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BANGALORE – 560001 2002-2004

DECLARATION

I here by certify that this project report entitled “Construction Of

Internal Control System With Respect To Materials And Stores At

INDITAL Construction Machineries Limited”, has been prepared by

me under the able guidance and supervision of Dr. Nagesh S

Malavalli, Principal, M.P. Birla Institute of Management , Associate

Bhartiya Vidya Bhavan, Bangalore.

This project report was prepared by me in partial fulfillment of the

requirement for the award of MBA Degree. I also declare that this

project report has not been submitted to any other University or

Institution for the award of any Diploma or Degree.

Date: 13/09/2004

Place: Bangalore

BHAVANA A

Reg. No.: 02XQCM6016

ACKNOWLEDGEMENT

This Project report has been made possible through the direct and indirect

cooperation of various people to whom I wish to express my deep sense of

Gratitude.

I am extremely grateful to my Guide Dr. Nagesh S Malavalli, for his valuable

advice and guidance throughout, which has enabled me in the successful

completion of this project and whose constant backing and support made my

project a knowledgably and insightful experience.

I also wish to express my profound thanks and gratitude to Mr. Vinod Menon, for

providing me the opportunity to undertake the project at INDITAL Construction

Machineries Ltd.

I express my sincere thanks to all the staff of INDITAL Construction Machineries

Ltd. who took off their valuable time without which this project could not be

completed.

I would also like to thank my friends and family members for their continuous

support and assistance they have given me.

GGuuiiddee’’s s CCeerrttiiffiiccaattee

This is to certify that Project titled “Construction of Internal Control

System with respect to Materials and Stores “at INDITAL

Construction Machineries Ltd. has been prepared by Ms. Bhavana A

bearing the registration number 02XQCM6016 under my guidance.

This has not formed a basis for the award of any Degrees/Diploma by

any other University

Date: 13/09/2004 Place: Bangalore

Dr. Nagesh S Malavalli

(Principal)

CONTENTS

Page No.

CHAPTER 1 Executive Summary 01

CHAPTER 2 Introduction 04

CHAPTER 3 Company Profile 08

CHAPTER 4 Review of Literature 19

CHAPTER 5 Materials Requisition Planning 29

CHAPTER 6 Methodology 34

CHAPTER 7 Study and Analysis 37

CHAPTER 8 Proposed Model 42

CHAPTER 9 Summary and Conclusion 55

Chapter 1

ExExeecucuttive Sive Suummmmaarryy

INDITAL Construction Machinery Ltd., was established in the year 1989 by

qualified technocrats, well experienced in the manufacture of construction and

material handling equipments. INDITAL started operations with the primary

objective of development and manufacture of State-of-art Mobile Cranes and

Material Handling Equipments.

The problem faced by INDITAL is to control the internal movement of materials

and avoid mismanagement of the same. The company proposes to adopt a

proper documentation procedure for the movement of materials between

departments.

Materials management is the management of the flow of materials into an

organization to the point, where, those materials are converted into the firm’s end

product(s).

Materials management is a function responsible for coordination of planning,

sourcing, purchasing, moving, storing and controlling materials in an optimum

manner so as to provide predetermined services to the customer at a minimum

cost.

For an effective internal control of materials, it is necessary that all the

departments should coordinate and work in cooperation of other departments, so

that it is easy to track the movement of goods, trace the materials to a particular

work order. It will also facilitate to create accountability on the materials.

The methodology adopted was to interact with the concerned authorities and to

study the current procedure adapted by the company, for internal control of

materials and stores. The procedure was evaluated and possible loop holes were

identified. Henceforth, an appropriate tailor-made procedure for internal control of

materials and stores is proposed.

The major loop holes identified were that Bin cards were not maintained, Quality

control department verbally intimates the purchase department regarding the

acceptance or rejection of goods, no document is maintained for return of goods

from production department to stores.

Chapter 2

IntIntrroodductuctiioonn

BACKGROUND OF THE STUDY

Materials Management Is a function responsible for coordination of planning,

sourcing, purchasing, moving, storing and controlling materials in an optimum

manner so as to provide predetermined services to the customer at a minimum

cost. This has necessitated integrated materials management function, which

demands an ability to bring together conflicting and yet interrelated functions, viz.

materials planning, purchasing, receiving and inspection, stores, inventory

control, scrap and surplus disposal.

Importance of Materials Management:

The significance of an efficient materials management system needs no

emphasis. It will facilitate the accomplishment of the following objectives: -

1. Lower prices for materials and equipment.

2. Faster inventory turnover.

3. Continuity of supply.

4. Reduced lead time.

5. Reduced transportation costs.

6. Less duplication of efforts.

7. Elimination of buck-passing.

8. Reduced materials obsolescence.

9. Improved supplier relationship and better records and information.

10. Better inter-departmental co-operation.

11. Personnel Development.

Materials occupy a significant place among the M’s of an industrial enterprise

because of several reasons. Some of these reasons are as follows:

1. The amount spent on materials is increasing in relation to the expenditure

on other inputs.

2. Materials offer considerable scope for reducing costs and improving

profits.

3. Materials form an important part of current assets in an organization.

4. Improving return on investment depends on the effective utilization of

materials

5. Materials ‘add value’ to a product.

6. Materials contribute to the quality of the end product.

7. Materials management assumes responsibility for whatever happens in

purchasing, storing, inventory or any other area connected with materials.

8. Conservation of materials and their availability for posterity is one of the

planks of social responsibility of business.

9. The efficiency of any organization depends upon the availability of right

materials, in right quantity, at right time and at the right price.

10. Materials, supplies and equipment are the life-blood of any functioning

industrial concern, government agency or commercial operation.

11.The relationship between man and materials is indivisible.

STATEMENT OF THE PROBLEM

The problem faced by INDITAL is to control the internal movement of

materials and avoid mismanagement of the same. The company proposes to

adopt a proper documentation procedure for the movement of materials

between departments.

OBJECTIVES OF THE STUDY

♦ To evaluate the procedure currently adopted to control the internal

movement of materials.

♦ To identify the loop–holes in the existing system and provide necessary

corrective actions to implement a better control on the internal movement

of materials

♦ To construct an effective Internal Control System with respect to Materials

and Stores.

Chapter 3

CoCommppaany ny PPrroofilefile

INDITAL CONSTRUCTION MACHINERY LTD., was established in the year

1989 by qualified technocrats, well experienced in the manufacture of

construction and materials handling equipments. INDITAL started operations with

the primary objective of development and manufacture of State-of-the-art Mobile

Cranes and Material Handling Equipments.

INDITAL, has since inception stressed on product quality. All equipments

produced are tailor-made to the Industry’s rigid specifications. This has resulted

in Sophisticated Material Handling products, produced exactly as per the

standards with pinpoint accuracy.

INDITAL’s products consistently help customers

cut costs, add efficiency, reduce down time and

increase speed of operations. INDITAL has the

products and knowledge to add increased value

to the customer’s material handling operations

and applications. Within the company’s business,

the resource of marketing, research, design,

engineering, systems and production share a common goal to enhance the

quality of the products and service in the market place while advancing the state

of Material Handling Equipment making technology.

At INDITAL, product and service combine to give its equipment their total value.

This value, along with INDITAL’s commitment to advanced manufacturing

technologies is the customers’ guarantee that the future of Material Handling

Equipments belong to the company with new ideas and the knowledge to

develop them.

COLLABORATOR

INDITAL derives its strength from the excellent Design base it has established

with initial support from a leading Italian Design firm specializing in Cranes,

Container Handling Equipments and Fork Lifts Trucks for leading European

Manufacturers, whose products are known World over for their steady

performance and quality.

With 15 years hands on experience in this field, INDITAL has established itself as

an innovative company with the capability to design and develop the most

sophisticated Material Handling Equipments with particular specialization on

customer designed equipments. INDITAL has achieved this capability through

years of active and close working with Material Handling Companies,

understanding their needs, and developing turnkey solutions. With this

background, INDITAL is now famous for the quick succession with which it has

been introducing new products in the country.

This tie up with MTS Engineering has thus enabled INDITAL to design and

produce the most modern equipments with State-of-the-art technology.

Mr. Claudio Fontanini heads m/s MTS Engineering, Italy, who is considered an

authority in the design of Material Handling Equipments and in particular Heavy

Fork Lifts, Container handling Equipments. Mr. Claudio Fontanini who holds

several patents to his credit is also on the board of INDITAL as the Technical

Director. This has further strengthened the capability of the Company and

INDITAL is now famous for quick succession with which it has been introducing

new products in the country.

INFRASTRUCTURE

INDITAL’s reputation as an innovative Material Handling Equipment producer is

without question. Its state-of-the-art production facilities offer superior quality. Its

research and technological skills are unparalleled. Its people are among the

experts in the industry. And its dedication to customers remains steadfast.

INDITAL manufactures its Mobile Cranes and

Container Handling Equipments in its modern

factory at Peenya, about 15 km from Bangalore.

The factory situated in a 10,000 sqm plot has state-

of-the-art Fabrication Facilities and modern

assembly shops covering about 5000 Sqm

TEAM

It is often been said that “Its not just what we make- its what we know”. With the

experience gained in manufacturing hundreds of equipments, INDITAL has learnt

plenty. Today INDITAL’s greatest strength has been its workforce. It has a

dedicated team of trained and experienced experts in the field of Engineering,

Design, Quality Control and Manufacturing, with whom it has been able to turn

out World Class products. All these experts are engaged in tackling the frequent

changes in the Material Handling Industry and the challenges presented by

changes in the technology.

INDITAL’s Sales Team with the active support from its State-of-the-art Design

group is ready to develop products to new specifications. And solve the

customer’s handling problems. Once INDITAL’s products are in use, its service

team, work with customers at their sites to solve their most difficult challenges

The Operating Managers, Supervisors, Technical Staff and Mechanics are well

aware of the contribution they are making to INDITAL’s products and the impact

they have on exceeding customer expectations. Resting with them are the tools

and the know-how to manufacture the best quality Material Handling Equipments

in the world.

EXPORTS

INDITAL has exported its equipments to Italy, Kuwait, Iraq and Bangladesh.

INDITAL is confident of exporting more of its equipments, particularly Container

Handling in the coming years.

PRODUCTS

MOBILE CRANES

During 1989, INDITAL launched its first product: An 8 Ton

capacity, 100% Pick and Carry Cranes, which was later

upgraded to 12 Tons. These were primarily meant for the

Granite and general purpose Material Handling Industry.

These Cranes ushered in a revolution in the material

handling industry, which had seen so far only tractor

based, cranes. During March 1992, INDITAL introduced the HC-18. This 18 ton

capacity Pick and Carry Mobile Crane was again the first for India. This model

introduced for the first time in India the concept of Power Shift Transmission for a

100% Pick and Carry Crane. With this feature and the Hydrostatic Steering, the

HC-18 became a favorite with the operators with lesser strain and fatigue being

experienced by them. Today, this model has established itself as a forerunner

and the Benchmark in the industry.

REACH STACKERS

With the experience gained from the manufacture and

successful working of its 10 ton, 12 Ton and 18 ton Pick

and Carry Cranes, in the most demanding and difficult

Indian conditions, INDITAL ventured with confidence

into the Container Handling Sector. The field of

Container Handling essentially requires 100% Pick and

Carry equipment like Top Lift Trucks or the Reach

Stackers. The latter being very similar to its currently produced models, INDITAL

started manufacturing the Reach Stacker during the later 1992.

This prestigious order was secured inspite of stiff Global Competition from

established World Giants in the field. Excellent technical support was received

from Mr. Claudio Fontanini, which enabling INDITAL to manufacture the first

Reach Stacker to be produced outside Europe. In February 1993, the Reach

Stacker was commissioned at the Inland Container Depot (ICD) of the

Container Corporation of India (CONCOR) at White Field, 20 km from

Bangalore. Ever since, the equipment has been working exceedingly well and is

handling an average of 3000 TEU’s a month. It has been found that this machine

has a peak handling capacity of 6000 TEU’s a month on a 16 hour/day basis.

This Reach Stacker employed the latest design in the field of Container Handling

and was specially designed keeping in mind the 24-hour a day, 30 days a month

work expected from the machine. The design was also

customized taking into consideration the adverse and

dusty climatic conditions of India, and tough operating

parameters.The response after the successful working of

the Reach Stacker has been so great that INDITAL is

now manufacturing the equipment in greater numbers

both for the Indian market as well as for export. Enquiries

have been pouring in from all major Indian ports, Container Terminals and also

from the Middle East and Far East.

Today INDITAL’S Reach Stackers have been successfully working in many

ports, various ICD’s of CONCOR, many private container Freight Stations, and

several Contractors working for ports like Mumbai Port Trust, Calcutta Port Trust,

Cochin Port Trust, Kandla Port Trust etc.,

SIDE LIFT & FORK LIFT TRUCKS

In 1996 INDITAL launched India’s first 5 high Stacking Side Lift Trucks. These

machines meant for empty Container Handing, which were fitted with a

telescopic side spreader to accommodate both 20` and 40` long containers.

Designated as the ECT series, these machines have now become very popular

in Container Terminals where space is at a premium. These trucks are now

available up to 6 high stacking levels.

During early 1998, INDITAL launched its FLT series of 10-ton/12 ton capacity

Fork Lift Trucks. These were custom designed for India with performance levels

on par with the best European equipments. These machines have become a

favorite with Material Handling Contractors and can be seen successfully working

all over India. Several variants of FLT-12 with attachments for Container

Handling / Tyre Handling/ Log Handling etc., have been introduced.

PUSHBACK TRACTOR Ground Support Equipments

Having firmly established itself in the Fork Lift, Mobile Crane and Container

Handling Industry, INDITAL during 2003 entered the Airport Ground Support

Equipment Industry. With the first development order coming from M/s Jet

Airways, a leading private airline in India, INDITAL successfully launched its

PBT-12 Aircraft Push Back Tractor in September 2003. This high power tractor

was primarily designed to handle the new generation Aircrafts acquired by Jet

Airways. The equipment has been working quite successfully and INDITAL is

gearing up to manufacture more such Tractors in the future.

QUALITY

INDITAL operates a Quality Management System, which complies with the

requirements of ISO 9001-2000 and is certified for Design, Manufacture and

supply of Material Handling and Earth Moving Equipments.

Strict quality control is established right from the raw material stage to the

finished product. Only the best possible raw materials and components find their

way into an INDITAL product. Quality, Innovation and Customer Satisfaction

have been one of the primary strengths of INDITAL on which it plans to build its

future.

Reliability is a key benefit in doing business with INDITAL. The Company’s goal

is to surpass all quality and service expectations. Control of INDITAL’s product

quality is a major concern right up to the shipping stage. Special transporting

precautions preserve the high quality of INDITAL’s products. Appropriate safety

measures, rust protection etc., guarantee that the quality processed into the

products remain intact upon delivery. No one is tougher on the INDITAL’s

products than the people who make them.

RESEARCH & DEVELOPMENT

INDITAL is investing a substantial amount of time and money in its expansion

activities, Research and Development and New Plants. INDITAL faces the future

with pride and confidence and is poised to bring out the following products and

that too in a quick succession, which has been INDITAL’s trademark:

• Level Luffing Wharf Cranes

• Pick and Carry Hydraulic Mobile Cranes

• Light Duty Earth Moving Equipments.

• Terminal Tractors.

• Airport Handling Equipments

SUPPORT

At INDITAL, product and service combine to give its equipment their total value.

This value, along with INDITAL’s commitment to advanced manufacturing

technologies is the customers’ guarantee that the future belongs to the company

with new ideas and the knowledge to develop them.

Today INDITAL is supported by a strong sales and service team catering to the

various clientele. INDITAL has also preferred to grow gradually while catering to

customer satisfaction. As a consequence INDITAL’s products were initially

launched in India. Gradually INDITAL extended its operational area to the

neighboring countries. Now, with a firm footing in the domestic market, INDITAL

is all set to tap the growing global market

WHY INDITAL?

• India's largest Container Handling Equipment manufacturer.

• INDITAL manufactures the widest range of Container Handling

Equipments in India.

• The only manufacturer in India having the indigenous design capability to

manufacture Fork Lift Truck up to 50 tons capacity.

• India's first manufacturer of SIX High Stacking Empty Container Handler.

• India's only manufacturer of Pick And Carry Cranes in the 18-32

categories.

• Has a range of Reach Stackers to suit every application and budget.

• 3 different types of Side Lift Truck for Empty Container Handling

• Capabilities to manufacture Non-standard capacity in Reach stackers,

Fork Lift Trucks, Mobile Cranes

• First Indigenous Producer of Aircraft Push Back Tractor with greater than

8000 Kilograms Draw Bar Pull

Chapter 4

Review of Literature

INTRODUCTION

Materials are of many types, viz., raw materials, purchased

components, materials-in-process (i.e., semi-finished goods),

finished goods, packing materials, maintenance and repairs

supplies, scrap and waste and rejects or rework are used in

manufacturing organizations. These materials are of various

size, shape, and specific features. The characteristics of the

materials to be used in production are determined by product

design decisions. The layout of facilities is directly affected by

the nature of these materials. For example, large and bulky

materials, heavy materials, fluids, solids, flexible and inflexible

materials and materials requiring special handling to protect

them from conditions such as heat, cold, humidity, light, dust,

flame and vibration affect the layout of facilities for handling,

storing and processing these materials.

Materials Handling is defined as the art and science of moving, packing and

storing of substances in any form. The scope of materials handling within an

organization depends on the type of the product manufactured, the size of the

organization, the value of the product and the value of the activity being

performed and the relative importance of materials handling to the enterprise.

Importance of Material Handling

1. Efficient Materials Handling is important to manufacturing operations.

Materials sent by vendors must be unloaded and moved through various

departments. These movements do not add value to the product but they

do add to the cost.

2. Materials handling is an important part of the design of a production facility

and can hardly be treated as separate. Materials handling system and plant

layout enhance effectiveness of each other. A good plant layout enables an

operation to use the most efficient handling method. Efficient operation of

appropriate materials handling methods reduces costs and enables

maximum capabilities to be derived from a given production facility.

There are three perspectives about materials handling. They are:

• The traditional point of view, wherein the emphasis is on the

movement of material from one location to another within the confines of

the individual plant.

• Plant-wise concern for overall flow of materials focuses on the inter-

relationship between all handling problems and the possibility of

establishing an overall materials handling plan.

• The systems point of view, involves a much broader consideration of

all materials handling activities involving the movement of materials from

all sources of supply (vendors), all handling activities within and around

the plant and the handling activities involved in the distribution of finished

goods to all customers of the firm.

Objectives of Materials Handling

Even though the best solution to the material handling problem is no

handling, it is hardly practicable in a manufacturing process. Hence the main

objective of material handling is to reduce the number of handlings as well

as the overall cost of material handling equipments and reducing the

distances through which the materials are handled. Other objectives of

materials handling are as follows:

• Lower unit materials handling costs.

• Reduction in manufacturing cycle time through faster movement of

materials and by reducing the distance through which the materials are

moved. Reduction in manufacturing cycle time results in reduced work-

in-progress inventory costs.

• Contribution towards the better control of the flow of materials through

the manufacturing facility.

• Improved working conditions and greater safety in the movement of

materials.

• Contribute to better quality by avoiding damage to products by

insufficient handling.

• Increased storage capacity through better utilization of storage areas.

Materials Handling Principles

Certain principles have evolved to guide facility layout to ensure efficient handling

of materials. Although there are no hard and fast rules, they do provide effective

guidelines for the efficient movement of materials in most facility layout. The

material handling principles that provide a framework for selecting specific

materials handling equipment or devices, which are the core of the materials

handling system, are enlisted below:

• Materials should move through the facility in direct flow patterns,

minimizing backtracking

• Related production processes should be arranged to provide for direct

material flows

• Mechanized materials handling devices should be designed and located

appropriately so that human effort is minimized

• Heavy and bulk materials should be moved the shortest distance during

processing

• The number of times each material is handled should be minimized

• Systems flexibility should be allow for unexpected breakdowns of

materials handling equipments, changes in production system technology,

etc.

• Mobile equipments should carry full loads all the times

Materials Handling Costs

The costs of materials handling arise from two sources: the cost of owning and

maintaining equipment and the cost of operating the system. While the cost of

owning the equipment generally known since entries are available in the books of

accounts, the costs of operating the handling system are elusive, as records are

not generally maintained.

Every effort should be made to reduce materials handling costs, particularly

because they do not add any value to a product. The product will not be worth

any more to the consumer simply because it is moved, but it will cost the

customer more.

There are three fundamental ways of minimizing the costs. They are as follows:

• Eliminating the handling itself whenever and wherever possible

• Mechanizing whatever handling still remains

• Making the necessary handling more efficient

Primary requisite of any action to be taken towards minimizing handling costs is

to have a record maintained for them.

Factors to be considered in planning Material Flow

A. Material or Product (Material flowing through the facility)

1. Characteristics

a) Receipts

b) Shipments

2. Volume of production

3. Number of different parts

4. Number of operators

5. Storage requirements

B. Process (Activity Centers)

1. Type

2. Sequence of operations

3. Possibility of performance during move

4. Specific requirement of activities

5. Product vs. process layout

6. Quantity of equipments

7. Space requirements

8. Number of sub-assembles

C. Handling Methods

1. Unit Handled

2. Desired Flexibility

3. Equipment Required

4. Possible Alterations

D. Moves

1. Frequency

2. Speed

3. Rate

4. Volume

5. Scope

6. Area

7. Distance

8. Sources

9. Destinations

10. Cross Traffic

11. Location of receiving and shipping

E. Building

1. Size

2. Shape

3. Type

4. Number of floors

5. Location of doors

6. Ceiling height

7. Desired Location of departments

F. Personnel

1. Number

2. Movement

3. Safety

4. Working Conditions

5. Supervisory Requirements

G. Site

1. Transportation facilities

2. Expansion Possibilities

H. Miscellaneous

1. Location of Auxiliary services and activities

2. Possible damage of materials

3. Cost of implementation

4. Production Control

5. Flexibility

6. Expendability

7. Levels of activity

Types of Material Handling Systems

The materials handling systems can be classified according to the type of

handling equipment used, type of material handled and the methods, need or

functions performed. These classifications are:

1. Equipment oriented systems depending on the type of equipment used:

a. Overhead systems

b. Conveyor systems

c. Tractor-transfer systems

d. Fork-lift truck and pallet truck systems

e. Industrial truck systems

f. Underground systems

2. Material oriented system depends on the type of materials handled:

a. Unit handling system

b. Bulk handling system

c. Liquid handling system

3. Method oriented systems are as follows:

a. Manual systems

b. Mechanized or automated systems

c. Job-shop handling systems

d. Mass-production handling System

4. Function oriented systems such as:

a. Transportation System

b. Conveying System

c. Transferring System

d. Elevating System

Chapter 5

MatMateerriials Reals Reqquisuisiititioon n

PlaPlannnniingng

A manufacturing company, to produce its end products, must co-ordinate the availability

of sufficient production capacity with the availability of all raw materials and purchased

items from which the end products are produced.

Hence, there is a need to manage he availability of dependent demand items

from which the products are made. Dependent demand items are the

components i.e., materials or purchased items, fabricated parts or sub-

assemblies that make up the end product.

One approach to manage the availability of dependent demand items is to keep a

high stock of all the items that might be needed to produce the end products and

when on the other hand stock dropped below a present re-order level, the items

are produced or bought as the case may be to replenish the stock to the

maximum level. However, this approach is costly due to the excessive inventory

of components, fabricated parts and sub-assemblies to ensure high service level

(i.e., availability of dependent demand items at a short notice).

An alternative approach to managing dependent demand items is to plan for

procurement or manufacture of the specific components that will be required to

produce the required quantities of end products as per the production schedule

indicated by the Master Production Schedule (MPS). The technique is known as

Material Requirements Planning (MRP) technique.

MRP is a system in which the given MPS is exploded into the required amounts

of raw materials, parts and sub-assemblies, needed to produce the end product

each time period (week or month) of the planning horizon. The gross

requirements of these materials are reduced to net requirements by taking into

account the materials that are in inventory or on order.

A schedule of orders is developed for purchased materials and in-house

manufactured items over the planning horizon based on the knowledge of lead

items for procurement or in-house production.

Objectives of MRP:

• To improve customer service by meeting delivery schedules promised and

shortening delivery lead times.

• To reduce inventory costs by reducing inventory levels.

• To improve plant operating efficiency by better use of productive

resources.

The MRP technique is used as an inventory control tool, providing reports that

specify how many components should be ordered, when they should be ordered

and when they should be procured or produced in-house.

Overview of MRP

Basically, MRP consists of a set of computer programs that are run periodically

(once a week or month) to incorporate the latest schedule of production

requirements. MRP performs three important functions, which are as follows:

1. Order planning or control – when to release orders and for what quantity?

2. Priority planning and control – comparison of expected date of availability

with the need date of each item.

3. Provision of a basis for planning capacity requirements and development

of broad business plans.

Flow chart that provides a general overview of MRP

MRP Inventory status file Product structure file

Production Activity Controls

Buy Items

Make Items

Purchase orders

Operation of the MRP system

MRP System Inputs

1. Inventory Status File – gives complete and up to date information on the on-hand

quantities, gross requirements, schedule receipts and planned order releases for

the item. It also includes other information such as lot sizes, lead times, safety

stock levels, and scrap allowances, etc.

2. Production Schedule – specifies what end products are to be produced and when.

The planning horizon should be long enough to cover the cumulative lead times

of all components that must be purchased or manufactured to meet the end

product requirements.

3. BOM File or Bill of Materials File (Product Structure File) – provides the

information regarding all the materials, parts and sub-assemblies that go into the

end product. This file identifies each component by a unique part number and

Inputs Processing Outputs

Inventory Status F ile

Production Schedule

Exception Reports

MRP Systems

I Production Order

Schedule

BOM File

facilitates processing by exploding the end product requirements into component

requirements.

MRP System Outputs

1. Planned Order Schedule – plans the quantity of each material to be ordered in

each time period. It also modifies the previous planned orders.

2. Exception Reports – lists the items requiring management’s attention to control.

Chapter 6

MetMethohodoldolooggyy

The present study has three phases:

PHASE – I : EXPLORATORY RESEARCH

In the first phase, an exploratory research has been undertaken to gain additional

background information about the general nature of the research problem. It

consists of secondary literature of survey consisting of books, journals, websites,

legal requirements and process adopted by companies in general.

PHASE – II : STRUCTURED INTERVIEW

In the second phase, a detailed and structured interview was undertaken with the

management and the concerned departments, so as to study the existing system

adopted by the company with respect to internal control system of materials and

stores.

PHASE – III : ANALYTICAL RESEARCH

The process as studied in the second phase was compared against the

exploratory research conducted in the first phase and the likely loop holes in the

process were identified. Henceforth a tailor made mechanism for internal control

of materials and stores was proposed.

LIMITATIONS:

As we know every project /study has its own limitations. In the course of the

project various types of limitations have been experienced.

♦ Since the scope of study is restricted to INDITAL, the problem of

generalization exists.

♦ As the data collection is through personal interview, personal bias cannot

be totally eliminated.

Despite of the limitation maximum care was exercised to make the study

scientific & meaningful.

Chapter 7

StuStudydy

&&

AnAnaalylyssiiss

The problem statement is to control the internal movement of materials and

avoid mismanagement of the same. As such many loop holes in the existing

Internal Control System were identified during the study. Some of them are

listed below as follows:

1. Purchase Order:

Sometimes, the Purchase Orders are made verbally and no confirming

Purchase Orders are made subsequently to support a document for the

order placed. As such, there is no purchase Order Number to refer to the

receipt of goods.

Analysis:

Since, few Purchase orders are raised verbally, stores will not have any

basis to accept the materials arrived. In such cases, the storekeeper

should contact Purchase department to confirm the Purchase order,

which delays the entire process. Hence, Purchase department should

raise purchase orders verbally only in emergency situations and a

confirming Purchase order should be raised to keep track of the

materials.

2. Format for Purchse Requisition:

The Purchase requisition raised by the Production Department

against the Work Order received from the Purchase Department

does not have a particular format and is prepared in loose sheets.

Apart from this the document is also prepared for two or three

works orders together and does not mention what materials are

required for which order.

Analysis:

Since the same Purchase Requisition is used for more than one

work order, the purchase department may not be in a better

position to give preference to those materials that is required for

the Work order that should be executed earlier to the other. Also, as

they are prepared in loose sheets there is always a possibility of

loosing the papers by oversight.

3. Quality Control Department:

No document is maintained to record the movement of goods

between the Quality Department and Stores. Sometimes the

workers take delivery of goods directly from the Quality Control

Department and later fills up the Materials Issue Slip in the Stores.

Analysis:

Since no document is maintained for the movement of goods from

Quality Control Department to stores, there is always a possibility of

loosing the goods in transit, which may go unnoticed and hence

affect the production schedule as a whole.

4. Non-maintenance of Bin Card:

The Stores does not maintain any Bin Card. Stores Ledger is also

not maintained. The materials returned to the Stores by the

Production Department are not recorded. Stock details are recorded

in the Purchase Department on a monthly basis. This document

does not exhibit the receipt and issue of materials on a daily basis.

Analysis:

As, neither a BIN Card nor a daily Stores Ledger is maintained, it is

difficult to know the level of any material as on any particular day.

This may result in Ordering of materials that are sufficiently available

and non-availability of goods when required.

5. Non-maintenance of Materials Requisition Note:

Materials Requisition Note is not maintained by the Production

Department. Stores have a Materials Issue Slip, which requires the

signature of the worker requiring the material and that of the

supervisor for the issue of materials. The worker receives the

materials by signing the Materials Issue Slip that is signed by the

supervisor at his convenience.

Analysis:

As, no Materials Requisition Note is maintained, the storekeeper

issues the materials for Production without appropriate basis for

such an issue.

6. Non-maintenance of Materials Rejection Note:

The Quality Control Department verbally communicates to the

Purchase Department about the rejection of goods. No written

document is maintained for the purpose.

Analysis:

As, Materials Rejection Note is not maintained and such rejection is

verbally communicated to the Purchase department. This may result

in the Purchase Department personnel ignoring the matter by

oversight leading to delay in meeting the Production schedule.

As the above loop holes were identified and appropriately analyzed,

the existing system adopted at INDITAL was found to be

insufficient. Quite a few grounds have been identified and analyzed

that make way for mismanagement of materials, which can be

eliminated by adopting a suitable process and procedure for the

same.

Chapter 8

ProProppoossed ed MoModeldel

The requirement of materials should be arrived at, by adopting an appropriate

Materials Requirements Planning (MRP) which requires the consideration of

the following:

♦ Bill Of material for the Work order received

♦ Requirement of the Materials by other projects

♦ Materials already ordered but awaiting receipt

♦ Production and Delivery Schedules

♦ Current levels of Materials in stores

♦ Safety Stock / Minimum Stock

♦ Maximum Stock

Purchase order shall be raised on the basis of the Bill of Material prepared

for each order received from the customer. However this system should be

adopted only for ‘A’ Class and ‘B’ Class items. ‘C’ Class items can be

ordered against the Purchase Requisition raised and issued by the Stores.

Purchase Requisition shall be prepared in duplicate. The original is passed

on to the Purchase Department while the duplicate is retained as a file

copy.

(Note: Purchase Requisition is raised only in case of ‘C’ Class

items)

Purchase Order shall be prepared in a set of three copies for distribution as

follows:

• Original and acknowledgement copy to supplier for acceptance

• Copy to the purchase department

• One copy to stores, for receiving materials

Purchase Order can be placed verbally only in case of emergency and the

Purchase Department should ensure that a ‘Confirming Purchase Order’ is

raised subsequently.

Conditions of purchase, indicating detail instructions as to indemnify

against dispute with the third party, method of settlement of disputes,

arbitration and the liquidated damages in case of non-supply within

schedule time etc. should be printed on the reverse side of the original

copy of the order.

A specimen of Purchase Requisition is given below:

Purchase Requisition

Date…/…/…….

No……….

Description Code No. Quantity Quantity Required for Orders

in Hand

Available Work Order No. Quantity

Required

Prepared By… … … … … … … … ...

Signature:………………

Flow Chart of Purchase Order

*- Denotes File Copy

Purchase Order

*Purchase Order

(Purchase)

Purchase Order

(Supplier)

Purchase Order

(Stores)

To check the materials on

receipt

Purchase orders shall be followed up thoroughly by purchase department

till the material is received in stores, accepted after quality inspection, and

replacement received for rejected materials.The copy issued to the Stores

for its reference shall mention the Work Order No. and shall be

accompanied by the Bill Of Material for each order.

Stores Receipt:

On the receipt of materials from the Supplier, the Storekeeper shall refer to

the Delivery Challen to find out Purchase Order concerned, and shall

prepare a Stores Received Note (SRN), in three copies, to be circulated as

follows-

• Purchase Department

• Quality Approval

• File copy

A Specimen of Stores Received Note is given below:

Stores Received Note No.

Supplier’s name:… … … … … … … … … … … … … … … … … … ..

Date…./…./…….. Carrier’s name:… … … … … … … … … …

Purchase Order No……………….. Challen No. & Date……………

Description Code No. Quantity Quantity

Quantity

Received Accepted Rejected

Received By… … … … … … … … … … … … … … …

Quantity Checked By… … … … … … … … … … … …

Quality Inspected By... … … … … … … … … … … …

After verification with the specifications given in the Purchase Order and

physical counting, the storekeeper shall enter the quantity columns, and

send two copies of SRN to Quality Control Department along with sample

material for Inspection and approval of quality. When the Quality Control

Department accepts the materials, the Inspector puts a seal on the

respective copies of SRN and puts his signature. One copy of the SRN is

sent to Stores for recording in Bin Card, while the first copy is sent to

Purchase Department as a record of acceptance of materials ordered and

supplied by the vendor. SRN can be checked and priced out by the

Purchase Department with reference to Purchase Order. Invoice when

received are checked with Priced SRN for issue of Pay Order to the

Accounts Department.

Flow Chart of Stores Received Note

*- Denotes File Copy

With Seal on Acceptance

S R N *S R N (Stores)

S R N (Stores)

S R N (Q.C.)

S R N (Purchase)

S R N (Q.C.

)

Entry in Bin Card

Entry in Stores Ledger

A Specimen of BIN Card is given below:

BIN CARD No.

Description:……………………………………………………

Code:………………… Lo cation:……………… Unit:………………..

Receipt Issue Balance Verified

Date SRN No. Quantity MRN No. Quantity Quantity By

When Materials are rejected, the Inspector shall preferably inspect the

whole lot and immediately raise a Material Rejection Note (MRjN) in three

copies. The original is sent to the Purchase Department through which the

supplier is intimated to replace the goods free of cost. The second copy is

sent to the Stores wherein the Storekeeper separates the goods and places

them in “Rejected Goods” areas.

Entry of outsiders, other than those employed in the department should not

be allowed inside the department, especially in the Quality Control

Department and Stores.

Flow chart of Material Rejection Note

* Denotes File Copy

A Specimen of Material Rejection Note is given below:

Material Rejection Note No.

SRN No.:……… Date…/…/………

Purchase Order No…………………

Supplier’s name: … … … … … … … … … … … … … … …

Description Code No. Quantity Rejected Reason for Rejection

Inspected By: … … … … … … … … …

Signature:……………………………………

Stores Issues:

When a worker requires any material, he shall approach the Supervisor

who issues a Materials Requisition Note (MRN) to that worker. This Note shall

mention the name of the worker authorized to receive the materials, Work

Order No. and should require the signature of the Supervisor. The worker

shall submit this Note to the storekeeper who prepares a Materials Issue

M Rj N

M Rj N (Purchase)

M Rj N (Stores)

*M Rj N (Q.C.)

Note (MIN) in duplicate against the Materials Requisition Note wherein the

worker signs on receipt of materials. The Storekeeper shall cancel the

materials issued in the Bill Of Material for the respective Work Order and

make necessary entries in the Bin Card. The Storekeeper shall seal the

original MIN and forward the same to the Purchase Department.

Flow Chart of Material Requisition Note

Flow Chart of Material Issue Note

* - Denotes- File Copy

A Specimen of Material Requisition Note is given below:

Material Requisition Note No.

Date: …/…. /……. Work Order No………..

Description Code No. Quantity Required

Worker Taking Delivery: … … … … … … … …

Supervisor’s Signature

M R N (Production)

M R N (Stores)

M I N (Stores)

*M I N (Stores)

M I N (Purchase)

A Specimen of Materials Issue Note is given below:

Material Issue Note

Date:.…/…./…… No.

MRN NO……….. Work Order NO………

Description Code No. Quantity Issued

Worker’s Signature Storekeeper’s Signature

Stores Returns:

The left over stock in Production should be sent back to the Stores after

the completion of each Work Order accompanied with a Materials Return

Note (MRtN) mentioning the materials returned, their quantity, pertaining to

which Work Order and shall be signed by the Production Manager. On the

receipt of the materials, the Storekeeper shall make necessary entry in the

Bin Card, put the materials in their respective bin. The Storekeeper shall

then put a seal on this note and send it to the Purchase Department along

with the other MINs for recording in the Stores Ledger.

Flow Chart of Materials Return Note

M Rt N (Production)

M Rt N (Stores)

M Rt N (Purchase)

Sealed on Receipt and Recording

A Specimen of Material Return Note is given below:

Material Return Note

Date:.…/…./…… No.

Work Order NO………

Description Code No. Quantity Issued

Production manager’s Signature

Stores Ledger:

The Purchase Department shall maintain a Stores Ledger wherein different

pages are allocated for different items of materials and entries are made on

day-to-day basis. This book shall also mention the value of the items.

A Specimen of Stores Ledger is given below:

Stores Ledger

Description: … … … … … … … … … … … … Folio No. …….

Code:………………… Location:……………… Unit:………………..

Receipt Issue Balance

Date SRN No. Qty Amt MRN No. Qty Amt Quantity Amount

Other issues at Stores:

Stores shall demark different locations that store materials that are at

different stage in the process. The proposed demarcation can be as

follows:

• Rejected Area

• Under Inspection

• Allocated for a particular order. Here the Work Order Number should

be mentioned and can be created as and when required.

Work in Progress:

At the Production Department, a Works Book must be maintained where in

a separate page is allotted for each Crane and entries are made each day

as to the materials that has gone into the Crane. This will provide as a solid

basis for valuing Work in progress as on any day.

Specialized Process for ‘A’ Class items:

‘A’ Class items, as they are bulky and frequent movement of the same is

not preferred, can be directly downloaded at the factory instead of Stores

so that the frequent handling of the materials is avoided. However, SRN

should be raised and necessary Quality Inspection should be conducted at

the factory itself. Also, when the material is taken to assemble to the final

product necessary MRN should be raised in the Production Department,

against which a MIN is also raised in the Stores. All these documents

should be circulated as usual.

Specialized Process for ‘B’ Class items:

As most of the ‘B’ Class items are Sub-contracted, and are received in less

quantities, each of these items should be preferably inspected so a better

check can be imposed on these items. This will ensure that the production

schedules are met and the finished product is ready for delivery on

schedule.

Specialized Process for ‘C’ Class items:

‘C’ Class items should be ordered on the basis of PRN raised by Stores

which is in turn raised when a particular item has reached a particular level

that can be fixed as ‘Reorder Level’. These items do not require any

Quality Testing and as only Quantity Check is sufficient which can be done

at Stores itself. As such it is sufficient if the Storekeeper himself certify the

Quality for these items and hence sign for the Quality of these items in the

SRN rose for the purpose.

Flow Chart of ‘A’ Class items

Flow Chart of ‘B’ Class items

Quality Inspection At Factory

Used For Production At Factory

Directly Unloaded At Factory

Unloaded At Stores

Total Quality Inspection At Quality Control Department

Issued for Production by Stores to Factory

Flow Chart of ‘C’ Class items

Unloaded and Quantity Tested At

Stores

Issued for Production by Stores to Factory

Chapter 9

Summary & Conclusion

The problem of controlling the internal movement of materials at INDITAL and

avoiding the mismanagement of the same can be resolved considerably by

adopting the proposed model that is tailor made for INDITAL. The proposed

model is advantageous to the company and ensures the company that there are

minimum or rather negligible possibilities for mismanagement of the materials,

especially during the internal movements of materials between various

departments.

The benefits that can be derived by the company by adopting the proposed

model are enlisted below:

9�Better control on the internal movement of materials between the

concerned departments.

9�Easy identification of the materials as to the source and destination.

9�Complete documentation of the activities concerning the internal

movement of materials between departments.

9�Improved Materials Requirements Planning.