Overview (Optional)

Posting In-time

Consumption of

Components

Receiving a Subcontract

Purchase Order – Goods Receipt

le (Accountant)

Enter Invoice

(Manager)Release Blocked Invoices

Results Recording

Record Usage

Decision

t Derivation Monitor

(Optional)

Process Order

Confirmation

Business View - 1Business BenefitsBusiness Benefits

Increased customer satisfaction

No process time for buyer

Increased transperancy

Reduced purchasing process cycle time

Buyer Sub-ContractorThird Party Vendor

Plan requirementsSupply material to the Subcontractor

Assign source of supply

Create purchase order and update contract

Create and validate sales order (Job Order)

Provide material (components) to the subcontractor

Process material

Generate material request automatically

Business View - 2Business BenefitsBusiness Benefits

Increased customer satisfaction

Reduced transaction cost

Buyer Sub-ContractorThird Party Vendor

Send out shipping notification

Confirm goods receipt

Adjust under and over consumption

Create invoice

Verify and release invoice

Check and release payment

Subcontracting (External) with Quality Management

Vendor: S-1003

Company Code 1000Plant 1000

Vendor: S-9000(subcontractor)

Purchase order for components with delivery address to subcontractor

Invoice

Delivery to subcontractor

Goods delivery

Delivery of components

Purchse order

CH-6210 (GranuSAP, 100 Lb)

LegendSymbol Description 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

Budget Planning: Indicates a budget planning document

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.

Business Activity / Event

Unit Process

Process Reference

Sub-Process

Reference

Process Decision

Diagram Connection

Hardcopy / Document

Financial Actuals

Budget Planning

Manual Process

Existing Version /

System Pass/Fail Decision

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.

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.

Role band contains tasks common to that role.

External Events: Contains events that start or end the scenario, or influence the course of events in the scenario.

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

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

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THANK YOU

• Prof.G.Purandaran• M.Tech (I.I.T-Madras)• PGDM (I.I.M-Bangalore)

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