Case 1
PURCHASE DECISION (Mr. J M Shah)
Prof. J.M. Shah was the Head of the Department of Mechanical Engineering, Birla Institute of Technology and Science, Pilani. He was a conscientious teacher, fully devoted to academics. He believed that students must work hard to become successful in their future life. But in spite of a tough exterior, Prof. Shah loved his students, since he himself had no children. The student community at Pilani, thus, had a very peculiar love-hate relationship with Prof. Shah. Suddenly, there were rumours of Prof. Shah being tipped to become the Vice-Principal. His training to handle the administrative work had begun. Much more paper work started coming to Prof. Shah, which he totally disliked. One day, Prof. Shah was summoned by the Principal and told that, ‘To become a Vice Principal, you must not only learn to handle paper work, but also financial and purchase tasks. It is, therefore, in your interest to also deal with the purchase of a new boiler for our laboratory;’ Prof. Shah would have liked to say that he had never bought even a pair of socks for himself, but only said, ‘It will be a bit difficult, but I will try; Sir.’ The Principal smiled and concluded that the task must be completed before the commencement of the next academic year.
Prof. Shah faced a number of aggressive salesmen during the next two months. He listened with rapt attention to every visitor without making any commitment. He took extensive notes and by the end, he had started asking searching questions. Keeping the deadline for the completion of the task in mind, Prof. Shah had decided that the decision must be made during the free time he would have during the Diwali mid-term break. Prof. Shah diligently read all the literature received from the companies as well as his notes made during these holidays and also consulted the maintenance staff.
As a first step, Prof. Shah ruled out two companies which were just not in a position to complete the task before 1 July, the following year, the date of commencement of the next academic year. This left only three companies in the race. Finally, Prof. Shah prepared the following table of comparative merits of the three suppliers. He called these A, B and C so that the decision was not coloured by the names of the companies. He replaced financial data with hypothetical monetary units and also replaced the name of the item being purchased from ‘boiler’ to ‘the system’.
| Table: Relative Merits |
| Characteristic |
Company A
|
Company B |
Company C
|
| 1. Total installed cost of the system in thousands of monetary units |
325
|
301 |
350
|
| 2. Annual maintenance cost for 750 hours of use in thousands of monetary units |
41.5
|
40 |
44
|
| 3. Expected life of the system in hours of use |
70,000
|
55,000 |
75,000
|
| 4. Income from selling the scrapped system in thousands of monetary units |
10
|
3 |
15
|
| 5. Expenses for running the system per annum in thousands of monetary units |
70
|
79 |
63
|
Prof. Shah felt very happy at being able to convert the problem into a numerical question. The quantitative analysis would be fully scientific and his purchase decision unquestionable. However, at this stage, he decided to call his favorite student Roy, who was then studying for his MBA. Prof. Shah handed him the above chart and directed him to prepare logical recommendations.
Question:-
Q.1) Place yourself in the shoes of Roy and prepare a statement for the purchase of the boiler or submitting to the Principal.
Case 2
Purchase of Steam Generator
NileshWable was in-charge of buying capital equipment in Bharat Heavy Machinery Ltd, manufacturers of construction and mining equipment. Part of Nilesh Wable’s duty was the rental of shop equipment as well as the purchase of new machinery. He was surprised to receive a requisition from assembly shop foreman, for a Rs 90,000 steam generator.
Nilesh Wable knew that steam generator was only required for an occasional cleaning job. In the past it had been a practice to rent one from a local firm. When Nilesh Wable asked the foreman why it was necessary to buy the generator, he answered, ‘that is none of your business. The Works Manager has approved the requisitions.’ When Nilesh Wable asked the Works Manager for an explanation, he replied, ‘I do not care whether the equipment is bought or rented so long as my foreman is happy with the arrangement.’
On checking the records, Nilesh Wable found out that over past 4 years the local firm (R.R. Equipments) had always supplied a good quality generator on time, whenever requested. Current rental charges for the equipment were Rs 750 per day or Rs 3,000 per week. Delivered and picked up by the firm. Annual usage during the last 4 years had been as follows:
| No of Times Rented |
No. of Days Used |
Total Rental Charges |
| 4 years ago: 5 |
19 |
Rs 9750 |
| 3 years ago: 3 |
11 |
Rs 6,500 |
| 2 years ago: 4 |
13 |
Rs 8,250 |
| 1 year ago: 4 |
17 |
Rs 10,000 |
The purchase requisition asked for immediate delivery since a cleaning job was scheduled for the following week.
Question:-
Q.1) Analyze the case and give your comments.
Case 3
Unethical Practices in Purchase
Deckor India Limited
‘Here is a list of our suppliers Sir,’ said Marwha while pushing the source register in front of Mr. R.P Singh, the newly-joined purchase executive. Mr. Marwha, the Purchase Officer, had been looking after the purchase for quite some time as the post of Purchase Manager had not been filled. The reasons for this were not known in the department. Singh went through the names and instructed Marwha to call the suppliers one by one so that he could talk to them. He gave Marwha a week to arrange meetings 3 to 4 suppliers a day.
‘Some of these you can meet just now, Sir,’ said Marwha.
‘Just now?’
‘Yes, Sir! The owners! proprietors partners of many firms are also our own employees. I have only to run round the shops and offices and get them here.’
‘Are you serious?’
‘Very much, Sir. Here are a few examples: Our requirements of autoparts are being met by the supervisor working in our autoshop. A union leader owns a workshop and does the subcontract work for us.
Stationery is being supplied by our head clerk. An accountant owns two- and four-wheelers, which are regularly retained by the company to collect and deliver material from/to suppliers, plants and transporters’ godowns. Gaskets and plastic caps are being supplied by an employee in the grinding section. A purchaser assistant has put up a plating shop in the name of his brother and invariably, jobs are routed to him for surface treatment. Same way, a number of other examples can be given. Should I call some of them now?’
R.R Singh interrupted, ‘My God!’
‘Why, Sir! What happened?’
‘Things seem to be in more mess than I imagined. Don’t you know, Mr. Marwha, that buying from employees is against the basic principles of scientific purchasing?’
‘But this has been buying policy all along,’ argued Marwha. ‘Please give me the register here, Mr. Marwha’, said Singh ‘and I shall let you know what is to be done.’
Singh studied the register in detail and wrote a long confidential memo to the Managing Director.
Questions: –
Q.1) Do you, like the purchase executive, subscribe to the view that employees should not be the suppliers of the company?
Q.2) Draft a memo to the M.D. against the current policy.
Q.3) How can the existing policy be reversed without causing bitterness?
Case 4
Dynamic Electrical Engineering Corporation
One evening, the following conversation crossed abruptly between a junior buyer and the managing director of the above company. ‘Good night, Mr. Modi!,’ called out the bright young man as Mr. Modi was slowly walking to his reserved parking space.
‘Good night . . . er,’ Mr. Modi sputtered, as he could not remember the name of these young fellows who changed so often in his company’s buying department. But Mr. Modi stared at the young man trying to squeeze a large ‘EXCEL TV’ package into the back of his car. Mr. Modi was not so much suspicious as he was curious. As a man of principle, Mr. Modi did not think badly of others. But the Excel Electronics and Components were one of their suppliers and Excel’s boxes were a familiar sight at their receiving bay.
Mr. Modi thought again about the incidence the next morning and walked straight into the Chief Buyer’s office and made discrete enquiries. Mr. Ajit Singh, who was the Chief Buyer of the company was, however, ready to discuss the matter quite openly.
‘A gift?’ retorted Mr. Modi.
‘Yes Sir, that’s right.’ Repeated Mr. Singh.
‘Excel has made this special offer to electrical goods buyers. If we doubled the order size last month and paid within ten to fifteen days, they offered the product buyer a choice of gifts. I got a stereo the same way from them last year. I have chosen a portable TV for you this year.’
Mr. Moth was stunned, ‘Does it happen quite often?’
‘Quite often’, replied Mr. Singh, ‘many companies are now making special offers to buyers. I encourage my buyers to take advantage of’ this special deal. Our stationery buyer last year got two weeks’ holiday at Darjeeling as a part of such a special offer.
‘You see here’, said Mr. Moth firmly, ‘I don’t like my company’s reputation should be jeopardized this way, by bribes.’
‘Not bribes Sir,’ retorted Singh angrily, they are legitimate gifts and part of Excel’s sales promotion efforts, made quite openly to every buyer.’ After a little pause, Singh started explaining, ‘Our company has saved a lot of money as a result of such deals since bulk orders usually command high discounts. And what is more, I do not buy anything beyond our requirement. The way prices are soaring, we can’t lose this amount’
‘You obviously do not worry so much about the cost of stocking or cash flow problems, do you?’ countered Modi. ‘If Excel wants to increase their sale or get earlier payments, they should offer more liberal discounts.’
‘Our suppliers say that a lot of companies are approaching as a means of giving their employees a tax-free bonus,’ sighed Singh.
But Modi was firm, ‘Well, I won’t have it here. I don’t like buyers of my company to be influenced need by gifts he told Singh quite frankly. ‘I think you are not questioning my integrity,’ interrupted Singh, who was not convinced by Modi’s self- righteousness. ‘I am not at all influenced by these gifts. They are good incentives to my buyers. These have cut employees’ turnover in my department at no cost to this company. I think these perquisites are a buyer’s commission, a natural reward for buyers.’
‘Our sales people work on commission, not to mention all kind of free entertainment at company’s cost. Why buyers can’t profit from their efforts? I think we contribute as much to this company’s profitability and still my buyer’s pay is much lower than that of any salesman. And yet you are complaining about a buyer taking home a TV’
Modi had to agree that Singh was an honest man and running his department efficiently. He had cut costs by 5 per cent last year; delivery time for critical items had been greatly reduced despite scarcity. Still, he felt that allowing employees to accept incentives from suppliers is il1advised. On the other hand, if he demanded to put a stop to it, he might well face a revolt within the buying department of his company.
Question:-
Q.1) Do you think this practice of accepting gifts from suppliers is ethical or unethical? How can you classify some activities as distinctly ethical and some unethical? Define a policy/a procedure for accepting gifts by buyers from the suppliers.
Group B
Case 5
BACKGROUND OF ACTIVITIES
Seth Ganapathy Ram Saheb, chairman of Ganapathy Ram Industries requested Prof. Gopalakrishnan to suggest a suitable system for the purchase function and develop yardsticks for the evaluation of the materials function after introducing adequate checks and balances in Ganapathy Ram Industries.
Ganapathy Ram Industries with an annual turnover of about two billion rupees is an important constituent of the Ganapathy Ram group located in northern India. The Ganapathy Ram Industries was the oldest member of the group and was established about four decades ago. The activities have been widely diversified in the same town and the present product range covers electrodes, paints, soap, vanaspati and industrial gas. Each unit is headed by a general manager, reporting directly to the chairman. The unit general manager has under him departmental heads for stores, labour, accounts, production planning, sales, manufacturing, maintenance and inspection. The vanaspati unit also has a buyer for raw material purchases who meets the oil requirements of other units as well. Other services like finance, taxation, computer, publicity and purchasing are centralized with the chairman’s office and each is looked after by a separate general manager.
CENTRAL PURCHASE DIVISION
The headquarters’ liaison officer at Delhi is in charge of imports, licensing, liaison, follow-up, etc. and is controlled by the general manager of the central purchase division. This central division caters to the needs of all items for the manufacturing units, except the oil requirements of vanaspati and other units. It also disposes of a scrap of Rs. 10 million per year. The qualifications of the existing central purchase division staff is available in Tables 45.1 and 45.2. The objective of the materials department, according to the chief of central purchase section, is to provide the required quantity of the required quality material at the appropriate time in as economic a manner as possible. Wherever possible, items are procured in the local area region, in order to develop industrialization of the local area and also to avoid transportation costs.
| Table 45.2 Overview of CPD & Consuming Units |
| |
Central Office |
Vanaspati |
Gas |
Soap |
Electrodes |
Paints |
| Sales (Miliion rupees) |
– |
1250 |
70 |
250 |
373 |
105 |
| Materials cost (Million rupees) |
– |
980 |
30 |
178 |
190 |
68 |
| Inventory (Million rupees) |
2 |
106 |
6 |
29 |
38 |
17 |
| No. of CPD items |
620 |
3830 |
3200 |
1875 |
2750 |
2200 |
| Value of CPD items (Million rupees) |
11 |
163 |
30 |
125 |
190 |
34 |
| No. of Indents |
525 |
1500 |
1400 |
675 |
1800 |
1000 |
| % Emergency indents |
15% |
25% |
12% |
13% |
45% |
15% |
| Approximate % CPD time |
10% |
20% |
5% |
15% |
25% |
25% |
It was made clear by all that the existing setup may not serve the best interests of the company. The purchasing activity includes selection of sources of supply, finalization of contract of purchasing items and services, placement of purchase, orders’, contacting after-sales service personnel, follow-up, maintenance of correct relation with supplier, approval of payment to suppliers and evaluating the suppliers. Capital items after approval by the board, are also handled by the central purchase.
Storage activity in Ganapathy Ram Industries, involves physical control of materials in main stores and sub-stores, use of preservatives on items, gate pass, minimization of obsolescence, timely disposal of scrap and surplus, efficient handling, maintenance of stores records, proper location, stocking, issue, receipt, physical verification, reconciling with book figures, etc. The stores is attached to the respective individual units and is under the control of unit general manager.
The inventory control officer, attached to the stores of individual units, is in charge of aspects such as materials planning, budgeting, fixing minimum—maximum levels, lead-time analysis, cost reduction, re-order levels, ABC—VED analysis, economic order, quantity determination, etc. He acts as the convener of weekly coordination meetings, which are attended by all departments of a particular unit. Representatives of finance/purchase also attend such coordination meetings, in which the problems of the units are discussed.
Materials management function has been understood in Ganapathy Ram Industries as the service function responsible for the coordination of materials, planning, source development, purchasing, follow up, handling, transporting, disposing, storing and controlling the inventory. Based on the sales forecast and the bill of materials, the materials planning and control is done. This involves estimating the individual requirements of items, preparing materials budget, forecasting planning the level of inventories, scheduling the orders and monitoring the performance in relation to production.
ORGANIZATION
The general manager of the central purchase division traced its origin in the company. The central purchase was introduced by him only three years back and in this period the CPD has done commendable work by devising suitable purchase procedures, developing professional expertise, preparing a manual, compiling a suppliers’ directory, and also in obtaining shortage spare-parts items at controlled rates from original manufacturers. He has mentioned that buying in bulk and development of commercial expertise by the staff are the other benefits in the present centralized purchase system. It has been difficult to quantify this benefit in rupees. He has emphasized that the top management is thi king of modernizing all the old/obsolete plants and he is preparing a report on the same. In spite of the break-down maintenance adopted by various units, he is trying his best to meet the spares requirements of the plants adequately. The total central purchase expense is worth about rupees five million.
He was of the view that it has also been possible to eliminate duplication in purchasing efforts with regard to common items by exercising adequate control on transportation and on suppliers. He has been able to negotiate the best price by bulking indents. Through centralization of procurement, the accountability for material procurement for all the manufacturing units has been vested in a single department. However, the general manager of CPD has admitted that the organization has not been able to introduce scientific techniques of development of drawings of critical spares, building failure data analysis, inventory control, vendor rating and cost reduction techniques in different consuming units in view of the limited number of staff in the central purchase and lack of interest in units. If the central purchase continues in the present form, then he has suggested that the number and quality of the present staff be strengthened adequately in Ganapathy Ram Industries in order to meet the challenging assignments and expanding activities. He estimated an addition of six offices and two assistants with an increase of about Rs.4,00,000 per annum for this purpose. He also felt that the units will press for decentralization of all other functions, resulting in total independence and complete autonomy, thereby killing the corporate image.
NEED FOR DECENTRALIZATION
On the contrary, the general managers of the consuming units mentioned to Gopalakrishnan the following difficulties in operating with the existing central purchase system of Ganapathy Ram Industries: (a) inordinate delay in procurements, with the average leadtime going up to about two months even for regular locally available items; (b) Supply of inferior quality materials which has to be sometimes consumed due to non-availability of the required material; c) following up central office to get the items; the unit general managers or their staff claim to spend up to 25 per cent of their time only on this activity; (d) raising of emergency indents to avoid plant shut-down; (e) in cases of spare parts, more than 50 per cent of indents become emergency items; U) the maintenance engineers have to spend a lot of time explaining details to the suppliers; (g) building up of in-process inventory due to non-availability of matching components; (h) stoppage of work due to non-availability of spare parts; (i) technical expertise, not adequately available in central purchase, to cover the diverse requirements; (j) purchasers have not even seen the items bought by them; (k) like decentralized maintenance, the purchase should also be decentralized; and (1) a sense of belonging and commitment to the consuming units lacking on the part of central purchase staff, as they serve many units. All the general managers have desired that the central purchase should be immediately wound up and the authority delegated to the individual units’ wants after providing adequate staff. They also pointed out how the decentralized maintenance organization is helpful to the performance of the units.
The central purchase staff, on the other hand, reports difficulties relating to, (a) incomplete specifications, particularly of spare parts; (b) frequent last-minute changes in bill of materials due to market condition; (c) non-availability of drawings for spares; (d) emergency indents going up to 55 per cent for spare parts; (e) immediate delivery requirement of long lead-time items; (I) creating an artificial shortage by overdraw from stores; (g) rejecting good quality materials and accepting bad materials when urgently needed, etc.
The general manager of the central purchase is of the opinion that the difficulties of the consuming units can be sorted out on a case- by-case basis, in the weekly coordination meetings. He was emphatic that by restoring to decentralization at the unit level, Ganapathy Ram Industries have to completely sacrifice the advantages of bulk-buying of common items and the corporate image. He is also of the view that one unit may pay higher charges to the same supplier for the same item, compared to another unit. These units may have to deal with a larger number of suppliers for the common items within multiplicated efforts in indenting, purchasing, follow-up, source development, vendor rating, purchase procedures, travelling, etc.
ACCOUNTABILITY
If the decentralized system is to be introduced, then the central purchase general manager has desired that adequate safeguards like adherence to purchase manual, avoidance of sharp practices, adoption of suitable delegation of powers and monitoring by internal audit must he developed, and in-built. It is also likely that the practices and the systems of procurement may differ widely, from one unit to another of the same group, in this process. The number of people who will be accountable for procurement will also be more, i.e. five different consuming units and the purchasing agency of the chairman’s office. In view of the above duplication and expansion, the salary component for purchasing will also be higher and the addition is estimated at rupees three million per year for all units according to the central purchase chief. It is implied that the general managers of the respective units would also devote considerable time for purchasing, which is included in this figure. But the consuming unit general managers mentioned that it is possible to reduce and eliminate most of the complaints to the satisfaction of the individual general managers, resulting in increased profitability, if the decentralized system is introduced. It is also possible to introduce the concept of integrated materials management, accounting for ‘total materials activity’ at each unit, if the decentralized system is introduced. Their estimate in the additional purchase cost has been only rupees one million per year for all units, with greater satisfaction to the consuming units and increased productivity.
Prof. Gopalakrishnan has obtained from the central purchase a list of common items, purchased from a common source, which is consumed by more than one unit. This list is given in Table 45.3 and
| Table 45.3 Illustrative List of Common Items |
| Item Group |
Vanaspati |
Gas |
Paints |
Electrodes |
Soap |
| Tinplate |
Yes |
Yes |
– |
Yes |
– |
| Stool |
Yes |
Yes |
Yes |
Yes |
Yes |
| Coal |
Yes |
Yes |
Yes |
Yes |
Yes |
| Cement |
Yes |
Yes |
Yes |
Yes |
Yes |
| L.D.C |
Yes |
Yes |
Yes |
Yes |
Yes |
| Caustic Soda |
– |
Yes |
– |
– |
Yes |
| Titanium dioxide |
– |
– |
Yes |
Yes |
Yes |
| V-Belts |
Yes |
Yes |
Yes |
Yes |
Yes |
| Hardware items |
Yes |
Yes |
Yes |
Yes |
Yes |
| Automobile spares |
Yes |
Yes |
Yes |
Yes |
Yes |
| Bearings |
Yes |
Yes |
Yes |
Yes |
Yes |
| Lubricants |
Yes |
Yes |
Yes |
Yes |
– |
| G.I. sheets |
Yes |
Yes |
Yes |
Yes |
– |
| C.B. boxes |
Yes |
– |
Yes |
Yes |
Yes |
| Wooden cases |
– |
– |
Yes |
Yes |
Yes |
| Electrical motors |
Yes |
Yes |
Yes |
Yes |
Yes |
| Hoop iron |
Yes |
– |
Yes |
Yes |
Yes |
| A 1 paste |
– |
– |
Yes |
– |
Yes |
| Lab chemicals |
Yes |
– |
Yes |
– |
– |
| Stationery/uniform |
Yes |
Yes |
Yes |
Yes |
Yes |
| Bulbs, tubelight electricals |
Yes |
Yes |
Yes |
Yes |
Yes |
| Diary & calender |
Yes |
Yes |
Yes |
Yes |
Yes |
| Publicity hoaeding |
Yes |
Yes |
Yes |
Yes |
Yes |
| Vehicle control |
Yes |
Yes |
Yes |
Yes |
– |
| Job contract |
Yes |
Yes |
Yes |
Yes |
Yes |
| Disposal of scrap |
Yes |
Yes |
Yes |
Yes |
Yes |
| Imports |
Yes |
Yes |
Yes |
Yes |
Yes |
This list is only indicative and not exhaustive and according to the the annual value of purchase is estimated to go up to rupees one billion for the total common items. But the general managers did not agree with the common list, as the individual specifications are different for each unit, even though the name may be the same.
The total existing central purchase expenses were about rupees two million per annum, 75 per cent of which constitutes the salary components alone. This excludes the time spent bi individual unit personnel on procurement. He has also found that the powers of delegation for purchase are as reasonably decentralized as in any other private sector organization. There has been only one advertized open tender since the introduction of central purchase in Ganapathy Ram Industries. The purchase department has access to the computer and uses it for ABC analysis, status of indents, follow-up, etc.
Prof. Gopalakrishnan has obtained the sales, materials cost, number of indents, percentage time spent by the central staff for each one of the operating units. He has also been surprised that any information he wanted could be obtained from central purchase, provided one week’s time was given to the staff. He has been informed by all, that the central purchase staff have not been involved in any unethical/corrupt practices and that there has not been a single complaint with regard to their integrity. He is now wondering as to what should be his recommendations for the overall benefit of Ganapathy Ram Industries Limited, on materials function and the yardsticks for evaluation of all activities of materials management.
The present central purchase service charges of rupees five million are allocated on the basis of purchase value only to the units. The above excludes electricity and steam charges. Besides the number of indents, bill of materials for regularly consumable items are also obtained from the consuming units. The emergency indents relate mostly to spare parts. The inventory carrying charges have been estimated at about 30 per cent and an average of three months’ stock is maintained in individual stores, with a maximum of 12 months for spare parts. About rupees ten million worth of non-moving items, mostly imported spare parts, are included in the inventory. The inventory of Vanaspati excludes the oil stock.
Question:-
Q.1) Summarize & Analyze the case with reference the principals of purchase management?
Case 6
G R Electricals
COMPANY BACKGROUND
Admiral Ganapathy Ram, the new managing director of Ganapathy Ram Electricals has been reviewing the overall performance of the company for the recent years. His attention is drawn almost immediately to the high inventory holding of the company. He has felt that the high working capital locked up in the current assets may be making inroads into the company’s profits. For the purpose of improving corporate performance he has sought the advice of Prof. Gopalakrishnan.
Ganapathy Ram Electricals, a public sector company, had been established two decades ago mainly for the manufacture of turbines, heavy industrial valves, generators high pressure equipments, boilers, electrical heavy items, etc. to cater to the needs of the processing and power industry. The company has made modest profits in the current year, for the first time, to the tune of about rupees one million. The accumulated losses, however, showed a figure of Rs. 48 million. The total outstandings from the state electricity boards, central thermal power corporations central hydro-power corporations, and other public sector undertakings are about Rs. 35 million. The production is usually based on job orders. Many of the products are turnkey- based and even though the company tries to standardize its products as per Indian Standards specifications clients with foreign collaborations do not cooperate fully.
A meeting of the management team was held recently to discuss the company’s problems. The departmental heads of the company walked into Ganapathy Ram’s office some days ago to discuss the high inventory holding and other problems of the company.
WORK IN PROGRESS
Admiral Ganapathy Ram: Gentlemen, you are all aware of the purpose of this meeting. Our performances as it would appear in the annual report, is excellent on paper for this year, compared to previous years. However, it could be much better if we work with a team approach. My major concern is with the high inventories of all categories. Mr. Rangan, is there any way of decreasing our work-in-progress and semi-finished goods inventory?
Rangan, production manager: I do not think it is very high Sir, considering our production cycle of 10 to 15 months for many jobs. You know, we are forced to make non-standard/tailor-made/job order/one-off special products. This not only increases the setting changes and production cycle time in the machine shops but also the number of items of work-in-progress. We are now working only at 50 per cent of the rated capacity due to periodic job changes, setting changes and other disturbances in manufacturing. The work-in- progress in future will decrease if we increase the production volume. Some of the imported matching components are expected shortly and these may decrease the work-in-progress and assembly units. It is not possible to have ‘ready made’ methods to reduce the semi-finished goods inventory, in a heavy job-oriented industry like ours. We also need some balancing machines to reduce the semi-finished goods inventory.
Rangan has also mentioned in the meeting that the marketing department issues last-minute instructions for modifying the work orders to suit the changing priorities of the customers. In view of the 60 per cent power cut on high tension consumers in our state, the ovens are not charged at the right time. This results in wasting the efforts of carburizing the heat treatment, which is redone after normalization. The inspection department has not checked their gauges properly, which culminates in rechecking wrong rework and increases the works-in-progress.
WORKING CAPITAL
Ganapathy Ram: Mr. Kesav, do you have anything to say about our holding of raw materials and stores inventory? Are you happy with the present state of high stores inventories, resulting in increased working capital?
Kesav, materials manager: Against the present state of shortage of materials in the country and double-digit inflation rate, I feel we are doing well. We bad 8 months’ stock three years ago as raw materials and now have reduced it to about six months. This includes imported materials like copper and other non-ferrous items. Since low stocks result in machine down time, we have to carry this much reasonable stock.
Ganapathy Ram: Mr. Murali, how much does the materials component contribute to the cost of the product? Is it not around 65 per cent? Do you have, any working capital problems? How can we improve the overall profitability of the company? What are your views on the outstanding situation?
Murali, finance manager: You are quite right Sir, the ‘input’ cost covering raw material, spares and energy is about 66 per cent of the total cost. I would also like to point out that since we have now moved into the region of profits, this is the right time when we should become cost-conscious. I am sure we can make more profits by tightening working capital situation. Why, a reduction in the working capital itself could be a major source of profits. Our bankers have been advising us not to cross the limits. Perhaps there are methods to reduce all components of the working capital, namely raw material, semi-finished items, finished goods and receivables. Our cost of capital is about 18 per cent and I would say that the average inventory carrying cost of 30 per cent would be a reasonable estimate, after including the storage charges. This is likely to go up, if the cost of capital increases.
Further, our average cost of ordering is Rs. 87 per order for indigenous items and Rs. 2000 for imported items. These costs have not been split into fixed and variable components. Only three state power boards account for most of the outstandings. It may be possible for us to resource the current assets by applying scientific techniques. We are also thinking of introducing quality audit of receivables and steps for financial discipline in all functions. Perhaps, we can think of constituting a task force for this purpose.
SCIENTIFIC MANAGEMENT
Ganapathy Ram: Are you suggesting that we should use the modern scientific inventory management techniques as practised in Japan to reduce the working capital commitments?
Kesav: I do not think it is possible to apply any of the mathematical models or scientific techniques in this country. Everyone in my department is aware of their existence but when nothing that we want is freely available across the shelf in the country, how can we use scientific techniques? Recently, I read an article in Business India, wherein the shortcomings of these techniques — ABC-VEDEOQ, etc. — have been highlighted. Take, for example imports. I am forced to show a fast rate of consumption of existing licences in order to get fresh ones. Import substitution is impossible. If I procure the kind of inferior quality material that is available locally, Rangan will kill me. If there is a production hold-up due to stock-out of an item, every-one shouts at me for the stock-out. The finance staff seek information from us only to serve as a hindrance, forcing us to give half-truths in all aspects.
Further, we have 1,25,000 items covering such diverse categories, like boiler quality plates, V-belts, steel rods, special steels, production items, brass items, bearings, copper components, hardware, tools, uniforms, stationery, non-ferrous parts, spare parts, etc. The items are considered critical at one point or another by the user departments. Some of these items, particularly machinery spare parts, move only once in two years. We have collaboration agreements with many European countries. Hence, we are forced to adopt both the metric and foot-pound-second systems for the same items used in two different shops. This makes codification, identification and standardization very difficult in practice. The Russians identify electrical motors by weight only and not by horse power.
FINISHED GOODS INVENTORY
Rangan: Sir, Mr. Kesav is right. It is easy to give lectures on import substitution and standardization. The indigenous manufacturers are not up to the mark and he has a large number of items to be developed locally. Our previous experience in this context has not been satisfactory. We paid increased price for an inferior quality shaft, creating problems in the assembly shop. The indigenous suppliers increase price by more than 100 per cent after initial approval of the samples and they do not have access to basic facilities, such as quality raw materials, drawings, high precision machines, etc. The imports have also increased our work-in-progress and finished goods inventory, as we sometimes have to wait for matching items.
Ganapathy Rain: Mr. Gandhi, have you anything to add?
Gandhi, marketing manager: I am aware of the high finished-goods inventory. I am always following up with the clients for this purpose. Some of the expansion schemes of our clients have got stuck. I am, however confident of getting orders issued on a global tender basis for some of the World Bank-aided new power schemes. Even though the demand is unpredictable and competitive, I am definite that the finished goods stock would be liquidated shortly, even though some of the state electricity board contracts wherein our tender quotations are the lowest have been given to Italy on other considerations.
Mr. Ganapathy Ram: In our total purchases, what proportion do we import? I think it is about 35 per cent in terms of the annual purchase budget.
Murali: It is 36 per cent, to be precise. This is for the current year. Last year, it was 38 per cent. Our computer can also be used in the materials department effectively for all types of analysis and to reduce the working capital, even though we are yet to make a beginning in this area.
Ganapathy Ram: Thank you, gentlemen: I am requesting Prof. Gopalakrishnan to get in touch with you all for further details of our operations.
After the meeting, Admiral Ganapathy Ram was still not sure of his priorities and has been wondering whether anything drastic could be done about the high inventories. He suspected that his officers were not coming with all the facts in this situation. He has even felt that with characteristic ineptness, his officers choose their own bizarre strategy. He requested Prof. Gopalakrishnan to study the matter impartially and recommend suitable solutions.
ORGANIZATION STRUCTURE
The managing director has five departmental heads — production, materials, finance, marketing and personnel — reporting to him. The production manager is in charge of all shops, maintenance, engineering, safety, design, material control, production planning, tool room, quality control, inspection and all production shops. The finance manager looks after budgets, audit, bank finance, stores accounting. costing and the traditional accounting aspects. The material head has three managers for purchase, stores and inventory control. The personnel manager has informed Prof. Gopalakrishnan that the company has a well-defined policy on advertisement, interview, selection, recruitment, induction, promotion, grievance procedures, suggestion schemes, etc. as is prevalent in other public sector undertakings. The company employs 950 officers, mostly engineers of various categories and 8,900 workers.
However, a few executives associated with the company since inception have been complaining about direct recruitment of some MBAs, foreign-trained technologists and retired defence personnel for senior managerial cadre. They have also criticised before Prof. Gopalakrishnan the promotion policy of merit-cum-seniority as SWEAR BY CAT i.e. subordination will be encouraged and rewarded but your competence will at best be tolerated. However, he admitted that the coordination meetings are converted into forums for proving one’s strength.
The chief mechanical engineer reports to the production manager and is the overall in-charge of maintenance of mechanical, electrical, electronics, civil, instruments, etc. A maintenance engineer with a group of 3 to 10 mechanics looks after each maintenance sub-function. Support facilities like tool room, sub-stores, repair shop, reconditioning and testing facilities are adequately available in Ganapathy Ram Electricals. At the time of purchasing the capital machinery, the maintenance engineers have not been consulted. The maintenance engineers are responsible for the plant capacity utilization and the official policy is for planned and preventive maintenance. But a judicious combination of preventive and breakdown maintenance is the order of the day. It is not uncommon to see breakdown maintenance practised in a large number of cases during the last quarter of the year. Contract maintenance is in vogue for typewriters, air-conditioners and buildings.
MATERIALS ORGANIZATION
The purchase manager is in charge of source development, vendor rating, import substitution, follow-up, materials intelligence, market research, imports, pre-qualification of tenders, legal aspects, contract management, local purchase, sub-contracting, etc. The purchase section in Ganapathy Ram Electronics has 20 officers and 35 other categories of staff. The materials research cell under the purchase manager looks after the registration of new suppliers, sourcing, contracts, advertisement for open tenders and different aspects of work pertaining to import licences and liaison with various government departments. The progress cell in purchase keeps records of inflow and outflow of documents, such as materials, purchase requisitions, enquiries, tenders, purchase orders, movement of files to other departments and also looks after other miscellaneous work such as periodical reports to the banks, state government undertakings, central ministries, Bureau of Public Enterprise, etc.
The stores section in Ganapathy Ram Electricals releases the material to different sections and work centres. The central stores, headed by the manager, stores, has five stores officers to look after all the production items and one stores officer to look after the construction stores. Receiving functions, inwarding, traffic, disposals and clearance are looked after by an officer. The function of the materials management organization begins after receiving the materials, purchase requisition from the materials control section. The materials control section usually initiates most of the requisitions based on indents from the design office for production materials. The quality control staff under the production manager is in charge of inspection of the items in the stores; whenever necessary, stage-wise inspection of machinery is carried out during manufacturing at the suppliers’ end.
The inventory manager, reporting to the materials manager, is in charge of setting up minimum/maximum levels for all items, standardization, variety reduction, codification, value analysis, materials planning, cost reduction studies, etc. He has five clerks under him. He has got access to computer facilities and personal computers; however, scientific applications in this field are yet to be introduced in the materials management in Ganapathy Rare Electricals. The materials engineering section attached to the mechanical engineering department, under the production manager, provides the technical services for identifying the specifications of ferrous materials, castings and forgings. They make the technical delivery conditions and send them to the suppliers. The material engineering section maintains close liaison with the design and development sections.
PURCHASE PROCEDURES
For must of the items, the materials purchase requisitions are received from the materials control section. They are prepared, identifying therein the cell-wise distribution of materials groups in the purchase section Before the requisitions are sent to the purchase department, the materials control section ensures that the administrative sanction or budgetary approval for the same is available. This is furnished on the material purchase requisitions. The progress cell enters the incoming requisitions in a register and then forwards it to the respective purchase cells through the concerned officer.
The single tender is adopted in Ganapathy Ram Electricals in respect of proprietory items, which includes proprietory items for main production, spare parts of specific nature, items for which only single source is available, monopoly suppliers and in cases of emergency purchases. For an order value below Rs. 1,00,000 per item, limited tenders are applicable, while open tenders are adopted for values exceeding rupees one lakh. For import purchases made for the first time by the company, global tender are issued. Pre-qualification of parties is adopted as per the company’s rules.
The materials manager is given the authority to decide in favour of limited tenders, wherever required, up to a limit of Rs. 1,50,000 per order. For such items as castings/forgings/special types of tools for which only limited high quality suppliers are available in the country; exemption is made in the above limits as per the purchase manual of the organization. For all other items, decisions for converting open tender to limited tender can only be taken with the financial concurrence and approval of the managing director. Splitting the orders are usually not resorted to, in view of the financial and audit objections. Special emergency powers of Rs. 5000 per item, subject to a maximum of rupees one lakh per annum, are vested with the production head.
After the mode of tender is decided, the case is then forwarded to the materials research group, wherever necessary, for obtaining the possible list of suppliers for limited tenders. In case of open tenders, the materials research cell obtains the annual consolidated requirements from all the purchase cells with the requisite details. Whenever written enquiries need to be sent, as in limited tenders, these are issued through the progress cell, which make the necessary entries in the materials requisition register and return the office copy of the enquiry to the case file in the concerned purchase cell.
ISSUE OF PURCHASE ORDER
The tenders and quotations are received by the progress cell, which enter them in a register and keeps them in the tender box. The tenders are usually opened on the due dates in the presence of the concerned officers from purchase, finance and production as well ‘is suppliers’ representatives. After making entries in the tender-opening register of the progress cell, the quotations are sent back to the respective purchase cells. Tenders without earnest money deposit, or received late, are rejected without any consideration.
Case files with the comparative statements are forwarded to the materials control/materials engineer/indentor. In case of general consumables and certain raw materials, castings and forgings, the case files are always sent to the indentor concerned for obtaining his technical opinion. The movement of the files is indicated by a flow diagram, as shown in Table 48.1. The lead-time of converting an indent to a purchase order varies, with a minimum of two months for locally available items used repeatedly to a maximum of eight months, particularly for imported/advertised tender items. Occasionally, files have been misplaced or lost, and hence this administrative lead-time has even gone up to 24 months! Thus, the total lead-time including manufacturing item transporting, inspecting time, etc. usually vanes from seven months to over 20 months.
After the files are returned to the purchase department with the recommendations of the above departments, they are scrutinized and forwarded to the finance department for financial concurrence, giving the entire history of the case, including the last purchase and the action proposed to be taken. When the concurrence is obtained, the purchase cells prepare orders on the basis of the purchase order number from the statistical cell. It ther forwards them to the respective authorities as per the existing powers of delegation. Whenever necessary, negotiations are resorted to for high value items with the suppliers giving the lowest quotation, provided the technical specifications are adequately met. Some suppliers have complained about kickbacks,
corruption, nepotism, cuts, winding-up charges, favouritism, political interference, parochialism, selective negotiation, etc. in the placement of orders, but the materials head has dismissed them as emanating from incapable suppliers due to frustration. The functions of the materials intelligence cell, over and above their involvement in purchase procedures are: organising information for maintaining statistics of suppliers and materials, maintaining records of price trends of important materials, maintaining records of indigenous manufacturers to aid in import substitution, preparation of reports to the bureau of public enterprises, parliament, ministry, etc.
Having been briefed about the existing inventory management practices in Ganapathy Rain Electricals, Prof. Gopalakrishnan wanted some sample data on the movement of files in the organization. After about a fortnight, the materials department gave all the data, which are detailed in Tables 48.2, 48.3 & 48.4.
Table 48.2 Inventory and Consumption (Figures in Rs. Million)
| Item |
Inventory |
Comsumption |
Inventory |
Consumption |
|
| Raw materials |
780 |
820 |
980 |
960 |
|
| Production Components |
475 |
630 |
520 |
520 |
|
| Spare Parts |
115 |
30 |
130 |
35 |
|
| Total of stores items |
1370 |
1480 |
1630 |
1515 |
|
| Semi-finished goods |
1150 |
– |
1220 |
– |
|
| Finished goods |
980 |
– |
1150 |
– |
|
| Overall total |
3500 |
– |
4000 |
– |
|
|
It has been noticed that about Rs. 80 million worth of material — numbering about 10,000 items, mostly imported spares, has not been included in any of the last three years in the above table and was classified as non-moving spares, but not declared as obsolete. Further analysis in – dicated that the coverage for inventory of imported items was about 30 months in the stores items. About Rs. 10 million worth of imported rejected material from Italy has been lying in the stores for the last three months in the stores.
| Table 48.3 Purchase Order by Type of Tender |
| Sl.no |
Category |
Number of orders |
Value (Million rupees) |
| 1 |
Single tender |
2800 |
580 |
| 2 |
Limited tender |
1800 |
355 |
| 3 |
Opened tender |
1550 |
340 |
| 4 |
Rate contract |
1935 |
35 |
| |
|
8085 |
1310 |
| Table 48.4 Purchase Order by Value (Current year) |
| |
Range of value per order |
Number of orders
|
| 1 |
Upto 1000 |
1320
|
| 2 |
1000 – 1500 |
1150
|
| 3 |
1500 – 2500 |
980
|
| 4 |
2500 – 5000 |
1645
|
| 5 |
5000 – 12,500 |
720
|
| 6 |
12,500 – 25,000 |
550
|
| 7 |
25,000 – 50,000 |
380
|
| 8 |
50,000 – 250,000 |
650
|
| 9 |
Above 250,000 |
875
|
Over 60 per cent of the purchase orders were found to contain only on- item per order. The above excludes bazaar purchases, for which three oral quotations are necessary and purchase is made from the imprest account.
Questions:-
Q.1) Summarize and Analyze the case with ref to the principles of purchase management?
Case7
CORPORATE SCENARIO
Dr. Ganapathy Ram, the president of Ganapathy Ram Fertilizers has requested Prof. Gopalakrishnan to study the company’s operations and make suitable recommendations in the areas of maintenance, spare parts, stores and purchase. For this purpose, Prof. Gopalakrishnan has interviewed officers at different levels in the factory and also met a few vendors. He has collected relevant information on systems, procedures, practices, manuals and current problems, which is summarized below.
Ganapathy Ram Fertilizers is a large public sector company located near a public sector refinery from where one of the raw materials, naphtha, is being pumped. The plant is located near i major port, which is 30 km away and these were the major considerations in locating the plant in the area about two decades age.. According to the president, the high technology, high gearing of cap- – tab and fluctuating market conditions have so combined that perforce only a group of competent professional managers could manage the plant effectively.
The share capital is Rs. 25 crore, whereas the loan capital is Rs. 60 crore. The design, engineering and construction of the plant was done by an international consortium and commercial production started in a period .of four years. Ammonia, urea and complex fertilizers are the products being manufactured. There is a maintenance workshop which is well equipped. Proposals for expansion into allied fields are being reviewed periodically, even though the technology of the existing plant is outmoded.
ORGANIZATION STRUCTURE
The president is the overall chief executive, responsible to the board of directors and the ministry. Under him, he has four directors for finance, production, personnel and marketing. The finance director is in charge of money management, accounting, electronic data processing, financial control, audit, costing and other conventional financial aspects. The personnel director is in charge of selection, recruitment, training, promotion, grievance handling, suggestion schemes, canteen, administration, transport labour welfare, industrial relations, legal aspects, union matters, etc. The marketing director looks after sales to cooperatives, open market sales, advertisement, market research, forecasts, finished goods, warehouse, receivables, management of credit, etc. The production director has under him managers for stores, purchase, inventory control, cost reduction, maintenance overhaul, workshop, all manufacturing plants, etc. The company has a fourth generation computer and is used by all sections. Weekly coordination meetings are held at different levels in order to ensure a smooth working of all departments.
PRODUCTION PROCESS
Naphtha, steam and air are combined to form ammonia. Naphtha is desulphurized arid is split into hydrogen and carbon dioxide at 30 atmospheric pressure. Air, which is introduced at this juncture, provides nitrogen. The gases present are hydrogen, carbon monoxide and carbon dioxide. The carbon dioxide impurities are removed by absorbing in a catalyzed chemical under pressure. The pure gas is compressed to 200 atm. and is converted to ammonia using a special synthesis catalyst.
In order to manufacture urea, the following procedure is used. In a stainless-steel-lined reactor, ammonia and carbon dioxide are mixed at 200 atmospheric pressure. The carbon dioxide used in the process is obtained from the ammonia plant. After decomposition and recovery steps — to ensure maximum product yield from the ammonia liquid — the urea solution obtained is concentrated, crystallized and milled in the mill tower. By decomposition, the unconverted ammonia and carbon dioxide are recovered. The small white pulls of urea are obtained by spraying the hot liquid urea from the top of a 200 feet tall cylindrical concrete tower against a counter current steam of air. Part of the urea is bagged for direct sales and the remaining is used to create complex fertilizers.
In the complex fertilizer plant, a mixture of nitrogen, phosphorous and potassium — NPK is made. Here, ammonium phosphate is’ obtained on a slurry by mixing ammonia and phosphoric acid after ammoniation. This slurry is mixed with urea, potassium chloride, filter materials and catalysts in a granulator. This granulated fertilizers mixture is then screened, dried, coated with an anti-caking agent and then bagged in 50 kg gunny/high density polythene bags. The present rated capacity of the three plants in terms of metric tonnes per day is 900 for ammonia, 1000 for urea and 1800 for complex fertilizers. However, the three continuous process plants are working at only about 95 per cent of the rated capacity due to overhauling, extended plant turn-around and unforeseen breakdowns. Over 250 hours of production time were cost in the last year, and non-availability of critical spares account for 10 per cent of these losses. Acute shortage of water in summer (the plant needs about 300 million gallons of water), and other miscellaneous causes are reasons for the breakdown. The company’s policies on pollution control devices and treatment effluents have been repeatedly criticized by the national environmental and geological boards.
SALES AND WORKING CAPITAL
The company’s marketing department is responsible for both wholesale and retail sales, with about 15 regional. warehouses catering to the respective regions. It also has a market development group with agronomists and soil scientists. The company adopts villages for intensive popularization of its products. The marketing department is in charge of warehousing, distributing and realizing the sales proceeds of the finished goods. The production director gets the annual sales projection from marketing and develops the monthly targets after allowing for a three-week shutdown for maintenance. Based on this production plan, the raw material requirements are planned and ordered directly by the production director. It is observed that the materials department is not charged with the responsibility of procurement of raw materials.
Naphtha is obtained from a nearby refinery on a long-term contract basis, as per the administered price of the ministry and one week’s requirement of naphtha is maintained in two large tanks. Phosphoric acid is imported directly under own licence by Ganapathy Ram Fertilizers, one month’s requirements is stocked and a six-monthly schedule is sent to the supplier. The ships arrive once in 20 days. Potassium chloride is supplied by the Agriculture Ministry through Indian potash Limited, which is a company set up by the fertilizer plants in the country. About 15 days requirement is stocked in the plant and an annual schedule is given to the supplier. Furnace fuel oil is supplied by the Indian Oil Company according to a mutually agreed schedule. In all above cases, money has to be paid on receipt of material. Bank credit is not forthcoming to the extent required as foreign loans have the first charge on all receivables. Only 30 per cent of the receivables can be discounted in banks due to the nature of the client profile. Out of a total inventory value of Rs. 15 crore, nearly rupees two crore is accounted for by packing materials like gunny bags and polythene bags. Bulk transportation of the finished goods is ruled out as the product has to be protected against moisture. Further, there is a glut in the area due to the vagaries of demand, forcing the company to sell at below the cost of manufacture.
Collections of outstandings become a difficult job. The cash inflows in the form of government subsidies and receivables from cooperatives also take quite a long time for realization. The selling expenses, including salaries, advertisement, agronomical trade shows, order processing costs, developmental/distribution, finished goods storage, entertainment, liaison with ministries and fertilizer associations, etc. approximate to two per cent of the annual turnover.
The finance director has emphasized that even though the company is making profit at the rate of 10 per cent on the turnover, the ministry and the board are pressing for better performance to compensate a portion of the overall losses in other public sector under-takings. He has been advocating that a memorandum of understanding should be signed by Ganapathy Ram Fertilizers, either individually or with all the other public sector fertilizer plants, put together, with the ministry, in order to have more autonomy in day-to-day working. The company has been allowed expansion so long as it either employs its existing resources, or finds additional resources on its own. The bank at times has brought to the company’s attention that it has to adhere to the agreed working capital limits. The finance director is toying with the idea of depreciating or capitalizing some spares, like compressors, over a period of a few years.
PURCHASE MANAGEMENT
The purchase manager, working wider the production director, looks after the purchase of all categories of raw materials, spares, consumables and miscellaneous items. He has 20 officers and 20 other categories of staff reporting to him. The procurement of capital equipment is handled by the board after consulting the materials, projects and production departments. In the case of raw material procurement, a letter of credit has to be opened for phosphoric acid. The administered price of potash, naphtha, and furnace oil has to be paid on receipt of the material. The bill for packing materials and other categories of items have to be settled within 30 days. The materials cost, including fuel, utilities, spares, raw materials and packing material, works out to about 60 per cent of the total output value. The inventory carrying charges, comprising cost of capital and storage charges, is about 30 per cent. The ordering cost per order has been estimated as Rs. 400 for indigenous items and Rs. 1000 for imported items. The stock-out cost depending upon the nature, duration and criticality of shortage has not yet been calculated.
Each plant keeps a register in which the maintenance jobs, which are to be taken in the next month, together with the materials requirement are listed down. This information has been computerized and a consolidated list given to the purchase section. This helps to prepare the purchase budget. The spares are procured based on past consumption, stock in hand, lead-time, original ‘equipment, manufacturer’s recommendation, etc. Each indent is scrutinized by a committee consisting of purchase, stores and maintenance. A total of 25,000 items, other than raw materials, are handled by the purchase section through 4000 purchase orders per year. The materials are classified as mechanical spares, electrical spares, vehicles, pipes, fittings, catalysts, chemicals, uniforms, civil contracts, hardware items, etc. and are grouped into a nine digit code, including a check digit for computerized usage. A few directly charged items are also obtained as per indents and held for safe custody till the issue is made. Since the shut-down cost is prohibitive in a continuous-process industry, a service level of over 99.5 per cent is arrived at for most items. The internal lead-time of converting an indent to a purchase order is about six weeks for indigenously available items requiring repeated use. A suppliers’ directory, after adequate prequalifications, has been developed by the purchase department. ABC analysis, movement analysis, vendor rating have been started recently. Items for which the annual consumption is more than Rs. 50,000 per order have to be finalized by a tender committee comprising of representatives from finance and user purchase sections. A comprehensive purchase manual listing all activities, number of copies, follow-up procedures, powers of delegation, contract management, etc. has been prepared about five years ago.
STORES
The stores manager reports to the purchase manager and has an inventory control manager working with him. The stores contain 25,000 items, besides the raw materials. Most of the items in the stores are spare parts, for which annual budgets have been made by the maintenance department. The stores/purchase function does not question the authority of the demand, even though the number of spares has doubled in the last five years. Minimum/maximum levels have been developed for all moving categories of spares, after consulting the maintenance departments by considering lead-time, price, usage, availability, criticality, number of sources, imported/indigenous, etc. Attempts have recently been made in the company to categorize stores into maintenance, rotables, insurance and overhauling spares. In spite of the existence of new digit codes, sometimes the maintenance department uses suppliers’ part numbers in the indents. The inventory value of spares is about Rs. 15 crore, and this represents about three years’ consumption value. In this, 2500 items, mostly bearings, fittings, accessories, pipes, tubes, valves, etc. accounting to about rupees one crore have not moved even once during the last five years, but they have not been classified as obsolete items. In this context, stores manager has been emphasizing the fact that every insurance item may be non-moving in nature, but every non-moving item need not be an insurance item. The stores and purchase managers have started identifying the slow moving costly spares, which could be categorized on common pool spares with similar fertilizer plants, in order to start a spares bank. A stores manual indicating the procedures of the stores functions like receipt, issue, records, including gate-pass, stores preservatives, identification, etc. is available in the company.
The annual shut-down is a peculiar phenomenon of the capital intensive chemical process and lasts for about three weeks. The shutdown plan is documented well in advance with the help of a computer and a list of items prepared by the maintenance is procured about two months in advance. The materials specially ordered for overhauling requirements are kept separately in the stores and are not issued for regular consumption. In this process, it has become necessary to lock up a working capital of up to Rs. 60 lakh in overhauling spares for about one month for fear of extending the down-time of rupees ten crore worth of equipment by a few days. If parts are not readily available to meet real emergencies and contingencies, the production director can authorize purchases up to Rs. 5000 per item, subject to a maximum of rupees two lakh in a year.
MAINTENANCE POLICIES
Prof. Gopalakrishnan interviewed the maintenance engineers/foremen) mechanics of the company and obtained the following information. One chief maintenance engineer under the control of the production director is the overall in-charge of the three plants. He has one maintenance engineer for each plant. Each maintenance engineer has under him one junior engineer for each major specialization, like mechanical, electrical, electronic, civil, instruments, etc. and each junior engineer has a group of three to five mechanics/foremen reporting to him. The department consists of a total staff of 135 persons of various categories. All the maintenance staff have access to the central workshop technical library, repair workshop, testing facilities, tool stores, gauges, etc. The maintenance engineers have been trained in the latest plant engineering concepts.
The objective of the maintenance function is to qualitatively complete the job assigned, with the least time assigned for the repair and at the least cost. A proper supervision of the job by adhering to the code of practices, according to the maintenance engineers, reduces the failure ‘rates and increases safe working period of the plant, thereby reducing inventory and increasing productivity. They emphasize that there are very few operative areas in the continuous-process single-stream plant, where standby equipments have been provided. The overall maintenance expenditure is about four per cent of the annual output value, out of which spares constitute 75 per cent. Contract management is in vogue for air-conditioners, buildings and typewriters
. The official policy is for planned and preventive maintenance only and aims at zero maintenance, but a judicious combination of preventive and breakdown maintenance is the order of the day. Preventive maintenance schedules have been prepared for all rotating equipments and gasifiers. All rotating equipments have been covered under the vibration monitoring programe. The condition monitoring of bearings is done with stock pulse meter/engineering stethoscope. Ultrasonic thickness survey and radiography of high pressure welding joints are done as and when required. Monthly maintenance plan is made for certain critical equipments, such as gasifiers, ball mills, reversing values. For all critical equipments, detailed maintenance instructions have been issued by the maintenance engineer. A contingency plan for critical equipments has been prepared so that whenever emergency situations arise, critical jobs such as replacement of turbine rotor and compressor rotors can be taken up on a priority basis.
An integrated computerized maintenance information system with job card as the input and various maintenance control outputs is being planned. Each plant is maintaining log books for the different jobs carried out. The maintenance job card is very elaborate and carefully designed to include the following aspects: month, date, hour, minute of issue, nature of job, fault, equipment name, code, completion time of job, priority—normal/urgent/immediate/—required, safety permit required or not, electric isolation required or not, planned completion date of job, type of maintenance—preventive/breakdown/rectification)routine, 1other equipment stopped time, contract value, job code, manhours used including overtime, manpower cost, quantity and code of spares consumed, details of actual job done, etc. However, the maintenance department admits that in spite of their best efforts, it is not uncommon to see breakdown maintenance practised in the plant due to frequent unforeseen failures and during the end of the financial year targets get priorities over planned maintenance.
MAINTENANCE: A TO Z BOTTLENECKS
Many among the maintenance staff feel that this important function has not been given adequate recognition in Ganapathy Ram Fertilizers and they are bitter about being treated as glorified fitters or mechanics. They also complain about the promotion policy of meritcum-seniority as ‘SWEAR BY CAT’ — subordination will be encouraged and rewarded but your competence at best will only be tolerated. In spite of these difficulties, they have been trying their best to maintain the obsolete outmoded plant, based on old technology, in working condition. They attach great importance to the downtime cost of an equipment, which consists of total of elements such as:
(a) Time for reporting failure
(b) Preliminary identification of the cause of failure
(c) Preparation of work order of initial inspection to locate the same
(d) Diagnose the cause of the failure
(e) Time for getting spare parts from the market or stores wherever necessary
(f) Physical process of repair
(g) Trial test to satisfy the functioning
(h) Transit time to return to user after completing the documentation
(i) Loss of production/profit
(j) Loss of corporate image during the time of the above elements. In view of the problems encountered, some trained senior maintenance engineers have joined fertilizer plants in the Gulf countries, seeking greener pastures. The maintenance engineers have categorized their difficulties, which have also been periodically brought out in the coordination meetings, in the following manner:
(a) Long lead-time of procurement of spare parts
(b) Inconsistent and poor quality of highly priced indigenous spares
(c) Excessive time spent in identification of spares by the non-technical stores personnel
(d) Adhering to three quotations for proprietary monopoly items, perhaps from the same typewriter
(e) Finance department insisting on pre-audit of budgeted items (0 Stores giving nil stock advice against indents resulting in stoppages
(g) Mechanics spending a lot of time in stores td identify the spares instead of carrying out their job of repairing the equipments.
(h) Ignoring periodical maintenance and inspection during the last quarter of the year to increase production, resulting in a major breakdown of equipments in the future
(i) Resorting to cannibalization during non-availability of spares
(j) Not buying quality spares from the original equipment manufacturers, but only buying spurious items in the guise of effecting cost- reduction
(k) Forcing maintenance staff to follow up status of indents and pending orders
(I) Difficulties in maintaining machines, for the purchase of which they have not been consulted or associated
(m) Being forced to sign huge volumes of stores reconciliation discrepancy vouchers, at the year-end
(n) Overstretching the plant capacity to meet the targets, by operating under hazardous conditions
(o) Crude behaviour of after-sales servicing staff, ASS, during the guarantee period
(p) Manufacturers’ failure to supply illustrated spare parts catalogues, schedules, drawings, maintenance instruction manuals, reliability data, failure analysis, equivalent substitutes, criticality of parts
(q) Non-availability of identification details like reference number, part number, section catalogue number and drawings
(r) Suppliers not having proper provisioning arrangements for real emergency breakdowns
(s) The purchase department procuring items without any technical knowledge or ever seeing them
(t) The finance department complaining about working capital problems, without bothering about plant down-time
(u) The finance department asking too many questions, whenever the maintenance budget is exceeded due to price increases
(v) The finance department forcing the maintenance section to declare insurance spares as obsolete items to be disposed of
(w) The production department insisting on analysis of large failures of spares
(x) Lack of appreciation/recognition/incentives/rewards for good work carried out by the maintenance department
(y) The maintenance department not consulted in buying capital items.
A TO Z DIFFICULTIES IN S & P
The stores and purchase executives also have their share of complaints and give vent to their feelings in the weekly coordination meetings. An indicative list is given below:
(a) Maintenance department classifies every item including V-belts, motors, panels, etc. as a proprietary item, when several makes are available
(b) Incomplete and improper specification
(c) Indents mentioning ‘as per sample’ and without proper specification
(d) Every item becoming most urgent with red tags resorting to air freighting
(e) Work order number not indicated for financial accounting purposes
(f) Refusing to help in indigenization and developing alternative sources by overtightening the specifications and resorting to non-standard spares
(g) Using suppliers’ part numbers and not internal codification, prefering only Fenners V-belt, Taylor’s instrument, Audco valves Siemens motor, etc.
(h) Replacing by modules resulting in the wastage of a portion of the assemblies
(i) Directly dealing with suppliers, thereby undermining the authority of the purchase department
(j) Withdrawing the entire quantity as soon as an item is received, without allowing stores to complete documentation
(k) Overshooting budgeted consumption norms by 200 per cent even in regular items like fasteners, V-belts, bearings, pipe-fittings
(1) Not providing forecasts for many categories of spares as failure
(m) Refusing to provide the feedback information on life of parts
(a) Passing suppliers’ disputes to the purchase staff
(p) Classifying all non-moving items, mostly emanating from project surplus, as insurance items
(q) Rejecting good quality spares indented earlier but later found not required due to wrong advance planning
(r) Accepting inferior quality rejects, when items are badly needed, thereby adopting double standards in inspection
(s) Inadequate notice of overhauling requirements, without bothering about procedures, internal administrational lead-time, advertising lead-time, manufacturing lead-time, transportation and inspection lead- time
(t) Ineffective cooperation to cost reduction studies, such as standardization, variety reduction, simplification, vendor rating, value engineering, etc.
(u) The original equipment manufacturer blaming the maintenance department for improper maintenance operations, poor handling without safety guards, etc. and hence not agreeing to warranty replacement
(v) Maintenance department not agreeing to segregate initial spares from non-critical ones
(w) Refusing to develop drawings indigenously, due to inadequate staff strength
(x) Maintenance department letting off steam only during stock- outs, without any accountability for high inventory for non-moving items
(y) Refusing to categorize spares such as commissioning maintenance, rotable, insurance, floats, capital overhauling, etc., on a scientific basis
(z) Maintenance refusing to pool high value insurance spares for similar equipments, in a spares bank for the whole country.
Having studied the problems of Ganapathy Rain Fertilizers, Prof. Gopalakrishnan has started writing his report.
Question:-
Q.1) Summarize and analyze the case with reference to the principal of purchase management?
