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