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ED

BBA VI semester
Module IV
Faculty J Vidhya
Module IV: Market and Materials
Management Analysis
Vendor development, vendor selection
decision factors,
methods of price determination, direct and
hidden cost in material management,
market development, market feasibility,
activities and
decisions in materials management

Kautilya in Arthasastra
Stores and purchase personnel should
definitely be expert in his job, adept in the art
of negotiations, intelligent, loyal to the
organisations goals, suppressing personal
greed.
Importance of Supplier Selection - 1
One of the most important processes performed in
organizations today is the evaluation, selection and continuous
measurement of suppliers.

Selecting a vendor is now as important a process as developing
new products.
Importance of Supplier Selection - 2
Supplier selection process is a multi-criteria problem, which includes both
qualitative and quantitative factors.
Purchasing commands a significant position in most organizations
sincepurchased parts, components, and supplies typically represent 40 to
60 percent of the sales of its end products.
Thus relatively small cost reductions gained in the acquisition of materials
can have a greater impact on profits.
Suppliers have a large and direct impact on the cost, quality,technology,
and time-to-market of new products.

Importance of Supplier Selection - 3

Organizations ability to produce a quality product at a reasonable cost
and in a timely manner is heavily influenced by its
supplierscapabilities.

Supplier selection is one of the key issues of SCM because the cost of
raw materials and component parts constitutes the main cost of a
product Management.

A sound supplier selection decision today can reduce or
prevent a host of problems tomorrow

Vendor Selection Decision Factors
Steps in Vendor Selection Process

Evaluating Needs and Defining Objectives
Gathering a Limited Pool of Vendors
Interviewing with Vendors
Selecting and Applying the Method








Evaluating Needs and Defining Objectives
What need you are looking to satisfy?
Increase product quality
Which evaluation categories you will use?
What are your business, technical and usability requirements?
What are the must requirements?
Max price, min performance, etc
How will you score the requirements?

OUTCOME: list of requirements, objective and criterias to
evaluate the vendors and the way to score different criterias

Gathering a Limited Pool of Vendors
Evaluating all potential vendors takes much
time
Basic screening and elimination due to lack of
must requirements


OUTCOME: vendors pool

Interviewing with Vendors
One by one interview with vendors
Gap analysis between your requirements,
objectives and vendor properties
Scoring each criteria


OUTCOME: criteria-score list for each vendor




Selecting and Applying the Method
Select one among various methods
AHP, fuzzy logic method, etc
Calculate overall vendor score using selected
method
Select the vendor with best score
Supplier Evaluation Criterias

The evaluation criterias are fundamental to choose the best
supplier. They are specific to each firm, because they vary
according to the needs.

The criteria exposed in the following slides are the most
common ones.*

Six categories of criteria selected

(*) We have analysed almost 30 texts in order to select the most
common criterias
Supplier Evaluation Criterias
The six classes for the suppliersevaluation
measurement:

FINANCIAL HEALTH
EXPERTISE
OPERATIONAL PERFORMANCE METRICS
BUSINESS PROCESSES & PRACTICES
ENABLING BEHAVIORS OR CULTURAL FACTORS
RISK FACTORS
Financial Health
In order to evaluate if a potential supplier is in good
financial position, a buyer can use indicators such as:
Sales
Profitability
Liquidity
ROI
Debt ratio
Transparency of finances
Expertise
The purchasing department of the firm should choose
its suppliers according to its capabilities:

Network capabilities
Quality and production capabilities (dedicated
level?)
Technical level compared to sector average
Spread of technical creation
Investment in R&D

Operational Performance
There are a large number of criteria in this category, such
as:
On-time delivery
Lead time
Responsiveness
Inventory management and control: reorder management, forecasting
capabilities
Order acceptance, processing & fulfillement
Customer service
Preventive maintenance
Hours of operators training in Total Quality Control (TQC) or JIT

Business Processes and Practices
How does supplier provide a product or service at the
best value, on time and exactly as required from the
buyers?

Best practice and quality based information.
This evaluation business can help get at the root causes of supplier
problems.
For example: is the quality standard of the products met by the
production process (preventing defection) or by inspecting the quality
of the products after production?

Behaviors and Cultural factors
The evaluation criteria of such a category focus on the
long term sustainability of potential suppliers:

What is the improvement culture of the supplier?
Are his information capabilities always up-to-
date?
What is his intention of coordination?


Risk Factors
A suppliers risks are risks for the buyer.
Indeed, if a supplier takes too much risk, it can
have a great impact on his customer.
Risk factors can be uncovered in the previous
criteria exposed, but also in criteria such as:
trade relations, currency exchange, insurance,
legislations.
Criteria Selection
In reality, these mesures of supplier performance are difficult
to obtain (financial publications, questionnaires, surveys, site
visits).
Whichever criteria chosen, the assessment system must be
optimal for good decision making.
Markov chain concept: the decision environment is dynamic,
i.e. there must be interaction between the cooperation
patterns and the supplier evaluation criteria.

Reasons for popularity of materials
management
The amount spent on materials is higher than other inputs
Materials offer considerable scope for reducing cost and improving profit
Improving return on investment depends on the effective utilisation of
materials.
Materials add value to product
Quality of end product depends on materials
Materials management assumes responsibility for whatever happens in
purchasing, storing, inventory or any other area connected with materials.
Need for preservation of scarce resources for posterity
Increasing demand for ensuring environmental safety
The efficiency of any organisation depends upon the availability of right
materials, in right quantity, at right time and at right price.
Materials are life-blood of mans development

Materials management involves planning,
programming, organising, directing,
controlling, and co-ordinating the various
activities concerning the materials. The
production managers found it necessary to
develop an organised body of knowledge on
this subject. The resulting set of related
disciplines is known as materials
management.
Materials Management
Materials are any commodities used directly or
indirectly in producing a product such as raw
materials, component parts or assemblies.

Materials management is the grouping of management
functions supporting the complete cycle of material
flow, from the purchase and internal control of
production materials to the planning and control of
work in process to the warehousing, shipping, and
distribution of the finished product.
Thomas F. Wallace & John R. Dougherty

Materials management is the management of
the flow of materials into an organisation to
the point, where, those materials are
converted into the firms end product(s)
Bailey & Farmer

The executive who engage in materials
management are concerned with three
basic activities: buying, storage of materials
and movement.
Functions of Materials Management
Materials planning and programming
Raw material purchase
Receiving, store keeping, and warehousing
Issuing of material
Inventory control
Value engineering
Transportation of materials
Vendor development
Vendor rating
Disposal of scrap and surpluses
Focus of Material Management
To procure right materials
In Right Quantity
Of Right Quality
At Right Time
From Right sources
At Right prices
5 Rs, principles of purchasing
Primary Objectives
Buying the best item at the lowest cost
Reduction in inventory cost and High inventory
turnover
Maintaining the flow of production
Maintaining the consistency of quality
Optimisation of acquisition and possession,
resulting in lower cost
Cordial relationship with suppliers
Maintaining good records
Contribution towards competitiveness
Personnel development

Secondary Objectives
Promotion of standardisation with suppliers
Development of reciprocal relations with
customers
Committees to decide on economic make or-
buy decisions
Development of inter departmental
relationships
Can undertake acquisitions


Advantages or benefits of M M
Material cost can be lowered ( Sales price can be
brought down to a reasonable level)
Controlling of indirect cost (such as materials
movement)
Risk of inventory loss minimised (theft, pilferage )
Reduction in loss of time of direct labour
Cost of material used in different department
ascertained
Control of manufacturing cycle
Material congestion in storage places avoided
Improvement in delivery of the product
Phases in M M
Planning (Plans for capacity or production
levels and required inventory levels
Material utilisation (efficiency of the flow of
materials through the plant)
Physical (storing, receiving and issuing of
materials and physical checking of inventory of
raw materials, work in process, finished goods,
record keeping)
Control or follow up (feedback and corrective
action involved)

Challenges of M M
Selection of appropriate vendors
Land and storage cost increase
Difficulty in forecasting demand accurately
Scarce capital for investment in materials
inventory
Diversification of product lines
Optimising time and quantity for products
Management of information
Direct & Indirect costs in MM

Examples of direct costs

Indirect costs

Examples of indirect costs
Main depts. Of M M
Materials planning
Purchase
Stores
Inventory control
Purchasing
Purchasing is to procure the materials,
supplies, tools, equipment etc.
5 Rs Material, Quantity, Source, Time, Price

Procurement purchase, material supervision and
management as inventory control, receiving and
salvage operations.
Vendor rating
It is a method to evaluate a vendor against
certain parameters, related to his supplies.

Factors considered:
Vendors are assessed on the basis of a wide
variety of factors or criteria which might include
but not limited to:
Price
Discounts received
Maintenance of specifications

Promptness of delivery
Freight and delivery charges
Service
Market information
Co-operation
Management competence
Credit terms
Cost reduction suggestions
Inventory plans
Financial position
Rating techniques
Categorical plan
Personnel from different division maintain
informal evaluation records
Purchasing , engineering, quality control, receiving
and inspection.
For each supplier , each person prepares a list of
performance factors important to him. At a
monthly meeting, each major supplier is
evaluated against the list and assigned an overall
group evaluation, like preferred, neutral, or
unsatisfactory.
Weighted point plan
The performance factors to be evaluated are
given weights, for example quality might be
weighted 25, delivery 20, price 30 and service
25.
Weights selected represent buyers judgement
about the relative importance of the
respective factors.
Quantitative terms

Critical incidents method
Record of events related to buyer vendor
relationships is maintained in each vendors
file. They reflect positive and negative aspect
of actual performance.
This kind of documentation useful in
discussing ways and means of improving
performance, acknowledging the existence of
good relationships, determining the
competence of a vendor, and if necessary
considering termination.
Checklist system
A simple checklist is used to evaluate the
vendors.
Check list may be something like
Reliability, technical capability, after sales service,
availability, buying convenience etc.
Ethics
Ethics is a segment of philosophy concerned
with values of human conduct.
Ethics refers to a code of conduct that guides
an individual in dealing with others.
Ethics relates to the social rules that influence
people to be honest in dealing with others.
Ethics in purchasing
Many decisions remain largely a matter of personal
judgement.
Purchase manager is the custodian of company funds,
responsible for their conservation and wise spending.
Because of his contacts, he is the custodian of companys
reputation for courtesy and fair dealing.
A high ethical standard of conduct is essential.
They are subjected to more temptations
Since they spend millions, they yield tremendous power and
are the objects of considerable attention from suppliers.
They are in an excellent position to be dishonest if they want
to.
But they have to be ethical
Value analysis ( value engineering)
Purchasing & methods engineering
This activity is aimed at modifying the specifications
of materials, parts, and products to reduce their
costs
Focus is on the value of the product- what function is
to be performed by the product- and how that value
can be achieved at the lowest cost.
Primary attention is devoted to the materials.
Suppliers suggest improvement & cost reduction
ideas.
Inventory Management
The term inventory includes materials raw, in
process, finished packaging, spares and others stocked
in order to meet an unexpected demand or
distribution in the future.
Inventory can be used to refer to the stock on hand at
a particular time, of raw materials, goods-in process
of manufacture, finished products, merchandise
purchased for resale, and the like, tangible assets
which can be seen, measured and counted. In
connection with financial statements and accounting
records, the reference may be to the amount assigned
to the stock of goods owned by an enterprise at a
particular time.

Types
Finished goods inventories
Stock in trade ready for shipment
Maintenance, Repair and Operating
inventories
- cutting tools , grinding wheels, jigs
Maintenance inventory
Electrical switches, fuses, lamps, lubricants, safety goggles
Stationary inventories
Canteen provisions, medical supplies, uniforms
Objectives of Inventory
To facilitate smooth operation of the
manufacturing process.
To minimise investment in inventory
To reduce material handling costs
Reasonable utilisation of people
Inventories are held to facilitate product display
and service to customers, batching in
production in order to take advantage of longer
production runs and provide flexibility in
production scheduling
Inventory costs
Ordering cost
Carrying cost
Out of stock or shortage cost
Capacity cost
Ordering Costs
Cost of placing an order with a vendor of
materials
Preparing a purchase order
Processing payments
Receiving and inspecting the material
Ordering from the plant
Machine set up
Start up scrap generated from getting a
production run started
Carrying costs
Costs connected directly with materials
Obsolescence
Deterioration
Pilferage
Financial costs
Taxes
Insurance
Storage
Interest

Capital costs
Interest on money invested in inventory
Interest on money in land and building
Storage space costs
Building rent
Depreciation
Cost of maintenance

Inventory service costs



Out of stock costs
Lost sales, transportation
Capacity costs
Overtime when capacity is low
Idle time when capacity is large
Benefits of Inventory management
Inventory control ensures an adequate supply of
materials, stores, etc. minimises stockouts and
shortages, and avoids costly interruptions in
operations.
It keeps down investments in inventories, inventory
carrying costs and obsolescence losses to the
minimum
It facilitates purchasing economies through the
measurement of requirements on the basis of
recorded experience


It eliminates duplication in ordering or in
replenishing stocks by centralising the source from
which purchase requisitions emanate
It permits a better utilisation of available stocks by
facilitating inter departmental transfers within a
company
It provides a check against loss of materials through
carelessness or pilferage
It facilitates cost accounting activities by providing a
means for allocating material costs to products,
departments or other operating accounts
It enables management to make cost and
consumption comparison between operations and
periods

It serves as a means for the location and
disposition of inactive and obsolete items of
stores
Perpetual inventory values provide a
consistent and reliable basis for preparing
financial statements.