Course: BBA

Year : II
Semester : IV
Subject Code: 406
Subject: Production and Operation Management

Unit II- Inventory Management

Syllabus: Inventory Management : methods- ABC analysis, XYZ analysis,

EOQ, Purchasing research, Vendor relations and selection of vendors,
Martial Requirement Planning

Inventory Management: Inventory management helps companies identify which and how
much stock to order at what time. It tracks inventory from purchase to the sale of goods. The
practice identifies and responds to trends to ensure there’s always enough stock to fulfill
customer orders and proper warning of a shortage.
Once sold, inventory becomes revenue. Before it sells, inventory (although reported as an asset
on the balance sheet) ties up cash. Therefore, too much stock costs money and reduces cash flow.
One measurement of good inventory management is inventory turnover. An accounting
measurement, inventory turnover reflects how often stock is sold in a period. A business does not
want more stock than sales. Poor inventory turnover can lead to dead stock, or unsold stock.

Importance: One of the most valuable assets of a company is its inventory. In various
industries, such as retail, food services, and manufacturing, a lack of inventory can have
detrimental effects. Aside from being a liability, inventory can also be considered a risk. It can
be prone to theft, damage, and spoilage. Having a large inventory can also lead to a reduction in
sales.
Both for small businesses and big corporations, having a proper inventory management system is
very important for any business. It can help you keep track of all your supplies and determine the
exact prices. It can also help you manage sudden changes in demand without
sacrificing customer experience or product quality. This is especially important for brands
looking to become a more customer-centric organization.
Balancing the risks of overstocks and shortages is an especially challenging process for
companies with complex supply chains. A company's inventory is typically a current asset that it
plans to sell within a year. It must be measured and counted regularly to be considered a current
asset.

Benefits of inventory management: The main benefit of inventory management is

resource efficiency. The goal of inventory control is to prevent the accumulation of dead stocks
that are not being used. Doing so can help prevent the company from wasting its resources and
space.
Inventory management is also known to help:
 Order and time supply shipments correctly
  Prevent theft or loss of product
 Manage seasonal items throughout the year
 Deal with sudden demand or market changes
 Ensure maximum resource efficiency through cycle counting
 Improve sales strategies using real-life data

Steps and types of inventory management: Most product inventory management

systems follow the same basic steps for finished products:
 Products arrive at your warehouse
 Products are checked and stored
 Managers or crew update inventory levels
 Customers place an order
 Customer orders are approved based on inventory
 Products are pulled and packaged
 Inventory levels are updated again

Types of inventory management: This process is fairly straightforward and often

involves help from software. There may be variations depending on what type of inventory
management you are doing. Here are the main types you should know:
 Raw materials: This refers to pieces of your product that need to be shipped to you and assembled
by your team. Inventory systems that track these must account for supplier timelines.
 In progress: Products made from raw materials and are currently being assembled or grouped fall
under this category. This stage of inventory management may have one or several active projects
at a time.
 Repair: Scheduled maintenance, updates, and refurbished goods all count toward this segment.
Repairs may be handled in-house or in collaboration with a third party.
 Finished goods: Any good that is ready to ship to businesses or consumers is considered finished.
These need to be updated regularly and constantly monitored to meet demand.

Inventory management techniques: Without accurate inventory information, it can be

very difficult to make decisions that affect your business. There are two main methods of
keeping track of inventory: periodic and perpetual. The main difference between these is how
often data is updated. Regardless of how often you track inventory, you may want to use one of
the following inventory management techniques:

 ABC Analysis
ABC (Always Better Control) Analysis is inventory management that separates various items
into three categories based on pricing and is separated into groups A, B, or C. The A category
is usually the most expensive one. The items in the B category are relatively cheaper
compared to the A category. And the C category has the cheapest products of all three.
 EOQ Model
Economic Order Quantity is a technique utilized for planning and ordering an order quantity.
It involves making a decision regarding the amount of inventory that should be placed in
stock at any given time. The order will be re-ordered once the minimum order has been
reached.
 FSN Method
This method of inventory control refers to the process of keeping track of all the items of
inventory that are not used frequently or are not required all the time. They are then
categorized into three different categories: fast-moving inventory, slow-moving inventory,
and non-moving inventory.
 JIT Method
Just In Time inventory control is a process utilized by manufacturers to control their
inventory levels. This method saves them money by not storing and insuring their excess
inventory. However, it is very risky since it can lead to stock out and increase costs.
 Minimum Safety Stocks
The minimum safety stock refers to the level of inventory that an organization maintains to
avoid a possible stock-out.
 MRP Method
Material Requirements Planning is a process utilized by manufacturers to control the
inventory by planning the order of the goods based on the sales forecast. The order is usually
based on the data collected by the system.
 VED Analysis
VED is a technique utilized by organizations to control their inventory. It mainly pertains to
the management of vital and desirable spare parts. The high level of inventory that is required
for production usually justifies the low inventory for those parts.

Objectives of Inventory Management are as follows:

 To ensure a continuous supply of materials and stock so that production should not suffer
at the time of customers demand.
 To avoid both overstocking and under-stocking of inventory.
 To maintain the availability of materials whenever and wherever required in enough
quantity.
 To maintain minimum working capital as required for operational and sales activities.
 To optimize various costs indulged with inventories like purchase cost, carrying a cost,
storage cost, etc.
 To keep material cost under control as they contribute to reducing the cost of production.
 To eliminate duplication in ordering stocks.
 To minimize loss through deterioration, pilferage, wastages, and damages.
 To ensure everlasting inventory control so that materials shown in stock ledgers should
be physically lying in the warehouse.
 To ensure the quality of goods at reasonable prices.
 To facilitate furnishing of data for short and long-term planning with a controlled
inventory.
 To supply the required material continuously.
 To maintain a systematic record of inventory.
 To make stability in price.
 What is ABC analysis?
ABC analysis also referred to as ABC Classification, is a vital part of Inventory Management. It
allows business owners to distinguish the products in their stock and focus on managing them
based on their worth. The main objective of ABC analysis is to make maximum out of minimum
investment without wasting any resources or inventory.

Segment A: Products included in category A are the most essential goods with the highest value.
Segment A goods consist of approximately 20% of the total products with 80% of revenue
generation for your business. It is considered as a small category with minimal goods, but
maximum revenue.
Segment B: Products included in category B have a slightly higher value than segment B. It
approximately regulates 30% of goods with 15% revenue generation. Not to mention, the goods
included in this category are more in number but less in utility.
Segment C: Products included in category C are more in numbers but least valuable when it
comes to generating revenue. As compared to category A & B, segment C has the maximum
share of 50% of the stock, generating just 5% revenue.

Conduct ABC analysis in 5 Steps

Step 1: Use the formula mentioned below to calculate the annual consumption value of each product.
Annual number of units sold (per item) x cost per unit
Step 2: Enlist all the products in descending order based on their annual consumption value
Step 3: Total the number of units sold and the annual consumption value of the products.
Step 4: Calculate the cumulative percentage of the goods sold and the cumulative percentage of the
annual consumption values.
Step 5: Divide the data into three categories. The split of the ABC categories will be unique to your
company but approximately, 80%, 15%, & 5%.

Advantages of using ABC analysis

Applying ABC analysis to inventory management can have a wide range of advantages,
including:
 Better inventory optimization: The study reveals which products are in high demand.
Once those products are fully stocked, a business can use its limited warehouse space to
keep Class B or C items at reduced stock levels.
 Improved Inventory Forecasting: By keeping tabs on and compiling information on
goods with high customer demand, accurate sales forecasting can be improved. Managers
may use this data to decide on inventory levels & prices to increase overall company
revenue.
 Better Pricing: A growth in sales for a certain product may indicate that demand is
increasing, allowing for a price increase while still retaining profitability.
 Informed Supplier Negotiations: It makes sense to negotiate with suppliers for better
terms on Class A items since they make up 70% to 80% of a company's revenue. If the
vendor doesn't agree to cut rates, try negotiating after-purchase services, down payment
discounts, free delivery, or other cost savings.
 Strategic Utilization Of resources: ABC analysis can be used to monitor resource
allocation over time to ensure that Class A items are produced by consumer demand.
 Improved Customer Service: Service levels are influenced by various variables,
including the quantity sold, the price of the goods, and profit margins. A better
understanding of a product's life cycle stages the stages of a product's life cycle is
necessary for accurate demand forecasting and inventory management (launch, growth,
maturity, or decline). Offer greater service standards for the items you've determined to
be the most beneficial.
 Control over pricey items: A company's Class A inventory directly affects its success.
Prioritize monitoring demand and maintaining healthy stock levels to guarantee that there
is always a sufficient supply of the necessary products accessible.
 Sensible Stock Turnover Rate: You can maintain a sensible stock turnover rate by
meticulously managing inventories and gathering data.
  Reduced Storage Expenses: By maintaining the proper stock level depending on the A,
B, or C classes, you can lower the carrying costs associated with maintaining surplus
inventory.
 Simplified Supply Chain Management: To reduce carrying costs and simplify
processes, analyze ABC inventory data to determine whether it's time to merge suppliers
or go with a single one.

Disadvantages of ABC Analysis

Despite its benefits for maintaining and managing inventories, ABC analysis is a more than one-
size-fits-all approach. The application of an ABC study is impacted by the distinctive consumer
demand patterns, classifications, systems, & other issues each organization encounters. One
drawback of ABC analysis is that it focuses on the monetary value of inventory, and another is
that it takes a lot of effort and discipline to apply. Other drawbacks include the following:

 Parameter Instability: Due to the results of the ABC analysis, managers commonly
assign up to 50% of the items to a different category every quarter or year. The need to
review could save time and decrease client satisfaction because businesses typically only
realize the changes exist once there is a demand issue.
 Limited Pattern Consideration: The conventional ABC method does not account for
seasonality or the introduction of new products. Due to its generally static perspective of
demand, ABC analysis will need inventory inefficiencies when the demand is fluctuating
or uncertain. For instance, a new product's poor sales volume could be explained by
needing a consumer base.
 Low Knowledge Extraction: The information from the ABC class will give you only
some of the facts or specifics you need to make intelligent, strategic management
decisions.
 High Resource Consumption: One unfavourable outcome of ABC analysis is the
practice known as "bikeshedding," which involves giving excessive weight to
unimportant matters. Due to the ease of understanding of ABC analysis, staff members
may contribute their thoughts or look for their variations, turning it into a resource-
intensive procedure rather than a time-saving tool.
 Value Blindness: While ABC analysis based a product's importance on income or usage
volume, some products may resent this paradigm. For instance, even though a retail
display item rarely sells, its novelty may generate many customers (who will buy other
goods). In the aerospace sector, a specific plane component could not be used frequently
and have a low market value, but it might play an essential safety role.
 System differences: ABC inventory analysis conflicts with traditional costing methods
and does not follow "generally accepted accounting principles" (GAAP). Running several
costing systems will result in higher labour costs and decreased efficiency.
 Issues with Undersupply or Oversupply: One drawback of ABC analysis is that it
considers dollar values rather than the volume that moves through inventory, which
increases the possibility of running out of Class B or C items. The inverse can also take
place. If you keep placing orders without reviewing them regularly, you can have too
many low-class things gathered in your inventory.
  Loss Risk: B & C products aren't always useless just because they're less valuable than
Class A products. The fact that excess stocks are continually at risk of being damaged or
deteriorating is one of the weaknesses of the ABC analysis. As a result, routinely
uncounted or unmonitored inventory could be lost.
 Mandatory Standardization: The ABC approach can only be effective if every
component is subject to compulsory standardization of materials, which includes how
each component is labelled, stored, uniformly rated, and monitored.
 Arbitrary Categorization: In the absence of predetermined limits or established criteria
for each group, classifying items relies on the manager's expert judgment. As a result, this
method may be quite subjective.
 Business Restrictions: Businesses with an equal yearly consumption value of inventory
items by type cannot benefit from ABC analysis. For instance, according to the Pareto
Principle, a business that sells identical models of items like candy, nails, or socks might
need help organizing its stock.
 High Resource Consumption: Using ABC categorization to manage inventory may
need companies with many inventory items to engage more staff or purchase specialized
equipment.

What is an XYZ analysis?

An XYZ stock analysis is the complement to an ABC analysis, and adds a layer of statistical
review that shows the standard deviation of usage. Other names for this analysis include
Runners, Repeaters, or Strangers (RRS). The goal of this analysis is to understand which parts
have steady usage and which parts have unpredictable demand so companies can make the best
inventory decisions, successfully manage their shortages, and accurately determine order
policies.

Using variations in demand, the XYZ model classifies goods as one of three categories:

X Items: X items have very little demand variation. Demand can be reliably forecasted because
it does not change as often or as drastically compared to other items.
Y Items: Y items have fluctuating demand. The demand is typically due to a known or
predictable cause, such as specific seasons, holidays, or changes in economic factors.
Z Items: Z items have the highest demand variations. These variations are sporadic and
unpredictable, caused by unknown factors or unusually strong changes in demand.

EOQ APPROACH

Economic order quantity (EOQ) is a calculation companies perform that represents their ideal
order size, allowing them to meet demand without overspending. Inventory managers calculate
EOQ to minimize holding costs and excess inventory.
It doesn’t matter if your business sells jelly beans, appliances, furniture or airplanes. Finding the
economic order quantity for every product you purchase is almost certain to impact the bottom
line. Every business that manages inventory can benefit from measuring and following the EOQ.
  Economic order quantity is a metric that represents the ideal order size to minimize costs
for the business.
 Economic order quantity is a useful formula for businesses of all sizes and types that
order and hold inventory.
 Inventory management systems and ERP systems can automate economic order quantity
calculations, so your business makes the best, most informed decisions regarding orders
and inventory management.
Importance

Economic order quantity is a key metric for your organization’s sustainability because ordering
too much can lead to high holding costs and take resources away from other business activities,
like marketing or R&D, that could further boost sales or reduce costs.
Inventory is a type of working capital. Working capital represents business assets needed for
regular operations. But too much working capital can eat into your profits, and it also represents a
big opportunity cost.
EOQ may not be extremely helpful when managing your office supply closet. It's most important
when looking at large, high volume or expensive purchases. As your orders and inventory grow
and scale, EOQ has a greater impact on profits.

Benefits of Economic Order Quantity (EOQ)

The main benefit of using EOQ is improved profitability. Here’s a list of benefits that all add up
to savings and improvements for your business:
 Improved Order Fulfillment: When you need a certain item or something for a
customer order, optimal EOQ ensures the product is on hand, allowing you to get the
order out on time and keep the customer happy. This should improve the customer
experience and may lead to increased sales.
 Less Over ordering: An accurate forecast of what you need and when will help you
avoid over ordering and tying up too much cash in inventory.
 Less Waste: More optimized order schedules should cut down on obsolete inventory,
particularly for businesses that hold perishable inventories that can result in dead stock.
 Lower Storage Costs: When your ordering matches your demand, you should have less
products to store. This can lower real estate, utility, security, insurance and other related
costs.
 Quantity Discounts: Planning and timing your orders well allows you to take advantage
of the best bulk order or quantity discounts offered by your vendors.

Challenges of Economic Order Quantity (EOQ)

 Poor Data: One of the biggest challenges of determining EOQ is access to accurate and
reliable data. Manual or spreadsheet-driven systems may provide low-quality or outdated
information, which can lead to inaccurate calculations.
 Outdated Systems: Old and outdated systems may have incomplete data and lead to
missing out on potential savings. An inventory management system or cloud-based ERP
can solve this problem.
  Business Growth: The EOQ formula is ideal for businesses with consistent inventory
needs. With a fast-growing business, relying on EOQ can lead to inventory shortages.
 Inventory Shortages: If you’re just starting to use this method, it often generates smaller
orders. If you are too conservative with your calculations, you could wind up under-
ordering.
 Seasonal Needs: Seasonality can make EOQ more challenging, but not impossible. This
is because there could be major changes in customer demand throughout the year.

Calculating Economic Order Quantity (EOQ)

Calculating economic order quantity requires high school-level algebra. Once you get the
variables from your inventory management system, it’s easy to plug in the numbers and calculate
EOQ. When you use a robust ERP, these calculations may all be handled for you, including
order costs like inventory ordering costs, holding costs and stock out costs.

Three Variables (or Inputs) Used to Calculate EOQ:

There are several variations of the formula used to calculate EOQ. One popular EOQ formula is
based on these variables, also called inputs:

 D = Demand in units (annual)

 S = Order cost
 H = Holding costs (per unit, per year)
 Economic Order Quantity (EOQ) Formula

EOQ = √ [2DS/H]

Purchasing: it’s Meaning, Definition, Importance and Objectives

Meaning and Definition: Purchasing is the first phase of Materials Management. Purchasing
means procurement of goods and services from some external agencies. The object of purchase
department is to arrange the supply of materials, spare parts and services or semi-finished goods,
required by the organisation to produce the desired product, from some agency or source outside
the organisation.

The purchased items should be of specified quality in desired quantity available at the prescribed
time at a competitive price. In the words of Alford and Beatty, ”Purchasing is the procuring of
materials, supplies, machines, tools and services required for equipment, maintenance, and
operation of a manufacturing plant”.
According to Walters, purchasing function means ‘the procurement by purchase of the proper
materials, machinery, equipment and supplies for stores used in the manufacture of a product
adopted to marketing in the proper quality and quantity at the proper time and at the lowest price,
consistent with quality desired.”
Thus, purchasing is an operation of market exploration to procure goods and services of desired
quality, quantity at lowest price and at the desired time. Suppliers who can provide standard
items at the competitive price are selected.

Purchasing in an enterprise has now become a specialized function. It was experienced that by
giving the purchase responsibility to a specialist, the firm can obtain greater economies in
purchasing. Moreover purchasing involves more than 50% of capital expenditure budgeted by
the firm.

According to Westing, Fine and Zenz “Purchasing is a managerial activity that goes beyond the
simple act of buying. It includes research and development for the proper selection of materials
and sources, follow-up to ensure timely delivery; inspection to ensure both quantity and quality;
to control traffic, receiving, storekeeping and accounting operations related to purchases.” The
modern thinking is that Purchasing is a strategic managerial function and any negligence will
ultimately result into decrease in profits.

Importance of Purchasing:

 Purchasing function provides materials to the factory without which wheels of machines
cannot move.
 A one percent saving in materials cost is equivalent to a 10 percent increase in turnover.
Efficient buying can achieve this.
 Purchasing manager is the custodian of his firm’s is purse as he spends more than 50 per
cent of his company’s earnings on purchases.
 Increasing proportion of one’s requirements are now bought instead of being made as
was the practice in the earlier days. Buying, therefore, assumes significance.
 Purchasing can contribute to import substitution and save foreign exchange.
 Purchasing is the main factor in timely execution of industrial projects.
 Materials management organisations that exist now have evolved out or purchasing
departments.
 Other factors like:
o Post-war shortages,
o Cyclical swings of surpluses and shortages and the fast rising materials costs,
o heavy competition, and
o Growing worldwide markets have contributed to the importance of purchasing.

Objectives of Purchasing: The purchasing objective is sometimes understood as buying

materials of the right quality, in the right quantity, at the right time, at the right price, and from
the right source. This is a broad generalization, indicating the scope of purchasing function,
which involves policy decisions and analysis of various alternative possibilities prior to their act
of purchase.

The specific objectives of purchasing are:

 To pay reasonably low prices for the best values obtainable, negotiating and executing all
company commitments.
 To keep inventories as low as is consistent with maintaining production.
 To develop satisfactory sources of supply and maintain good relations with them.
 To secure good vendor performance including prompt deliveries and acceptable quality.
 To locate new materials or products as required.:
 To develop good procedures, together with adequate controls and purchasing policy.
 To implement such programmes as value analysis, cost analysis, and make-or-buy to
reduce cost of purchases.
 To secure high caliber personnel and allow each to develop to his maximum ability.
 To maintain as economical a department as is possible, commensurate with good
performance.
 To keep top management informed of material development which could affect company
profit or performance.
 To achieve a high degree of co-operation and co-ordination with other departments in the
organisation.

Steps in the purchasing process:

Below are the steps of a typical purchasing process:

1. Identify the need: The purchasing process begins when the business recognizes that they
have a need for a product, tool or service that will enhance their operations. Team members can
help identify needs as they complete their daily work by notifying their supervisors of any
challenges they encounter. Once the organization identifies a need, they can begin the purchasing
process.

2. Specify the requirement: During this stage, leaders investigate the need further and come up
with a plan for exactly what they require. For example, a frequent shortage of printer paper
becomes the need for weekly deliveries of 500 sheets of inkjet printer paper to ensure a
continuous supply.
The person who identified the need often works with other team members and management to
come up with the right solution to the problem, especially when concerning a larger purchase.
For example, the employee who identified the need for more printer paper may have the power
to specify the requirement on their own, while the need for new computer systems throughout the
entire office likely requires input from others.

3. Find and choose a supplier: Find potential suppliers who can provide the specific product or
service you want to purchase. You can conduct your own research online or contact those in your
professional network to ask for recommendations. If shipping costs are a factor in your purchase,
look for businesses in your local area.
During this stage, it is a good idea to consider several suppliers and compare them against one
another. When necessary, contact the supplier and request a quote or proposal from them. As you
are considering suppliers, consider factors such as cost, reliability and delivery time.

4. Negotiate costs: In many situations, it is possible to negotiate costs with a supplier, especially
when placing high-priced orders or orders you expect to recur regularly. Contact the supplier you
are considering and ask if they are open to negotiating the price. Suppliers may negotiate if it
means they can secure a large or long-term contract for their business.
Read more: Negotiation Skills: Definition and Examples

5. Get order approval: Before your business can initiate the transaction, you may need to get
approval for the order. This could include working with upper management and the accounting
department to ensure there are enough available funds within the budget for the purchase. In
some scenarios, the business may also need to establish a line of credit with the supplier. If you
haven't already, explain to management why this purchase is necessary and how you achieved a
reasonable price from the supplier.

6. Place the order: Once both sides agree to the transaction, you can formally place the order.
Have both sides agree to the specific details, such as price, delivery times, fees and installations.
Get everything in writing and have representatives from both organizations sign it. Then keep a
copy of this agreement in your files for future reference.

7. Receive and approve the order: When the order arrives, check for any issues with the
product or anything the supplier failed to deliver on. Timeliness is key because if there are any
problems, the supplier should address them before you release the rest of the payment.

8. Review supplier performance: Whether you work with a supplier on a onetime transaction
or set up recurring transactions, make it a regular practice to review your suppliers' deliveries for
quality and timeliness. A record of these reviews can help you identify and track any issues that
might arise later in your contract. Continue relationships with suppliers who continue to meet
your business' needs.

The Vendor Client Relationship

The definition of vendor provided by the Collins English Dictionary is “a person who sells
something”. True; but unfortunately for some seeking to establish a vendor client relationship the
word “sells” has negative connotations. A client becomes wary. A client may be so concerned
about being oversold that important information is withheld.

Consequently, their communication with the vendor prevents them gaining the best service.
Disappointment follows when the quote does not fit the need.

It does not have to be this way. Mutually beneficial relationships are established when the vendor
is viewed as a supplier of specialist services. Vendors hold a wealth of knowledge relating to
their products or services. A vendor also holds knowledge on utilization within industry. That
knowledge helps you, as a client, achieve your objectives.

1. INTERVIEW POTENTIAL VENDORS: Educate yourself on the depth and breadth of the
vendor’s services, their philosophies in implementing those services, and the general personality
of the prospective vendor organisation. It’s almost like culling resumes for a job interview. Some
of this information you can gain from advertising and websites, and it is well worth arranging
informal phone calls or meetings.

2. MEET WITH SUITABLE VENDORS: Explain your requirements. Be open and honest.
Giving the impression that you have an unlimited budget or unlimited training participation time
of all staff is wishful thinking generally. As a vendor this is our opportunity to educate you on
the range of options we offer, and give you the best solution for your current situation, but to do
so we need to know what the situation is.
In a recent meeting, instead of being embarrassed about it, the client was quite clear that our
training delivery covered the rollout of software only. After the system was fully implemented
their in-house trainers would provide sufficient resources. Knowing that, we made sure a full
transfer of knowledge package was included in the proposal to guarantee ongoing successful
training.
There shouldn’t be any embarrassment when you are not certain which service to ask for a quote
on. Remember you don’t need to have all the answers; that is the reason you’re engaging the
vendor. Allow them the opportunity to provide solutions. An experienced vendor will have
provided service to a wide range of industry; generally far more within a space of two years than
a client will have worked at in a lifetime.
At this stage gather prices and proposals. Even where the contract must go to tender it is
worthwhile going through the first two steps. The information gathered will help you establish
exactly what service you are seeking and the price range, and enable you to accurately prepare
and then evaluate a tender.
Vendors understand that clients need to gather information and proposals and review them with
higher authorities.

3. MAKE YOUR SELECTION: Sometimes you will have a preferred vendor, but their price is
outside the budget. Contact the vendor to discuss the situation. As a vendor we may have offered
an ultimate solution because the client expressed that preference, but a viable and less expensive
option is likely to be available. Think of this like choosing a printer. We’d all like the top of the
range model, but to meet the budget are likely to decline to purchase the stapling option. You
may be able to negotiate an alternative price in a discussion with your preferred vendor.
Sometimes these steps will be covered and completed within a month, but that is rare. Frequently
for us the conversations occur over many months. In that space of time we will also have been
keeping in contact with the client. By the time we’re engaged a good relationship has already
been developed and we both have confidence in the partnership.
Sometimes clients are reluctant to stay in contact when they haven’t finalized a decision. So why
do vendors continue to call? Obviously we want to gain the contract, but also we want to make
sure we will be in a position to provide the services. As vendors we need to predict your demand
on our services. If we receive a call the week before a client has decided delivery is to commence
(and it happens) we will not be able to provide training. Our trainers will be fully booked.
By keeping in contact with our clients we can make sure we’re in a position to provide the right
services at the right time. If you aren’t ready to make a decision yet, or have selected another
vendor, don’t be embarrassed about it, just clear.

Building A Strong Relationship

Once accepted as a partner with an organisation, what things lead to positive/unsatisfactory

outcomes? The usual suspects of honesty and trust need to be in place for both parties, but over
the years I’ve found there are three other key indicators of an outstanding relationship.

1. OPEN ACCESS TO INFORMATION AND STAFF: As the new people on your team we
need information to make our part of the project successful. In a good relationship access to the
people who can provide that information will be freely available. As a client you will know some
of the places the information can be found, which will be a great help. But there will be other
sources that we view as valuable too, which you may not have identified.
A client that dictates who the vendor may talk to in providing a solution will limit the ability of
the vendor to find the right solution. For instance whilst talking to a manager about the training
for their staff is useful, it is often more helpful to course design to talk to the end users and get to
know the practicality of their everyday work, so we can ensure training is transferred to learning.
Where restrictions on access to information occurs it is often well meaning (not wanting to
disturb others in setting up the project), but usually leads to a less successful outcome.

2. CONTINUOUS COMMUNICATION BETWEEN THE VENDOR AND CLIENT: We

all find it easy to communicate when all is going well. There have been initial meetings, phone
calls and emails to which both parties were responsive in setting up the project. It is very easy to
let this lapse as the project gets underway, and end up in a situation where the only
communication is about problems. Or even worse – one party is struggling and shuts down all
communication.
It is worthwhile to establish communication expectations from the outset and commit to meeting
these. This may be weekly progress reports, a monthly review meeting, or an evaluation process.
Telephone calls can be scheduled in just as a meeting with a staff member would. Contact by
email or phone needs to be responded to within 24 hours. And most importantly, problems are
not ignored. Every project has risks and issues. Be open about these. Identify and discuss them
from the outset, but also discuss them when they occur.

3. CLEARLY DEFINED PROJECT EXPECTATIONS: A mutual understanding of

expectations is paramount. Assumption of understanding is dangerous. As an experienced vendor
(having learnt by my own errors!), we know the questions to clarify. However I’m still
frequently an onlooker to other vendors providing their preferred approach, which does not meet
client expectations. Both parties need to take responsibility for understanding and articulating the
style of the solution to be provided. A project with clear definitions and expectations is more
likely to be completed in time and on budget with a continuing healthy relationship.

4. REWARD YOURSELF: A healthy vendor / client relationship is rewarding. It’s a team of

professionals working together to successfully achieve a common goal. Your partner is a trusted
source of information and advice. Your partner goes the extra mile on a project. Your partner
brings a fresh perspective and vast experience through the variety and range of people they work
with. All because they feel like a valued team member due to the relationship that has been
established.
The steps to establishing a healthy relationship sound like common sense when it is spelt out. As
the client, avoid taking the view that once the vendor is engaged they should know what to do. A
suitable vendor will know what to do, just not the specifics of how your organization needs it
done. As a client you still need to work on the relationship beyond the sale. A vendor who asks
for extra information, time and effort from you is not trying to avoid doing work themselves.
They are trying to work more effectively for you. Give and you will receive.

9 Factors Relevant for the Selection of a Vendor

1. Quality: The term quality stands for ability and willingness of the supplier to meet the
specifications of the buyer.
At no cost, the quality should be sacrificed for low price.

2. Price: Normally quality does not always go side by side with price but we must try to find out
those suppliers who make better than average product at an average price. However, sub-
standard and poor quality purchases should not be made at the cost of a low price.

3. Quick Delivery: The lead time i.e., time to get supplies, should be less so that there is a quick
delivery of goods. Generally, the best suppliers are the busiest and in order to get goods from
them, one has to wait for a long time. However, quick delivery reduces the amount of forward
planning and increases the flexibility.

4. Service: It is very important factor in selecting the vendor. It includes the provision of expert
advice to the buyer before and after the sale of materials and other items. Good service helps in
maintaining good relations between the supplier and the buyer. The speed and effectiveness of
arrangements to service and repair equipment is very important to certain machines.

5. Assurance of supply: Only those suppliers should be preferred who assure supplies of raw
materials and other components. Thus, suppliers who suffer recurring shortages should be used
with great care as it can adversely affect our production schedule.

6. Size of the supplier: Some authorities recommended that orders of small size should be
placed with a small company whereas the orders of large size should go to large companies.
However, this correlation can’t be always applied. A small supplier would generally work very
hard to perform a large order, if given a chance.

7. Number of suppliers: Should we place all order with one supplier or use two or more
suppliers? The use of a single supplier has the following advantages:

 In times of shortage, the supplier will give preference to the needs of the customer.

 A single supplier can also offer the best price with assured supplies.
On the other hand two or more suppliers may be beneficial in times of shortage. Large
companies generally buy from two or more suppliers getting the twin benefit of low price and
service.

8. Local suppliers: Sometimes, a buyer may be compelled to buy certain requirements locally
on account of the following reasons.

 Community relations between the company and public may force the buyer to buy
locally. For example, the supplier to a hospital or charitable trust by the local
businessman would help in raising the funds for such organisations.

 Local buying is generally justified when small quantities of materials are purchased.

 There is a feeling of closer co-operation between the vendor and the buyer.

 The delivery is quickly made.

 Urgent orders can be met promptly.

 Disputes, if any, can be easily resolved.

9. Miscellaneous Considerations: The following points should also be taken into account at the
time of selection of suppliers:

 In order to maintain complete objectivity, the buyer must keep himself free from
unethical influences. Favor to friends should be avoided. Similarly commercial bribery
such as gifts etc. has no place in selecting vendors.

 Dishonest vendors must be rejected forever.

Material Requirements Planning (MRP)

Material requirements planning (MRP) is a system for calculating the materials and components
needed to manufacture a product. It consists of three primary steps: taking inventory of the
materials and components on hand, identifying which additional ones are needed and then
scheduling their production or purchase.

Benefits of MRP: The primary objective of MRP is to make sure that materials and components
are available when needed in the production process and that manufacturing takes place on
schedule. Additional benefits of MRP are as follows:

 Reduced customer lead times to improve customer satisfaction.

 Reduced inventory costs.
 Effective inventory management and optimization -- by acquiring or manufacturing the
optimal amount and type of inventory, companies can minimize the risk of stock-outs,
 and their negative impact on customer satisfaction, sales and revenue, without spending
more than necessary on inventory.
 Improved manufacturing efficiency by using accurate production planning and
scheduling to optimize the use of labor and equipment.
 Improved labor productivity.
 More competitive product pricing.

Disadvantages of MRP: MRP has drawbacks, including the following:

 Oversupply of inventory. While MRP is designed to ensure adequate inventory levels at

the required times, companies can be tempted to hold more inventory than is necessary,
thereby driving up inventory costs. An MRP system anticipates shortages sooner, which
can lead to overestimating inventory lot sizes and lead times, especially in the early days
of deployment before users gain the experience to know the actual amounts needed.
 Lack of flexibility. MRP is also somewhat rigid and simplistic in how it accounts for lead
times or details that affect the master production schedule, such as the efficiency of
factory workers or issues that can delay delivery of materials.
 Data integrity requirements. MRP is highly dependent on having accurate information
about key inputs, especially demand, inventory and production. If one or two inputs are
inaccurate, errors can be magnified at later stages. Data integrity and data management
are thus essential to effective use of MRP systems.

To address these shortcomings of MRP, many manufacturers use advanced planning and
scheduling (APS) software, which uses sophisticated math and logic to provide more accurate
and realistic estimates of lead times. Unlike most MRP systems, APS software accounts for
production capacity, which can have a significant impact on availability of materials.

Techniques of Materials Planning:

(a) Bill of Materials Explosion: The planning for materials management is aimed at
determining the demand for the end-products. This is possible only through farsightedness or
forecasting. Therefore, forecasting forms “the basis for materials planning. There are various
techniques for forecasting. These techniques are equally applicable to demand to forecast.

The techniques are:

(i) Moving averages method.

(ii) Exponential smoothing and Time series.

(b) Past Consumption Analysis: For continuously needed materials and the materials where no
bill of materials is possible, this technique of analysis is adopted- The past consumption data is
analyzed and a projection for the future on the basis of past experience and future need is made.
To prepare such a projection, “average” or “mean” consumption and the “standard deviation” are
taken as bases and as guidelines for each item.
These are all statistical tools and are very effective to absorb the stock of fluctuation in
consumption of direct and indirect materials where no straight-forward norms of consumption
can be formulated. In the process industries, this technique is particularly suitable.

Material Control: Definition

Material control is the process of systematically controlling materials over the stages of
procurement, storage, and usage so as to help maintain the regular and uninterrupted flow of the
materials in the production pipeline.
No system of costing is complete without an effective material control system. Material control is
a system that ensures the provision of the required quantity of materials of the required quality at
the required time with the minimum capital investment.

Material Control: Explanation

Materials are all the commodities consumed in the production department to produce items either
directly or indirectly. Inventory is a common term used for raw materials, components, work-in-
progress, and finished goods stocked in the store. Materials are also vital for calculating the cost
of production. In some cases, materials account for more than 65% of a product's cost, and so
proper control over them is necessary. An efficient material control system helps to substantially
reduce the cost of materials and, in this way, limits the total production cost. Systematic and
effective control over materials also helps to maintain production schedules, meet
market demand, and avoid excessive investment in inventories.

Scope of Material Control

The following functions are within the scope of a material control system:
 Purchasing or procurement of materials
 Receiving of materials
 Inspection of materials
 Storage of materials
 Issuing of materials
 Maintenance of material records
 Materials or stock audit

Objectives of Material Control

To Ensure Uninterrupted Production: The first objective of material control is to ensure

smooth production by making available all types of required materials in the required quantity at
the right time.
The uninterrupted supply of materials is essential for the smooth flow of production, which is
important for the success of any business.

To Provide Required Quality of Materials: The second objective of material control is to

ensure the availability of all types of materials of the required quality.
If the quality of the materials is low, it will affect product quality. In turn, this will affect the
company's reputation and sales.

To Minimize Wastage and Loss of Materials: Material control systems also aim to control or
minimize all types of wastages and losses of materials that may arise due to carelessness in the
storing, issuing, and handling of materials.

To Control Investment in Stock of Materials: An important aim of material control systems is

to minimize the capital investment in the stock of materials. Materials are purchased and stored
before the actual production commences. A large amount of capital may be locked up in materials
that may not be required at that time.
Similarly, there may be sometimes be under-investment in materials, leading to interruptions in
production due to non-availability of the required quantity of materials. An efficient material
control system helps to ensure the optimal investment of capital in the purchase of materials.