PROJECT REPORT ON

A Study Of THE PROCEDURE OF MATERIAL

PROCURMENT IN
BY GROUP NO. 3 SR NO 1 2 3 4 5 6 7 8 9 10 NAME OF THE STUDENT Chavan Sandesh Manohar Joshi Rohit Shivram Joshi Manoj Laxmikant Kadam Jayesh Mohan Karotia Ashok Kanhaiyalal Kesaria Paras Jagdish Kolwankar Neha Raghunath Kumbhar Sameer Laxman Lad Samir Kirit Mathew M. Philip MMM (I) SEMESTER I Under the Guidance Of ROLL NO 4 21 22 23 25 26 27 28 29 30

Prof. Sandeep. Chopde

METs INSTITUTE OF MANAGEMENT UNIVERSITY OF MUMBAI (2010 2011)

1 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

INDEX
Sr no .
1 2 3 4 5 6 7 8 9

List of Contents
Introduction Material Procurement Stock Status A B C Analysis Purchase requisition Supplier Management Raising Purchase Order Mascot Universal Pvt Ltd. Conclusion Appendix I Questionnaire

PG . NO .
4 5 7 9 11 12 13 19 20 21

10 Appendix II Bibliography

2 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

CERTIFICATE
This is to certify that Project Title Procedure followed for material procurement at Mascot Universal Pvt Ltd is based on the Original study conducted by members of Group-3, under my guidance and this had not formed basis for the award or any other degree of this Institute/University.

Place: Mumbai ____________ Date: 18.12.10 Faculty Sign Prof. Sandeep Chopde

3 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Acknowledgements

We would like to convey our science thanks to the Managing Director of M/s Mascot Universal Pvt. Ltd., Mr Mohit Lalvani for granting us permission to interact with various departments in the company in order to understand the Procedure followed for Material Procurement in the organisation. It was really a great pleasure to interact with the employees of MUPL (Mascot Universal Pvt Ltd.) & it has provided us immense practical knowledge about the application of the theoretical aspect of the course.

4 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

INTRODUCTION

Inventory Management: Inventory Management is the starting point in the process of procurement of material since it forms the base depending on which the management or the particular purchase department takes decisions for the procurement of the material. It is very important since an optimum inventory management includes optimum inventory carrying costs. Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment
o Lead Time This is important since it gives an idea to the

procurement department about the right time at which they will have to place orders for procuring the material such that they get the delivery on time. This avoids out of stock situation.
o Carrying costs of Inventory This helps the inventory

control department as well as the management to analyse the material movement pattern & advise or recalculate the inventory levels to be maintained.
o Asset Management This is an important aspect of Costing

since it involves the maximum investment of funds

o Inventory Valuation Allows a company to provide a

monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business,
5 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions. There are different methods which are followed in order to carry out effective inventory valuation. The following methods are the most commonly used for inventory valuation by companies:
o Inventory

Forecasting This helps in forecasting the inventory levels to be maintained in future in order to plan the material procurement process sales) are the first goods that were purchased or consumed (cost of production). The ending inventory is formed by the last goods that were purchased and came in at the end to the inventory.

o First-in First-Out (FIFO): The first goods to be sold (cost of

o Last-in First-out (LIFO): The first goods to be sold (cost of

sales) are the last goods that were purchased or consumed (cost of production). The ending inventory is formed by the first goods that were purchased and came in at the beginning to the inventory.
o Weighted

average method: This method requires to calculate the average unit cost of the goods in the beginning inventory plus the purchases made in the period. Based on this average unit cost the cost of sales (production) and the ending inventory of the period are determined.

Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.

6 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Stock Status

The procurement department conducts meetings with the inventory control individuals and analyses the stock status for the particular product. Every year, the inventory control department revises the following aspects of the inventory of a particular product:

o Minimum stock level: The minimum level or minimum

stock is that level of stock below which stock should not be allowed to fall. In case of any item falling below this level, there is danger of stopping of production and, therefore, the management should give top priority to the acquisition of new supplies.
o Re Order Quantity:

This is that level of materials at which a new order for supply of materials is to be placed. In other words, at this level a purchase requisition is made out. This level is fixed somewhere between maximum and minimum levels. Order points are based on usage during time necessary to requisition order, and receive materials, plus an allowance for protection against stock out. The order point is reached when inventory on hand and quantities due in are equal to the lead time usage quantity plus the safety stock quantity.

o Safety Stock Level: It is a term used by logisticians to

describe a level of extra stock that is maintained to mitigate risk of stock outs (shortfall in raw material or packaging) due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according
7 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

to their plans.[1] Safety stock is held when there is uncertainty in the demand level or lead time for the product; it serves as an insurance against stock outs. With a new product, safety stock can be utilized as a strategic tool until the company can judge how accurate their forecast is after the first few years, especially when used with a material requirements planning worksheet. The less accurate the forecast, the more safety stock is required. With a material requirements planning (MRP) worksheet a company can judge how much they will need to produce to meet their forecasted sales demand without relying on safety stock. However, a common strategy is to try and reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. This can be extremely important for companies with a smaller financial cushion or those trying to run on lean manufacturing, which is aimed towards eliminating waste throughout the production process.

o Reserve

Stock level: This unexpected contingencies.

is

maintained

to

cover

8 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

ABC Analysis

ABC analysis is the widely used approach for classifying the inventories on the basis of cost and use. This is a type of pareto analysis and sometimes also referred to as Always Better Control approach.

The inventories are classified into three groups:

A-Type Inventory: These are high value, low volume type of inventories. This means that their annual consumption is very less but these are very costly items. Despite needed less in volume, their annual monetary value is quite high, as these are very costly items. ABC-analysis recommends careful control of A-Type inventory. More periodic review is needed. Involvement of higher level of management is recommended in the review process. A small reduction in the safety stock and EOQ will casue substantial saving for the organizations.

It has been observed that only a small percentage of items (say 10 to 20%) accounts for major percentage (say 70-85%) of total annual monetary consumption in inventories. These items are referred to as A-Type items.

C-Type Inventory: Majority of the items (say 60-70%) constitute only a minor fraction of the total annual monetary consumption (say 5 to 15%) in inventories. These items are C-Type items. The control needed for these items may not be very stringent. Bulkpurchase decisions may be useful as the item cost is less.
9 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Therefore, lesser number of orders may be placed. These items may be under the supervision of lower level of management and only exceptional reports or monthly reports are needed by top management.

B-Type Inventory: Items other than A and C type constitute 2030% in terms of percentage of items and 10 to 25% in terms of their annual consumption value. These are termed as B-type inventories. Their control and supervision are moderate as compared to A or C type inventories.

Graph 2.1

10 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Demand analysis vis--vis stock status

The Sales & Marketing departments communicate the demand pattern of a particular product in the market to the material planning department. This helps the procurement team to understand the amount of products that need to be procured after they have checked with the inventory levels by co-ordinating with the inventory department.

Most of the times in the manufacturing plants, a purchase requisition is initiated from the end user department.

Purchase requisition

A purchase requisition is an authorization for a purchasing department to procure goods or services. It is originated and approved by the department requiring the goods or services. Typically, it contains a description and quantity of the goods or services to be purchased, a required delivery date, account number and the amount of money that the purchasing department is authorized to spend for the goods or services. Often, the names of suggested supply sources are also included. A purchase requisition is owned by the originating department and should not be changed by the purchasing department without obtaining approval from the originating department. This important distinction (e.g. essential control) is not clearly defined in some of the more popular integrated procurement software systems on the market today. In some industrial (e.g. production line) environments, the purchasing department may be assigned responsibility for requesting and purchasing goods. This is
11 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

especially true for raw material purchases where the purchasing department is also responsible for inventory management. A purchase requisition is not a purchase order and therefore should never be used to purchase goods or services or be used as an authorization to pay an invoice from a supplier or service provider.

12 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Once the quantity of placing the order is finalised, then comes the stage where the company analyses 2-3 vendors for procurement of material. Most of the companies always keep more than one approved vendors for a particular material, so that if one of the vendors is not able to supply any quantity of the material, the other can do so & thus the out of stock or short supply situation is avoided.

Negotiation Companies often have their procurement negotiate various terms with vendors or suppliers. o Resource cost,
o Shipping methods, o Contractual agreements and

department

o Trade discounts (TD) o Payment terms Advance/ Credit period o Cash discounts (CD) o Rate specific to MOQs (Minimum order quantities) o MOVs (minimum order values)

13 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Procurement employees are typically required to follow predetermined guidelines for these items. Following up on issues and correcting errors is a common function of this procedure.

14 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Supplier Management

After locating proper suppliers and securing contracts, it then falls to the purchasing function to monitor and control the suppliers' performance until the contracts are fulfilledand beyond, if further business is to be conducted. All purchasing organizations need some vehicle for assessing supplier performance. Many firms have formal supplier-evaluation programs that effectively monitor supplier performance in a number of areas, including quality, quantity delivery, on-time delivery, early delivery (just-in-time users do not like early deliveries), cost, and intangibles. For some firms, consistent supplier performance results in certification. Supplier certification generally implies (or in some cases formally asserts) that the supplier has been a part of a formal education program, has demonstrated commitment to quality and delivery, and has proven consistency in his processes. Frequently, organizations are able to take delivery from certified suppliers and completely bypass the receiving inspection process. The buyer is also responsible for maintaining a congenial relationship with the firm's suppliers. If the buyer is an unreasonable negotiator, and does not allow the supplier to make an adequate profit, future dealings may be endangered. The supplier may refuse to deal with the buyer in the future, or the supplier may greatly increase the price of a product the buyer could not obtain elsewhere. Also, relations can become strained when the buyer consistently asks for favored treatment such as expediting or constantly changing a particular order's delivery schedule.

15 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Raising purchase order

The purchase order needs to include all the terms & conditions which have been decided with the vendor or the supplier to avoid any sort of miscommunication during the time of supply& receipt of goods. Following are the factors included in a purchase order for a standard purchaser.

o o o o o o o o o o

PO no. PO date Product name Pack size Rate per unit Quantity Freight terms Payment terms Delivery schedule Authorized signature

Next step is the follow up of the material status with the supplier on regular basis. After this is done efficiently, the next step would be the receipt of material.

16 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

After receipt of material, the purchase follows the following procedure to ensure the material received matches with the order raised. o GRN (Goods receipt note) o Purchase inward entry

17 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Procedure Followed For Material Procurement at

Core Business: Mascot Universal Pvt Ltd is a firm engaged in procurement of Raw materials from MNCs based outside India in order to make available these raw materials to Indian manufacturers in the Pharmaceutical & Cosmetic industry. Since the company provides more than 400 customers (Manufacturers) with more than 200 different raw materials, they undergo a regular & extensive material procurement process. In Mascot, more than one department is involved before taking decisions for material procurement. Following is a chart which gives an idea about the different teams involved in the decisions for material procurement.

18 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Following process is followed for the material procurement at MASCOT:

Graph 2.2

o Next page shows the example of the Purchase order raised o Confirmation from the supplier for logging of the order is very important because unless the confirmation is sought, one cannot be confident of the material procurement. o In Mascot, the material procurement department personnel meets the supplier in order to reconcile the purchase orders
19 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

placed & takes the ETA (Expected time of arrival of the material) o This gives them an idea about the material arriving which in the end helps to analyse the further order placing process.

A/c From

20 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

P.O.No.:

After the receipt of material in the warehouse, certain procedures are followed in order to ensure proper condition of the material.

Graph 2.3

o Here the third point i.e matching the product name, quantity

& batch number is considered very important at Mascot. This

21 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

helps them identify rejections if any. If any of these parameters do not match the physical material received, then they reject the material & it is returned to the supplier.

o This identification is crucial because returning of the material immediately will affect the payment of the material to the supplier. Mascot will not have to pay for this material since it is not acceptable.

o This helps control unnecessary costs.

22 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Some more inputs related to Material Procurement in general

Following Graph can give us an idea of the entire procurement process in a nutshell. This gives an idea how the procurement department has to co-ordinate with different departments in a

Graph 2.4

company for effective decision making.

E-Purchasing And E-Procurement

The Internet and e-commerce is drastically changing the way purchasing is done. Internet use in buying has led to the terms "epurchasing" or "e-procurement." Certainly, communication needed in competitive bidding, purchase order placement, order tracking, and follow-up are enhanced by the speed and ease afforded by establishing online systems. In addition, negotiation
23 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

may be enhanced and reverse auctions facilitated. Reverse auctions allow buying firms to specify a requirement and receive bids from suppliers, with the lowest bid winning.

24 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

E-procurement is considered one of the characteristics of a world-class purchasing organization. The use of eprocurement technologies in some firms has resulted in reduced prices for goods and services, shortened orderprocessing and fulfillment cycles, reduced administrative burdens and costs, improved control over offcontract spending, and better inventory control. It allows firms to expand into trading networks and virtual corporations. Criteria for e-purchasing include:

o Supporting complete requirements of production (direct) and non-production (indirect) purchasing through a single, internet-based, self-service system.

o Delivering a flexible catalog strategy.

o Providing tools for extensive reporting and analysis.

o Supporting strategic sourcing.

o Enhancing supply-chain collaboration and coordination with partners.

25 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

CONCLUSION
From all the above project content & observations, following is a comprehensive list of objectives for purchasing and supply management personnel would include:
o To support the firm's operations with an uninterrupted flow

of materials and services:

o To

buy competitively and wisely (achieve combination of price, quality and service);

the

best

o To minimize inventory investment and loss; o To develop reliable and effective supply sources; o To

develop and maintain healthy relations with active suppliers and the supplier community; while achieving and relationships with them; maintaining effective working

o To achieve maximum integration with other departments,

o To take advantage of standardization and simplification; o To keep up with market trends; o To train, develop and motivate professionally competent

personnel;
o To avoid duplication, waste, and obsolescence; o To analyze and report on long-range availability and costs of

major purchased items;

o To

continually search for new and alternative ideas, products, and materials to improve efficiency and profitability; and

26 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

o To

administer the purchasing and supply management function proactively, ethically, and efficiently.

27 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Appendix I Questionnaire
o Would you suggest E- procurement procedure to be the optimal process for the procurement of material? o Which is the process of Stock valuation used in the industry? Which one is the most optimal one?

28 Procedure Followed for Material Procurement MMM Sem I (2010-2011)

Appendix II Bibliography

o Cost Accounting Babatosh Banerjee o Principles and Practice of cost Accounting N. K. Prasad o Cost Accounting Charles T. Horngern o Cost and Management Accounting S. N. Maheshswari o Cost Accounting Blocker and Weltmer o Cost Accounting Prof. Vanita Patel o Cost Management and Accounting Ravi M. Kishore o http://www. google.co.in

29 Procedure Followed for Material Procurement MMM Sem I (2010-2011)