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Materials Inventory Management
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Operation ManagementMaterials & Inventory Management
G.PurandaranM.Tech (I.I.T-Madras)
PGDM (I.I.M-Bangalore)
Scope of POM
• .
A Production System Model
Operations Management Definition
• Operations management is defined as:– the design, –operation, and – improvement of the systems
• that create and deliver• the firm’s primary products and services.
Operations Decision Making
People Plants Parts Processes
Planning and Control
Materials &Customers
Products &Services
Input Output
Operations Management
Marketing StrategyFinance Strategy
Marketplace
Corporate Strategy
Operations Strategy
The Transformation Process (value adding)
QualityManagement
StatisticalProcess Control
Just in Time
Materials Requirement Planning
Inventory Control
AggregatePlanning
Operations Management - Overview
ProjectManagement
Supply Chain Management
Process Analysisand Design
Process Controland Improvement
Waiting Line Analysis and Simulation
Services
Manufacturing
OperationsStrategy
Facility Layout
Consulting andReengineering
Process Analysis
Job Design
Capacity Management
Planning for Production
Supply ChainStrategy
PRODUCTION AND OPERATIONS
MANAGEMENT
Module : 1 SCOPE OF MATERIALS
MANAGEMENT
Definition of Materials Management
• Business Definition for: Materials Management An approach for• Planning, • Organizing, and• Controlling
– all those activities principally concerned with the flow of materials into an organization.
Flow of Material
• .
Scope of MM
• The scope of materials management varies greatly from company to company and may include:– Materials planning and control,– Production planning, – Purchasing,– Inventory control and stores,– In-plant materials movement, and – Waste management.
Primary•Right price•High turnover•Low procurement & storage cost•Continuity of supply•Consistency in quality•Good supplier relations•Development of personnel•Good information system
Objective of material management
Secondary•Forecasting•Inter-departmental harmony•Product improvement•Standardization•Make or buy decision•New materials & products•Favorable reciprocal relationships
Objective of material management
Interface of Materials Management with other Functions
• Interface with Marketing • Interface with Production• Interface with Finance• Interface with Inspection and quality control
Materials Management
• .
COST and Materials Management
• .
Materials Management
• .
Various Construction Materials
Process of Material Management
Materials Handling & Traffic Variety
.. . . .
Purchasing
Store Keeping
Inventory Control
Receiving, Inspection and Despatching
Value Analysis, Standardization and Variety Reduction
Disposal of Scrap and Surplus, Material Preservation
.. . . .
Material planning
AIM OF MATERIAL MANAGEMENT
To get
1. The Right quality
2. Right quantity of supplies
3. At the Right time
4. At the Right place
5. For the Right cost
Integrated Materials Management
• The various activities represent these four functions:• 1.Planning and control functions are:
• inventory management , • production planning and scheduling.
• 2.Purchasing functions are: • buying, subcontracting, value analysis and follow ups.
• 3.Value analysis and• 4.Physical distribution functions are:
• receiving ,• packaging, • shipping,• transportation and storage, making it the Integrated Materials
Management
Basis for forming Organization
• Materials Management provides an integrated systems approach to the co-ordination of the materials activities and the control of total material costs.
• Obviously, the MM organization is derived from its fundamental objectives.
• Since Materials management function ranges from receiving the material requisition to placement of purchase orders and then on the other hand to receiving the material and making it available to the users , a commonly seen organization of materials management is divided into an integrated sections as :
• Purchasing• Stores• Inspection• Traffic
PRODUCTION AND OPERATIONS
MANAGEMENT
Module : 2 MATERIALS
CODIFICATION
Material Identification• Material Identification is a systematic approach to identify:
– particular grade of material for reverse engineering,– alteration or repair of the existing assets or products, non-
traceable material and– use of substitute material.
• The initial stage in Material identification involves:– identifying the source of material ( stray, batch mix-up)– product application( tensile, compression, fatigue), – form of material ( casting, forgings, rolled, extruded, welded),– shape of material ( plate, sheet, pipe, solid, preformed)
followed by– chemical analysis, surface and core hardness, tensile test,
case depth evaluation, microstructure condition.
Metals
Polymers Ceramics
Composites
Classification of Materials
Classification of Construction Material
Material Type Details Example
Bulk materials Materials that are delivered in mass
and are deposited in a container.
Sand,Gravel,Topsoil,Cement,
Concrete
Bagged
materials
Materials delivered in bags for ease of
handling and controlled use.
Cement
Palleted
materials
Bagged materials that are placed in
pallets for delivery
Cement, Doors
Packaged
materials
Materials that are packaged together to
prevent damage during transportation
and deterioration when they are stored.
Pipes,Tiles,Electrical Fitting
Classes of Materials• Metals
– Iron and Steels– Aluminum and Alloys– Copper and Alloys– Nickel and Alloys– Titanium and Alloys
• Ceramics and Glasses– Alumina– Magnesia– Silica– Silicon Carbide– Silicon Nitride– Cement and Concrete
• Polymers– PE– PMMA– Nylon (PA)– PS– PU– PVC– PET– PEEK– EP– NR
• Composites– GFRP– CFRP
Classes of PropertyEconomic Price and availability
Recyclability
General Physical Density
Mechanical Modulus
Yield and tensile strength
Hardness
Fracture toughness
Fatigue strength
Creep strength
Damping
Thermal Thermal conductivity
Specific heat
Thermal expansion coefficient
Electrical and Magnetic Resistivity
Dielectric constant
Magnetic permeability
Environmental Interaction Oxidation
Corrosion
Wear
Production Ease of Manufacture
Joining
Finishing
Aesthetic Color
Texture
Feel
Metals
• Metals are typically split into ferrous (iron containing) and non-ferrous
• Most widely used metals are alloys except for aluminum and precious metals
• Metals are in general are good thermal and electrical conductors. Many metals are relatively strong and ductile at room temperature, and many maintain good strength even at high temperature.
Steel
Aluminum
SuperAlloys• A superalloy, or high-
performance alloy, is an alloy able to withstand extreme temperatures that would destroy conventional metals like steel and aluminum. Superalloys exhibit excellent mechanical strength and creep resistance at high temperatures, good surface stability, and corrosion and oxidation resistance.
Objectives of Codification
34
• Bringing all items together.• Enable putting up of any future item in its proper place.• Classify an item according to its characteristics.• Give an unique code number to each item to avoid duplication and
ambiguity.• Reveal excessive variety and promote standardization and variety
reduction.• Establish a common language for the identification of an item.• Fix essential parameters for specifying an item.• Specify item as per national and international standards.• Enable data processing and analysis.
Basis of codification
35
• Who will be the user?• To what use is the codification going to be
put?• What kind/degree of mechanization will be
needed to use the codification system?
Codification by Group Classification
• Based on ‘shape’ of items1. Wire2. Tubing3. Rod4. Bar5. Sheet6. strip
Methods of coding of materialsMethods of coding of materials
• Alphabetical method• Numerical method• Alphabetical-cum-Numerical method
37
38
Alphabetical methodAlphabetical methodIn this method first alphabet letters are used for codification of each category of materials. For example: steel wire is coded as SW or steam coal is coded as SC etc.
Alphabetical-cum-Numerical method
• In this method, a combination of these two methods is used for coding of materials.
• For example, a steel wire of gauge 4mm quality A stored in rack/bin No.22, is given the code number SW4A/22. Such a method gives exact information than any of the above two methods.
39
Numerical method• This method is used where materials accounting is to be
mechanized by use of punched cards or computers.• For numerical coding a list is prepared for various
departments and allotting to each of them a suitable number. • The first two digits of the code number represent
– the department for which the materials are meant and
• other two digits state the– name of material as mentioned in the standard list or materials
manual.
For example, if code is 2341 it means Material No.41 [copper wire] is to be used in Department No.23.
40
Codification of Raw-MaterialCodification of Raw-Material
Raw-Material
1 9 99 99
Generic Groupe.g. Magnesite, Alumina
Sub-Generic Groupe.g.Fused Mag, Fire clay
Running Serial No.e.g. 01
Codification of Generic ItemCodification of Generic Item
Item Typee.g. Stores
2 99 99 999
Generic Group (00-70)e.g. Bearing, Switchgear
Sub-Generic Groupe.g. Ball Bearing
Running Serial No.e.g. 201
Codification of Drawing/ Part No. ItemCodification of Drawing/ Part No. Item
Item Typee.g. Stores, Service
2 99 99 999
Generic Group (80-98)e.g. Casting, Fabricated
Sub-Generic Groupe.g. Equipment Code
Running Serial No.e.g. 001
Codification of Capital EquipmentCodification of Capital Equipment
Item Typee.g. Stores
2 99 99 999
Generic Group (99)e.g. Capital Equipment
Equipment Classe.g. Mixer, Press
Running Serial No.e.g. 001
Codification of Service ItemsCodification of Service Items
Service Item
3 9 99 999
Type of Service
e.g.Transportation, AMC
Sub-Group
e.g. Truck Load, Trailor
Running Serial No.e.g. 001
Codification of Secondary ProductsCodification of Secondary Products
Secondary Products
4 9 99 99
Major Group
Mining Pdt, Metal Scrap
Sub-Group
e.g. Clay, Ferrous Scrap
Running Serial No.e.g. 01
Advantages of Codification
47
It enables systematic grouping of similar items and avoids confusion caused by long description of items since standardization of names is achieved through codification, it serves as the starting point of simplification and standardization. It helps in avoiding duplication of items and results
Standardization
•It is the Process of establishing basic specification for a set of commonly used characteristics of size, shape and performance for products.
Simplification
• It is closely related concept or process which refers to: the reduction in the number of different sizes and shapes of items produced or stocked
It is defined as the elimination of superfluous varieties , sizes, dimensions, features etc., making the design, assembly or product simpler, less complex and less difficult to use
Simplification
Variety Reduction
•The process of standardization logically leads to simplification and variety reduction
•Variety reduction defined as a form of standardization consisting of the reduction of the number of types of products, or materials or part within a definite range to lesser number which is adequate to meet prevailing needs at a given time.
Inventory
• Inventory or stock refers to the goods and materials that a business holds for the ultimate purpose of resale (or repair).
INVENTORY
TYPES OF INVENTORY…
Work inprocess
Work inprocess
Work inprocess
Finishedgoods
RawMaterials
Vendors Customers
CLASSIFICATION OF INVENTORY• ABC Classification(consumption) (25/80+15/15+70/05)• XYZ Classification(value stored) (High,Medium,Low)• HML Classification(unit-value stored) (High,Medium,Low)• VED Classification(spare parts mainly) (Vital,Essential,Des)• FSN Classification(consumption) (Fast, Slow, Non)• SOS Classification(agriculture) (Seasonal, Non)• SDF Classification(availability) (Scarce, Difficult, Easy)• GOLF Classification (source of supply) Govt, Ordinarily
available, Local and Foreign)
13
14
ABC Classification
A Items: very tight control, complete and accurate records, frequent review.
B Items: less tightly controlled, good records, regular review.
C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder.
16
ABC
• .
27
* Based on the consumption pattern to combat obsolete items. * Classification depends on the pattern of
issues from stores.
F – Fast moving S – Slow moving N – Non Moving
FSN
VED Classification
• Items are classified as to how:• Vital, • Essential, and or • Desirable they are in the total scheme of
things.• In case of electricity appliances example
• Essential items are wire , switch etc• Desirable items are decorative fittings, lamp shades
etc.
Inventory Control and Management
Working capital-Inventory
• Working capital typically means the firm’s holding of current or short-term assets such as cash, receivables, inventory and marketable securities.
• These items are also referred to as circulating capital
• Corporate executives devote a considerable amount of attention to the management of working capital.
Operating cycle of a typical company
• .
Payable Deferral period
Inventory conversionperiod
Cash conversioncycle
Operating cycle
Pay forResourcespurchases
Receive CashPurchase
resources
SellProductOn credit
Receivable Conversion period
Time & Money Concepts in Time & Money Concepts in Working Capital CycleWorking Capital Cycle
Each component of working capital (namely Each component of working capital (namely inventory, receivables and payables) has two inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY, when dimensions ........TIME ......... and MONEY, when it comes to managing working capital it comes to managing working capital
TIME IS MONEYTIME IS MONEY
You can get money to You can get money to move fastermove faster around the cycle around the cycle or or reduce the amountreduce the amount of money tied up. Then, of money tied up. Then, business will generate more cash or it will need to business will generate more cash or it will need to borrow less money to fund working capital. borrow less money to fund working capital. As a consequence, you could As a consequence, you could reduce the cost of reduce the cost of bank interestbank interest or you'll have additional or you'll have additional freefree money money available to support additional sales growth or available to support additional sales growth or investment.investment. Similarly, if you can Similarly, if you can negotiate improved termsnegotiate improved terms with with suppliers e.g. get longer credit or an increased credit suppliers e.g. get longer credit or an increased credit limit, you effectively create limit, you effectively create freefree finance to help fund finance to help fund future sales.future sales.
If youIf you ThenThen ...... ......
Collect receivables (debtors) Collect receivables (debtors) fasterfaster
You release cash from the You release cash from the cyclecycle
Collect receivables (debtors) Collect receivables (debtors) slowerslower
Your receivables soak up Your receivables soak up cashcash
Get better credit (in terms Get better credit (in terms of duration or amount) from of duration or amount) from supplierssuppliers
You increase your cash You increase your cash resourcesresources
Shift inventory (stocks) Shift inventory (stocks) fasterfaster
You free up cashYou free up cash
Move inventory (stocks) Move inventory (stocks) slowerslower
You consume more cashYou consume more cash
PRODUCTION AND OPERATIONS
MANAGEMENT
Module : 3STORES MANAGEMENT
AND MATERIALS HANDLING
Nature of Stores Store as building where inventories are kept. Storage is the function of receiving, storing, and
issuing materials. Stores ensures ready accessibility of major
materials there-by efficient service to users. Minimisation of stores cost, and continuous supply
is the prime function of stores. Stores layout is a fundamental factor in
determining the efficient performance of stores department.
A satisfactory storage system compromises between the use of space and the use of time.
Random location means that items can be stored in any storage position which is available.
Keeping stock on one side of the aisle in which case the layout is called comb type .
Stores manual is a written statement of policies, and procedures.
Stock Verification
Periodic, continuous and low point inventory are three ways of stock verification.
Verification of stock when the stock is the lowest is known as low point inventory verification.
Periodic stock verification is taken once in a year.
Classification and Codification Classification and codification enables
reduction in sizes, and varieties.
• Principles of Classification and Codification Consistency, coverage of entire range of items,
mutually exclusive code and easily understandable are the principles of classification and codification.
II. Materials Handling
Materials handling is the art and science of moving, packing and storing of substances in any form.
Objectives of Materials Handling1. Lower unit materials handling cost2. Reduction in mfg cycle time 3. Better control of the flow of materials4. Better working conditions5. Better quality 6. Enhanced storage capacity7. Higher productivity
Selection and Design of Handling System
• Selection and design of the materials handling system should be done along with the development of the layout, as each one affects the other.
Materials Handling Costs
Materials handling costs include cost of owning and maintaining equipment and cost of operating the system.
Factors affecting the selection of
Materials Handling Equipment1. Production problem2. Capabilities of the handling equipment
available3. Human element involved
Types of Materials Handling Systems
Types of material handling systems: a. Equipment oriented systemsb. Material oriented systemsc. Methods oriented systemsd. Functions oriented systems
Selection and Design of Handling System
Selection and design of the materials handling system should be done along with the development of the layout, as each one affects the other.
Types of Materials Handling Equipment
1. Conveyers
2. Cranes, Elevators and Hoists
3. Industrial Trucks
4. Auxiliary Equipments
5. Miscellaneous Handling Equipments
Conveyor
• .
Cranes
• .
Towing Tractor
• .
Material Safety and Security
• .
What does the RADIATION Symbol look like?
• All radioactive materials and radiation generating devices must be labeled with the universal symbol for radiation
• Only authorized individuals who are properly trained should handle materials or devices with this radiation symbol
What is Radiation?
• Radiation is energy emitted from a substance. There are two types of radiation: ionizing and non-ionizing. – Everyday examples of non-ionizing radiation are
• Microwaves used to cook food• Radio waves• Television• Light
• Ionizing Radiation means alpha particles (α), beta (β), gamma (γ) and X-rays (among others) that are capable of producing ions. These types of energy can cause chemical changes to living things. Large exposures to ionizing radiation may damage cells or tissues. Real-life examples of ionizing radiation are X-ray machines and radioisotopes used in biomedical research.
What is Contamination?
• Contamination is radioactive material in a location where it is not desired– Lab bench, door knobs, telephone, computer, offices, etc.
• Loose Contamination, like dust, can be easily removed
• Fixed contamination is embedded in the material’s surface and is more difficult to remove.
PRODUCTION AND OPERATIONS
MANAGEMENT
Module : 4AMANAGEMENT OF
OBSOLETE and SCRAP MATERIALS
SCRAP MANAGEMENT
1
What is scrap and what is scrap management ?
89
• Scrap - Waste that either has no economic value or only the value of its basic material content recoverable through recycling
• Scrap management - Manufacturers do not intend or plan to make scrap, but depending on the industry and the product, scrap is produced. But depending on the type of scrap, it may be re-cycled back into the production process or sold as a revenue generating product or simply non-recyclable and the enterprise has to pay for an outside contractor to dispose of the product.
Definitions
90
Surplus Obsolete ObsolescenceSalvage Reclamation
Quantity more than stock
No longer usable
No longer required but in usable condition
Saving material for utilization
Bringing back to original condition
Scrap Yard
91
• It is a place where receiving or handling scrap is done
Categories Of Scrap
92
Ferrous Scrap
Biological waste Pharmaceuticals waste
Electronic / Metal
Scrap are of 3 categories : Ferrous, Metal , Non metallic i.e., waste
93
Few other types of waste…
94
Types of waste
Non-biodegradable
Biodegradable
Classification of Wastes according to their Properties
Paper
WoodFruits
Plastics
Old machinesCans
95
Types of waste
HazardousNonHazardous
Classification of waste according to their Effects on Human Health and the Environment
Unsafe to use commercially, industrially, agriculturally or economically
Safe to use commercially, industrially, agriculturally or economically
96
Sources of Wastes
Household
Industries
97
Sources of Wastes
Agriculture
Fishery
Responsibility of Scrap Disposal
Primary ResponsibilityPurchase Department
Secondary ResponsibilityOperations Department
Maintenance DepartmentStores Department
98
Reasons for Generation of Scrap
99
• Change in Design, Method or Product• Mistakes in procurement• Wrong planning decisions• Wasteful processes in production• Inevitable waste during the adjustment of
the equipment• Overall absence of efficiency
Scrap Management
100
Prevention
Minimization
Reuse
Recycling
Disposal
Procedure for Scrap Disposal
• Reuse
• Return to supplier
• Sale to another Company
• Sale to Dealer
101
Types of Contract
Fixed Price
Varying Price
Specific Bids
Ab initio Negotiation("from the beginning“)
102
Salvaging
• Meaning – Saving for advantageous use.
• Salvage Operation
1.Collecting, Storing, Sorting
2.Ascertain, Restoring, Reviewing
3.Direct to Buyer from Shop-floor
4.Steps for disposal
103
Reclamation
• Meaning – Brining back to original condition
• Reclamation Operation
1.Knowledge of discarded material
2.Determining what can be reclaimed?
3.Deciding Method
4.Calculation of Cost
5.Determination of Economic aspect
6.Operating as Manufacturer104
Non-Hazardous Waste
• Gunny bags• Cardamom residue• Wooden scrap• Metal scrap• Plastic• Biological sludge• Corrugated boxes
105
Scrap Control & Minimization
• Solvent recovery in production• Addition of used acid layer in equalization tank• Preparation of low grade perfumes • Biological sludge as manure• Treated water for gardening• Separation of waste• Use of compost manure• Old paper as filler in packing• Use of paper bags• Recycling of waste paper
106
Solvent recovery in production
107
Addition of used acid layer in equalization tank
108
109
Preparation of low grade perfumes
Biological Sludge as Manure
110
04/19/23 Welingkar college, Matunga 111
Treated Water from ETP to Gardening
Separation of Waste
112
Compost Manure
113
Old paper as Filler in packing
114
Use of Paper Bags
115
116
SAVE EARTH TO SAVE YOURSELF
PRODUCTION AND OPERATIONS
MANAGEMENT
Module 4BPURCHASE
MANAGEMENT
Purchasing is the act of buying an item at a price.
Purchasing objective: Buying raw materials of the right qualities, in the right-quality at the right time, at the right price, and from the right source.
Purchase Organisation
Purchasing Cycle
Purchasing cycle comprising of eight steps.1. Recognition of Need
Recognition of need : Identifying an item that is officially brought to the attention of purchasing department.
2. Description of RequirementPurchase requisition should give accurate information for ordering recognised product.
3. Selection of Source
Registered suppliers who are approved by the company.
Buying from single supplier helps develop long-term relationship and reduces the risk and interruption in the supply.
Buying from multiple suppliers may not help in maintaining quality and helps get material at competitive prices.
4. Determination of Price and Availability
5. Placing the Order
6. Order Acknowledgement
7. Follow Up and Expediting
8. Checking The Invoice and Approval
Purchasing Policies
• Ancillary Development
• Make or buy
• Speculative buying
Vendor Rating
Vendor Rating: It is the process of rating a supplier based on some rating technique.
Rating Techniques
1. Categorical Plan
2. The Weighted Point Plan
Weighted point plan: The performance factors to be evaluated by giving weights.
3. Critical Incidents Method
Critical Incidents Method: It is based on buyer-vendor relationship.
4. Checklist System
Value Analysis
Value analysis is also known as value engineering.
Value analysis is applicable to all aspects of manufacturing processes.
Vendor rating
Vendor Rating ?
• A vendor is any person or company that sells goods or services to someone else in the economic production chain.
• Vendors or suppliers are given standing, status, or title according to their attainment of some level of performance, such as delivery, lead time, quality, price, or some combination of variables.
• It may take the form of a hierarchical ranking from poor to excellent and whatever rankings the firm chooses to insert in between the two.
Cont.• For some firms, it may come in the form of some
sort of award system or as some variation of certification.
• It is a direct result of the widespread implementation of the just-in-time concept.
Objectives
• To help the buyer in future selection• To provide buyer with the information helpful
in subsequent negotiation• To provide the buyer with the important
information which he can act upon any corrective measure
Advantage of vendor rating• Helping minimize subjectivity in judgment and make it
possible to consider all relevant criteria in assessing suppliers.
• Providing feedback from all areas in one package.• Facilitating better communication with vendors.• Providing overall control of the vendor base.• Requiring specific action to correct identified
performance weaknesses.• Establishing continuous review standards for vendors,
thus ensuring continuous improvement of vendor performance.
Disadvantage of vendor rating
• Inexperience with Products and Services• Unfamiliarity With Corporate Operations• Resistance Within Company• Threat to Security
How vendors are rated
Vendors are rated on the basis of various characteristics:
• Time delivery• Quality• Price• Others actors such as1.Supplying useful market information2.Meet emergency order
Methods of vendor rating• Categorical plan:This is a very subjective method.Mangers from concerned department prepare list
of factors important from their viewsEach of the major supplier is evaluated against
each evaluator’s list of factors evaluation is done in the terms of
1. Good 2. Satisfactory 3. poor
Methods of vendor rating
• Weighted point plan the buyer decides on
1.Factor important form evaluation
2.Weightages for each factor
3.The vendor performance in respect of each factor
Methods of vendor rating
• Cost ratio plan: Under this method, the vendor rating is done on the basis of
various costs incurred for procuring the materials from various suppliers.
The cost ratios are ascertained for the different rating variables such as quality, price, timely delivery etc.
The cost ratio is calculated in percentage on the basis of total individual cost and total value of purchase
example
• The total delivery cost is Rs5000 and the total purchases are Rs 1,00,000 then delivery cost ratio will be
• 5,000 / 1,00,000 x 100 = 10%
Example
Operations ManagementOperations Management Outsourcing as a Supply Outsourcing as a Supply Chain StrategyChain Strategy
OutsourcingOutsourcing
Outsourcing can replace entire Outsourcing can replace entire purchasing, information systems, purchasing, information systems, marketing, finance, and operations marketing, finance, and operations departmentdepartment
Applicable to firms throughout the Applicable to firms throughout the worldworld
Making the right decision may be the Making the right decision may be the difference between success and difference between success and failurefailure
What is Outsourcing?What is Outsourcing?
Procuring from external suppliers service Procuring from external suppliers service or products the firms used to provide for or products the firms used to provide for itselfitself
Offshoring is moving processes to a Offshoring is moving processes to a foreign country but retaining controlforeign country but retaining control
Firms that outsource are called clients, the Firms that outsource are called clients, the actual work is done by the outsourcing actual work is done by the outsourcing providerprovider
Extension of the long-standing practice of Extension of the long-standing practice of subcontractingsubcontracting
What is Outsourcing?What is Outsourcing? Outsourcing has become a major Outsourcing has become a major
strategy as firms move toward strategy as firms move toward specializationspecialization Increasing expertiseIncreasing expertise
Reduced cost of reliable transportationReduced cost of reliable transportation
Rapid deployment of telecommunications Rapid deployment of telecommunications and computers and computers – the Internet– the Internet
Examples of OutsourcingExamples of Outsourcing
Call centers in French AngolaCall centers in French Angola
Legal and finance service in the PhilippinesLegal and finance service in the Philippines
EDS handling information EDS handling information technology for Nexteltechnology for Nextel
IBM providing travel and IBM providing travel and payroll for P&Gpayroll for P&G
Solectron producing Solectron producing IBM computersIBM computers
Types of OutsourcingTypes of Outsourcing Common processes outsourced areCommon processes outsourced are
PurchasingPurchasing
LogisticsLogistics
R&DR&D
OperationsOperations
Service managementService management
Human resourcesHuman resources
Finance/accountingFinance/accounting
Customer relationsCustomer relations
Sales/marketingSales/marketing
TrainingTraining
Legal processesLegal processes
Outsourcing implies a legally binding Outsourcing implies a legally binding contractcontract
Theory of Comparative AdvantageTheory of Comparative Advantage
If an external outsourcing provider can If an external outsourcing provider can perform activities more productively than perform activities more productively than the client firm, the outsourcing provider the client firm, the outsourcing provider
should do the workshould do the work
This applies regardless of the
geographical location
Risks in OutsourcingRisks in Outsourcing Outsourcing can be riskyOutsourcing can be risky
As many as half of all outsourcing As many as half of all outsourcing agreements fail because of inappropriate agreements fail because of inappropriate planning and analysisplanning and analysis
Erratic power grids, government difficulties, Erratic power grids, government difficulties, inexperienced managers, and unmotivated inexperienced managers, and unmotivated labor can create problemslabor can create problems
Failure to achieve unrealistic goals Failure to achieve unrealistic goals sometimes create the impression of failuresometimes create the impression of failure
Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Identify non-core Identify non-core competenciescompetencies
Can be incorrectly identified as a Can be incorrectly identified as a non-core competencynon-core competency
Identify non-core Identify non-core activities that should be activities that should be outsourcedoutsourced
Just because the activity is not a Just because the activity is not a core competence for your firm core competence for your firm does not mean an outsource does not mean an outsource provider is more competent and provider is more competent and efficientefficient
Identify impact on Identify impact on existing facilities, existing facilities, capacity, and logisticscapacity, and logistics
May fail to understand the May fail to understand the change in resources and talents change in resources and talents needed internallyneeded internally
Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Establish goals and Establish goals and draft outsourcing draft outsourcing agreement agreement specificationsspecifications
Goals can be set so high that Goals can be set so high that failure is certainfailure is certain
Identify and select Identify and select outsource provideroutsource provider
Can select the wrong outsource Can select the wrong outsource providerprovider
Negotiate goals and Negotiate goals and measures of measures of outsourcing outsourcing performanceperformance
Can misinterpret measures and Can misinterpret measures and goals, how they are measured, goals, how they are measured, and what they meanand what they mean
Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Monitor and control Monitor and control current outsourcing current outsourcing programprogram
May be unable to control May be unable to control product development, product development, schedules, and qualityschedules, and quality
Evaluate and give Evaluate and give feedback to outsource feedback to outsource providerprovider
May have non-responsive May have non-responsive provider (i.e., one that ignores provider (i.e., one that ignores feedback)feedback)
Evaluate international Evaluate international political and currency political and currency risksrisks
County’s currency may be County’s currency may be unstable, a country may be unstable, a country may be politically unstable, or cultural politically unstable, or cultural and language differences may and language differences may inhibit successful operationsinhibit successful operations
Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Evaluate coordination Evaluate coordination needed for shipping and needed for shipping and distributiondistribution
May not understand the timing May not understand the timing necessary to manage flows to necessary to manage flows to different facilities and marketsdifferent facilities and markets
Risks in OutsourcingRisks in Outsourcing
EmploymentEmployment
Changes in facilities and processes Changes in facilities and processes needed to receive components in a needed to receive components in a different state of assemblydifferent state of assembly
Vastly expanded logistics issuesVastly expanded logistics issues
Outsourcing brings other issues:Outsourcing brings other issues:
Methodologies for OutsourcingMethodologies for Outsourcing
Evaluating Multiple Criteria with Evaluating Multiple Criteria with Factor RatingFactor Rating
Break-even AnalysisBreak-even Analysis
Rating International Rating International Risk FactorsRisk Factors
Nine factors rated 0-3, 0 is no risk, 3 is high riskNine factors rated 0-3, 0 is no risk, 3 is high risk
Risk FactorRisk Factor EnglandEngland MexicoMexico SpainSpain CanadaCanada
Economic: Labor cost/ lawsEconomic: Labor cost/ laws 11 00 22 11
Economic: Capital availabilityEconomic: Capital availability 00 22 11 00
Economic: InfrastructureEconomic: Infrastructure 00 22 22 00
Culture: LanguageCulture: Language 00 00 00 00
Culture: Social normsCulture: Social norms 22 00 11 22
Migration: UncontrolledMigration: Uncontrolled 00 22 00 00
Politics: IdeologyPolitics: Ideology 22 00 11 22
Politics: InstabilityPolitics: Instability 00 11 22 22
Politics: LegalitiesPolitics: Legalities 33 00 22 33
Total risk rating scoresTotal risk rating scores 88 77 1111 1010
Table S11.2Table S11.2
Rating Outsourcing ProvidersRating Outsourcing Providers
Table S11.3Table S11.3
Seven factors rated 1-5 and an importance weightSeven factors rated 1-5 and an importance weight
Outsourcing ProvidersOutsourcing Providers
FactorFactor(criterion)(criterion)
Importance Importance WeightWeight
BIM BIM (U.S.)(U.S.)
S.P.C. S.P.C. (India)(India)
Telco Telco (Israel)(Israel)
1.1. Can reduce operating costsCan reduce operating costs .2.2 33 33 55
2.2. Can reduce capital investmentCan reduce capital investment .2.2 44 33 33
3.3. Skilled personnelSkilled personnel .2.2 55 44 33
4.4. Can improve qualityCan improve quality .1.1 44 55 22
5.5. Can gain access to Can gain access to technology not in companytechnology not in company
.1.1 55 33 55
6.6. Can create additional capacityCan create additional capacity .1.1 44 22 44
7.7. Aligns with policy/ Aligns with policy/ philosophy/culturephilosophy/culture
.1.1 22 33 55
Total and AveragesTotal and Averages 1.01.0 3.93.9 3.33.3 3.83.8
Advantages of OutsourcingAdvantages of Outsourcing
Cost savingsCost savings
Gaining outside experienceGaining outside experience
Improving operations and serviceImproving operations and service
Focusing on core competenciesFocusing on core competencies
Gaining outside technologiesGaining outside technologies
Other advantagesOther advantages
Disadvantages of OutsourcingDisadvantages of Outsourcing
Increased transportation costsIncreased transportation costs
Loss of controlLoss of control
Creating future competitionCreating future competition
Negative impact on employeesNegative impact on employees
Longer-term Longer-term impactimpact
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 10, Slide 157
• Insourcing – The use of resources within the firm to provide products or services
• Outsourcing – The use of supply chain partners to provide products or services
Sourcing decisions are high-level, often strategic decisions that address:What will use resources within the firm
What will be provided by supply chain partners
The Sourcing Decision
Make-or-Buy Decision
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 10, Slide 158
Advantages and Disadvantages of Insourcing
Advantages• High degree of control• Ability to oversee the
entire program• Economies of scale
and/or scope
Disadvantages• Required strategic
flexibility• Required high
investment• Loss of access to
superior products and services offered by potential suppliers
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 10, Slide 159
Advantages and Disadvantages of Outsourcing
Advantages• High strategic flexibility• Low investment risk• Improved cash flow• Access to state-of-the-art
products and services
Disadvantages• Possibility of choosing a bad
supplier• Loss of control over the
process and core technologies
• Communication and coordination challenges
• “Hollowing out” of the corporation
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 10, Slide 160
Factors Affecting the Decision to Insource or Outsource
Environmental uncertainty low high
Competition in the supplier market low high
Ability to monitor supplier performance low high
Relationship of product/service to high low buying firm’s core competencies
FactorFavors
InsourcingFavors
Outsourcing
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 10, Slide 161
Total Cost Analysis
A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options
• Direct costs – Costs that are tied directly to the level of operations or supply chain activities
• Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Chapter 10, Slide 162
Insourcing and Outsourcing Costs
•Direct material•Direct labor•Freight costs•Variable overhead
•Price (from invoice)•Freight costs
•Supervision•Administrative support•Supplies•Maintenance costs•Equipment depreciation•Utilities•Building lease•Fixed overhead
•Purchasing•Receiving•Quality control
Insourcing Outsourcing
Directcosts
Indirectcosts
PRODUCTION AND OPERATIONS
MANAGEMENT
Module : 5SUBCONTRACTING
• A business practice where main contractor hires additional individuals or companies called subcontractors to help complete a project. The main contractor is still in charge and must oversee hires to ensure project is executed and completed as specified in contract.
164
Subcontracts
Reasons for Subcontracting• One way in which an entrepreneur can save money is by hiring
contractors. • Here are five reasons to use a subcontractor.• It is usually much cheaper to outsource work rather than hiring
an employee. • With an employee, a business owner must pay heavy taxes and a
full-time salary. • On the other hand, a contractor only gets paid for the work they
complete. • Not only that, a contractor is responsible for paying the taxes
associated with compensation. • Of course, one must pay a contractor a higher wage to
compensate for the lack of benefits.
Reasons for Subcontracting
• Employees are what make a company; employees cannot do everything.
• In reality, there will come a time when a business must outsource some of their tasks.
• When outsourcing tasks, a business owner will usually have to call on a contractor.
• In reality, unless a business is large, the employees will not know how to do every complex job that the business requires.
Reasons for Subcontracting
• A lot of times a contractor does not have to be on site.
• With an employee, a business owner must provide space and tools for the employee to complete the job.
• A contractor usually uses his or her own tools for the job, and often does the job from his or her home or office.
Reasons for Subcontracting
• Flexibility is one of the biggest reasons companies love to bring on contractors.
• When a business needs a new website or extra help at tax time, the business can quickly find a solid contractor to complete the job.
• Then, when the contractor completes the task, the company can move on to other projects without having an employee on the payroll.
Reasons for Subcontracting
• A subcontractor is going to, in most cases, offer a superior service.
• Most independent contractors have been working in their field for years and have improved tremendously upon their skills.
• Whatever a business hires a contractor for, they are most likely going to get a well-qualified contractor to complete the task.
Reasons for Subcontracting
• In reality, businesses, be it large or small, love to use contractors.
• While there are some benefits to having full-time employees, there are also benefits to using a contractor.
• In the end, most business owners enjoy a mix of both contractors and employees.
• With this, a company can bring on help for critical projects while still keeping the most qualified employees on the payroll
Factors affecting Subcontract
Factors affecting Subcontract
Factors affecting Subcontract
Factors affecting Subcontract
Types of Subcontract
• Domestic subcontractor: A subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor.
• Nominated subcontractor: Certain contracts permit the architect or supervising officer to reserve the right of the final selection and approval of subcontractors. The main contractor is permitted to make a profit from the use of nominated subcontractors on site, but must provide "attendance" (usually the provision of water, power, restrooms, and other services to enable the nominated subcontractor to do his job).
Types of Subcontract
• In effect the appointment of nominated subcontractors establishes a direct contractual relationship between the client and the subcontractor.
• Named subcontractors: Effectively the same as a domestic subcontractor - A subcontractor who contracts with the main contractor to supply or fix any materials or goods or execute work forming part of the main contract. Essentially this contractor is employed by the main contractor.
Subcontracting (External) with Quality Management
SAP Best Practices for Chemicals
Purpose, Benefits, and Key Process Steps• Purpose
– The purpose of to describe business processes related to external subcontracting.– Benefits
• In-time consumption of components provided to Vendor• Two Production version provided for order type- one for in-house production and other for
external operation
– Key Process Steps
External Subcontracting in Procurement with QM External Subcontracting in Process Order
•Create Purchase Order•Approval of Purchase Order (Optional)•Stock Transfer for Subcontractor with Delivery•Processing Deliveries and Picking•Stock Transfer for Subcontractor without Delivery•Goods Receipt for Subcontract Order (without WM)•Results Recording•Record Usage Decision•Invoice Verification
•Create Planned Independent Requirement•Material Requirements Planning at Plant Level•Evaluation of the Stock/Requirement List•Initial Stock Posting•Create Process Order•Release Process Order•Create PO for External Processing with Material Number•Create Outbound Delivery Request•Post Goods Issue to Subcontractor Transfer Stock•Posting In-time Consumption of Components•Receiving a Subcontract Purchase Order – Goods Receipt•Results Recording•Record Usage Decision•Process Order Confirmation•Enter Invoice•Release Blocked Invoices
Required SAP Applications and Company Roles
• Required SAP Applications– SAP ECC 6.00 enhancement package 5
Company Roles
External Subcontracting in Procurement with QM External Subcontracting in Process Order
•Warehouse Clerk
•Engineering Specialist
•Purchaser
•Purchaser (Chemicals)
•Shop Floor Specialist
•Quality Specialist
•Accounts Payable Accountant
•Strategic Planner
•Production Planner
•Warehouse Clerk
•Shop Floor Specialist
•Purchaser
•Purchasing Manager•Accounts Payable Accountant•Quality Specialist
Process Flow DiagramSubcontracting (External) with Quality Management
Pu
rch
as
er
Create Purchase
Order
Pu
rch
as
er
Ma
na
ge
r
Approval of Purchase
Order (Optional)
Pu
rch
ase
r C
he
mic
als
Stock Transfer for
Subcontractor without Delivery
Stock Transfer for
Subcontractor with
Delivery
Processing Deliveries
and Picking
Goods Receipt for
Subcontract Order
(without WM)War
eh
ou
se
Cle
rk
Qu
ali
ty
Sp
ec
iali
st Results
Recording
Record Usage
Decision
Acc
ou
nts
P
ayab
le
Acc
ou
nta
nt Invoice
Verification
Process Flow DiagramSubcontracting (External) with Quality Management
Str
ate
gic
P
lan
ner
Create Planned
Independent Requirement
Pro
du
ctio
n
Pla
nn
er
Material Requirements Planning at Plant Level
War
eh
ou
se
Cle
rk
Pro
du
cti
on
P
lan
ne
r
Sh
op
fl
oo
r S
pec
iali
st
Pu
rch
ase
r
Evaluation of the
Stock/Requirement List
Initial Stock Posting
Create Process
Order
Release Process
Order
Create PO for External
Processing with Material
Number
(Purchasing Manager)Release
Purchase Order
(Optional)
(Purchaser Chemicals)
Create Outbound Delivery Request
Pick Confirmation
(Optional)
Generate Transfer
Order (Optional)
Confirm Transfer
Order (Optional)
Post Goods Issue to
Subcontractor Transfer
StockStock
Overview (Optional)
Posting In-time
Consumption of
Components
Receiving a Subcontract
Purchase Order – Goods Receipt
Acc
ou
nts
P
ayab
le (Accountant)
Enter Invoice
(Manager)Release Blocked Invoices
Qu
alit
y S
pec
iali
st
Results Recording
Record Usage
Decision
En
gin
eer
ing
S
pec
ialis
t Derivation Monitor
(Optional)
Process Order
Confirmation
Business View - 1Business BenefitsBusiness Benefits
Increased customer satisfaction
No process time for buyer
Increased transperancy
Reduced purchasing process cycle time
Buyer Sub-ContractorThird Party Vendor
Plan requirementsSupply material to the Subcontractor
Assign source of supply
Create purchase order and update contract
Create and validate sales order (Job Order)
Provide material (components) to the subcontractor
Process material
Generate material request automatically
Business View - 2Business BenefitsBusiness Benefits
Increased customer satisfaction
Reduced transaction cost
Buyer Sub-ContractorThird Party Vendor
Send out shipping notification
Confirm goods receipt
Adjust under and over consumption
Create invoice
Verify and release invoice
Check and release payment
Subcontracting (External) with Quality Management
Vendor: S-1003
Company Code 1000Plant 1000
Vendor: S-9000(subcontractor)
Purchase order for components with delivery address to subcontractor
Invoice
Invoice
Delivery to subcontractor
Goods delivery
Delivery of components
Purchse order
CH-6210 (GranuSAP, 100 Lb)
LegendSymbol Description Usage Comments
To next / From last Diagram: Leads to the next / previous page of the Diagram
Flow chart continues on the next / previous page
Hardcopy / Document: Identifies a printed document, report, or form
Does not correspond to a task step in a document; instead, it is used to reflect a document generated by a task step; this shape does not have any outgoing flow lines
Financial Actuals: Indicates a financial posting document
Does not correspond to a task step in a document; instead, it is used to reflect a document generated by a task step; this shape does not have any outgoing flow lines
Budget Planning: Indicates a budget planning document
Does not correspond to a task step in a document; instead, it is used to reflect a document generated by a task step; this shape does not have any outgoing flow lines
Manual Process: Covers a task that is manually done
Does not generally correspond to a task step in a document; instead, it is used to reflect a task that is manually performed, such as unloading a truck in the warehouse, which affects the process flow.
Existing Version / Data: This block covers data that feeds in from an external process
Does not generally correspond to a task step in a document; instead, this shape reflects data coming from an external source; this step does not have any incoming flow lines
System Pass / Fail Decision: This block covers an automatic decision made by the software
Does not generally correspond to a task step in the document; instead it is used to reflect an automatic decision by the system that is made after a step has been executed.
Ext
erna
l to
SA
P
Business Activity / Event
Unit Process
Process Reference
Sub-Process
Reference
Process Decision
Diagram Connection
Hardcopy / Document
Financial Actuals
Budget Planning
Manual Process
Existing Version /
Data
System Pass/Fail Decision
Symbol Description Usage Comments
Band: Identifies a user role, such as Accounts Payable Clerk or Sales Representative. This band can also identify an organization unit or group, rather than a specific role.
The other process flow symbols in this table go into these rows. You have as many rows as required to cover all of the roles in the scenario.
Role band contains tasks common to that role.
External Events: Contains events that start or end the scenario, or influence the course of events in the scenario.
Flow line (solid): Line indicates the normal sequence of steps and direction of flow in the scenario.Flow line (dashed): Line indicates flow to infrequently-used or conditional tasks in a scenario. Line can also lead to documents involved in the process flow.
Connects two tasks in a scenario process or a non-step event
Business Activity / Event: Identifies an action that either leads into or out of the scenario, or an outside Process that happens during the scenario
Does not correspond to a task step in the document
Unit Process: Identifies a task that is covered in a step-by-step manner in the scenario
Corresponds to a task step in the document
Process Reference: If the scenario references another scenario in total, put the scenario number and name here.
Corresponds to a task step in the document
Sub-Process Reference: If the scenario references another scenario in part, put the scenario number, name, and the step numbers from that scenario here
Corresponds to a task step in the document
Process Decision: Identifies a decision / branching point, signifying a choice to be made by the end user. Lines represent different choices emerging from different parts of the diamond.
Does not usually correspond to a task step in the document; Reflects a choice to be made after step execution
<F
unct
ion>
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• Prof.G.Purandaran• M.Tech (I.I.T-Madras)• PGDM (I.I.M-Bangalore)