Materials Management

02 Jul

1. What do you understand from integrated materials management? What are the obstacles encountered to make this approach effective?

2. Name the industry and the products for which materials requirement planning technique would be suitable than economic order quantities and explain why?

3. What do you understand from Materials Requirement Planning (MRP)? What are its advantages over conventional tools of inventory planning? Which types of industries have use of this technique?

4. Why should purchase department participate in product development? Explain to what extent it is practiced in Indian Industry?

5. Describe the procedure to be followed for the purchase of an item until payment of the bill. Indicate the controls involved.

6. What are blanket orders? What are their salient features? For what type of items is this method of buying suitable?

7. How will you organize buying of seasonal commodities? Explain giving examples?

8. How does “Buying under risk” differ from “Buying under uncertainty”? Give a comparative analysis of the two methods?

9. What are the responsibilities of receiving stores? What are the different types of materials received in the organization?

10.What is pallet? What are the different types of pallets used in the industry? Describe in brief the advantages of palletisation?

11. Define logistics management. Explain briefly the benefits that can accrue to the organization from the successful implementation of the concept?

12. How does an effective system of electronic data processing help in materials management ?

13. What do you understand from classification of materials? why is it done ? In what different ways can materials be classified?

14. What are the different methods of codification of items? Explain them briefly?

15. Discuss in details how standardization can assist management in any four of the following:

a) Better inventory control

b) Reduction in manufacturing cost.

c) Quality improvement

d) Minimization of obsolete and dormant stock

e) Economics in purchasing

f) Better stores management

16. What is meant by selective control of inventories? What different methods are used for selective control of inventory items?

17. “ABC analysis indicates selective control of inventories” Discuss.

18. What is the importance of EOQ in inventory control? what are the limitations of EOQ concept?

19. “Best buying results when annual procurement cost equals annual inventory carrying cost” Discuss?

20. “Long term contracts with staggered deliveries are better than frequent orderings for A and B class of items.” Discuss.

Materials Management

28 Jun

Group A

CASE 1                                                                                     

Renuka Machines Manufacturing Corporation
(
A case on vender rating in material management)
Renuka Thomas, President of Renuka Machines Manufacturing Corporation (RMMC), is concerned about company’s choice of suppliers for cleaning brushes, which are used in the company’s data processing equipment. Renuka occasionally plays tennis with Sheela George, President of George Machine Company (GMC), one of the company’s suppliers of cleaning brushes.
Recently, Sheela complained to Renuka that her company has been having difficulty in getting the traditional share of Renuka’s business. On the last buy, Sheela’s company failed to get any business, even though Sheela believed she was the lowest bidder. Renuka tells Sheela that normally she does not get into the details of procurement, but she promises to ask her Purchasing Manager, Dannis Chako to investigate.
The next day morning, Renuka calls Dannis Chako and tells him of Sheela’s complaint. He said (says), that he does not want to influence the company’s procurement policies, but he does not feel that Renuka should investigate to make sure that Sheela’s firm was treated fairly.
Purchasing Manager, Dannis discovers that George Machine Company was indeed the lowest bidder on the last buying. Quotations for an order of 20,000 units were as under:

George Machine Company                                                            Rs 2.22
Data Matics Electronics Company                                                 Rs 2.23
Royal Tools and Machine Company                                              Rs 2.25

Royal and Data Matics each got order for 10,000 pieces. Royal has done considerable development work on brushes, while George and Data Matics have done very little. The quality and delivery records of the three suppliers on the last ten orders for the brushes are shown below. Renuka Machines Manufacturing Quality Control Department has set an acceptable quality level of three per cent on the brush.

Supplier Quantity Ordered Quantity Defective Delivery
Royal 4,000 122 One week early
Dara Matics 4,000 92 One week late
Sheela 3,000 120 On time
Sheela 6,000 162 Two weeks late
Royal 4,000 38 On time
Data Matics 5,000 29 One Week Early
Sheela 2,000 88 1,000 pieces on time. 1,000 pieces 4 weeks late
Data Matics 6,000 98 Two Weeks Late
Royal 4,000 45 One Week Late
Sheela 5,000 162 One Week Late

Questions                                                                                          

1. Is Dannis Chako justified in eliminating George Machine Company as a supplier of brushes?

2. In what respect is the complaint from George Machine Company justified?

3. Prepare a report for Renuka Thomas explaining the decision to eliminate George Machine company as a supplier. Use quantitative data as much as possible to support your answer?

 

CASE -2                                                                                                        

Cause of John Mathai s Sorrow

( A case of inventory car in m.m.)
John Mathai was a very sad man on Sunday, 12 April 1998. He was the Chief Executive of Telecom Installations Ltd, TIL, a wholly owned subsidiary of the major producers of telecom equipment in the country: Telecom Manufacturing Company (TMC). Around 88 per cent of the production of TMC was produced for the Government of India under special terms and prices, but the balance 12 per cent was routed through TIL, who were really the All India Sales, Serving and Installation network of TMC.
John’s wife Sheela, herself a commercial executive with a multinational, found John staring at some sheets of papers after they returned from church. These papers had been delivered by John’s office while they were away. Fearing bad news, Sheela gently took the papers from John. It was a brief performance report of TIL for the just-ended financial year. The sales had grown at the rate of 32 per cent. Usually a poor performer, the Kolkata region, had done extremely well. The company had performed the task of providing telecom facilities to villages very well. This was a politically sensitive area. The number of villages provided telecom facilities during 1997-98 had grown by 16 per cent over the figure for the previous year. TIL also took annual maintenance contracts, AMCs for telecom systems sold by TIL/TMC and the income from the servicing contracts had also grown by a healthy 21 per cent. Sheela felt that TIL had done well and asked John to thank the lord for such good results. She requested John not to be too ambitious and ask for more and more. John took the report from Sheela and showed her the last page, which she had missed. It gave details of the inventory of TIL and Sheela realized that the inventory too had grown and that too at a hefty 27 per cent during the year. The growth had been in all the regions. The breakup of inventory under various heads followed. Sheela could not follow the technical details but understood the cause for John’s despair!

John wondered, ‘How can the inventory grow when there has been such a steep increase in sales, servicing and installation activities? This performance should have actually cleaned the stores and reduced the inventory.’ Sheela understood the problem and prompted John to have a detailed study conducted to analyse the situation and determine the causes of inventory increase. She hoped that this decision would help John to have peaceful Sunday at home and not run to the office!

All the field offices were hoping to get a congratulatory message from their Chief for the good performance achieved by TIL in sales, servicing and installation fields. Instead, everybody was surprised to get a crisp FAX on the black Monday morning on the unlucky 13 April 1998, announcing the setting up of an Inquiry Team consisting of Mr. Sreedharan, an auditor from the Bangalore office and Girish Sehajwala, Technical Executive from Mumbai office. The team was to analyze the reasons for the increase of inventory and submit its report by 30 April 1998. All the employees were directed to extend full cooperation to the team. The message, that the inventory control was essential, was received loud and clear by all the field offices. There were reports of demoralization and frustrations due to these events, but John Mathai chose to ignore these.
Sreedharan and Girish worked sincerely, as was expected from this handpicked team. They came out with following startling causes for the increase of inventory:

  1. The increase had been more in monetary terms due to an increase in prices by 11 per cent.
  2. The field offices were immensely encouraged by the increase in sales and had augmented their orders on the manufacturing units during August-September 1997. Deliveries were expected around December 1997. This was done because there were reports of a likely loss of production due to shortage of imported components. Deliveries did not take place when expected. The production picked up much later and the factories of TMC dumped the ordered equipment in March 1998. There were protests from the field offices that there would be little time to sell these systems in the current year, but the factories insisted on completing the deliveries since they had to show these sales during that year’s production. These items had thus added to the inventories without much chance of sales before 31 March 1998. Had the factories adhered to the delivery schedules, there would have been much less increase in the inventories.
  3. The installation materials had shown a significant increase in all the field offices. This increase had been due to the improper disposal of installation materials after every installation. For example, 60 to 70 per cent of stocks of all types of cables consisted of small pieces left from the cable drums after an installation. These pieces were too small to be used in subsequent work and, therefore, just added to the inventory. The entire 4.2 kilometres of D-8 cable in the Delhi office stores consisted of two one-kilometre drums and 2.2 kilometres of cable in the form of 503 pieces of lengths varying between half a metre to 3 metres. The field managers had not shown these amounts as consumed since an increase in consumed materials reduced the profitability of the installation tasks. The managers had also been apprehensive of scrapping the brand new cable. The small and unusable quantities of installation materials had been accumulating over the years. This year the accumulation had been higher since the installation work had been more.
  4. Current generation of electronic/telecommunication equipment consist of a number of circuit boards held together and interconnected. Fault detection system may be built in the equipment to indicate which circuit board has developed a fault. This helps in urgent repairs, because even an operator can easily replace the faulty circuit board. Each field office of TIL, therefore, stocked circuit boards to sell to customers located at some distance from the field office. The objective has been that in the event of a failure, the customer could restore the system by changing the defective circuit board with the spare good circuit board held by him. Simultaneously, the customer was to send for a TIL technician. The service engineer of TIL could repair the faulty circuit board and carry out a complete check up of the equipment. The service engineers have also been keeping some circuit boards with them, so that they can put back a system to work when visiting customers having problems and not having spare circuit boards. Badly damaged, circuit boards beyond the repair capabilities of the field offices have to be sent to the factory for repairs. Customers have to be given circuit boards for the duration of their circuit boards getting repaired at the factory. The team sent by John Mathai found that there was gross misutilization of these circuit boards. Service engineers ‘loaned’ some circuit boards to the customers, there was a lack of clarity about the circuit boards sent to the factory, etc. There was, in brief, no clear policy about these costly circuit boards and a large number continued to be on the inventory of the field offices.

John Mathai read the report twice and concluded that he must do something about the inventories. He would have to make a large number of policy decisions and involve the manufacturing factories of TMC who repaired the cards and sent the finished products for sale. What detailed actions would you recommend, and why? Comment about the reactions of John Mathai when he saw the annual performance report. Should he not have expected some of these results during his day-to-day working?

Question:-                                                                                    

Q.1) Summarize & Analyse the case with reference to the principles of materials management?

Q.2) How o reduce the inventory of TIL without affecting its operations?

 

CASE 3                                                                                  

Pool Stores

(A case of stores management in material management)
The National Authority for Civil Aviation, NACA, is a public sector undertaking reporting to the Ministry of Civil Aviation, Government of India. It is responsible for maintaining the facilities and services at all the civil airfields in the country. It offers these facilities/services to aircrafts owned by various airlines, private aeroplane owners, government aircrafts, etc., on payment basis. The facilities include runways, taxi tracks for the aircraft to operate and aprons for these to be parked. NACA also provides lights for the aircraft to take off and land at night and in bad weather. Air traffic control and communications for the same are needed for the safe operation of the aircraft. Similarly, aids for aircrafts to operate and navigate to their destinations are installed and operated by NACA. Majority of the important facilities are provided by modern electronic equipment. Terminal buildings, cargo/baggage handling facilities, etc., are important requirements. NACA not only has to install these facilities, but also maintain these. NACA is responsible for 72 airfields. An airfield is categorized as A, B or C, depending on the facilities available there. An important consideration for awarding category to an airfield is the time required for all the facilities to come on in an emergency such as power failure, breakdown/ failure of the equipment, etc. Important facilities are, therefore, duplicated. One system is ON and working, while the second system is on standby. The role of the two systems is changed at suitable intervals. The standby system has to quickly come ON in the event of the failure of the system that is working. The same applies to the power supply. This highlights the importance of keeping the facilities available at all times.
All the airfields in India are not under the charge of NACA. Some airfields are looked after by the Indian Air Force, a few belong to private or public sector companies and many airfields, constructed during the Second World War, are lying abandoned. Air Force officials must maintain their airfields in Al condition since the speeds of present generation aircraft and the requirements of defence operations call for airfield facilities to be available virtually without a break. This requires a high quantum of maintenance spares. The swift advances in technology, ‘especially in electronics, have reduced the chances of breakdown; at the same time, the cost of the spares has sky rocketed.
Mr. S. Rao took over as joint Secretary Expenditure, Government of India, and was disturbed by NACA’s heavy maintenance inventory. He suggested that non-moving stores be identified and was truly appalled to learn that 67 per cent of maintenance stores—totalling to 2012 type of items—had not been used during the previous 40 months. He approached Mr. U.N. Rao, Chairman, NACA, to review the situation since these stores had blocked Rs 902 crore. Mr. U.N. Rao wrote back that he could not take chances with Rs 400 to 600 crore worth modern airliners, which carried over 250 human lives. He clarified that these stores should be treated as Assurance Spares.
Mr. S. Rao met Mrs. Shashi Jam, Joint Secretary in charge of Air Force Finance at a conference and persuaded her to obtain the corresponding figures of non-moving stores for airfield maintenance for the air force. It eventually emerged that the Air Force managed 54 airfields and had 2007 non-moving maintenance spares, costing Rs 777 crore. The Air Force also suggested that these stores should be treated as Assurance Stores and not as non-moving maintenance spares. These provide the much-needed protection against stock-out during an emergency. This was extremely important since many of these spares were sourced from foreign suppliers and hence had a long lead-time.
The two Joint Secretaries got the lists of 2012 and 2007 nonmoving airfield maintenance spares from NACA and the Indian Air Force. They approached a mature, retired, senior Air Force engineer, Air Marshal Kuldip Singh, to suggest ways and means of reducing these dead inventories. Air Marshal Kuldip Singh’s analysis revealed that:

  1. 929 types of items were common in the two lists.
  2. Greater commonality could be achieved if this aspect was given due weightage while purchasing the capital systems.
  3. Indigenous development and manufacture of these equipment would automatically achieve the aim of commonality, since both NACA and Air Force will buy their requirements from Indian manufacturers. This trend was increasing very fast.
  4. Many NACA and Air Force airfields are located fairly close to each other.
  5. Facilities for ‘airlifting the stores are easily available to NACA and Air Force at their airfields.
  6. Each airfield had a main and a standby system. Maintenance spares would be required to repair the standby system. The failure rate of the current generation systems has been coming down and the philosophy of repair by replacement has minimized the repair time.
  7. Many foreign suppliers of the capital equipment have set up spares holding depots, which are open all the time in order to meet the urgent requirements of their customers.

The Air Marshal, therefore, suggested that the Air Force and NACA should set up ‘Pool Stores’. These stores should store common items, especially the non-moving maintenance spares. These Pool Stores should meet the demands of all the airfields within a radius of 150—200 km. This should result in maintenance spares being available at the airfield that requires these spares within 1 to 1.5 hours. The Pool Stores could be managed by NACA and the Air Force in the ratio of 4: 3 or by a newly-created government agency.

Recommendations made by Air Marshal Kuldip Singh were turned down both by NACA and the Air Force. It was pleaded that this concept would fail during emergencies, especially military operations, when the bombs were falling on the airfield. You have been given the powers to decide. What will you decide and why?

Question                                                                                

Q.1) Study & Analyze the case with ref to the principles of materials management?

 

CASE 4                                                                                               

The Charminar Club

(A case of scrap disposal in material management)
 The Charminar Club, Hyderabad became 50 years old on 7 January 1963. The anniversary celebrations were held on a lavish scale, though many in the staff were sorry, since? January 1963 was to be the last working day for Captain Bob Doll (Retired), Royal Navy. Captain Doll had been the Secretary of The Charminar Club for over 15 years. The staff had always worshipped Doll Sahib as their King’. There was a general understanding that the days of the old world charm must come to an end. The managing committee of the club had appointed Mr. N.G. Kavi, a chartered accountant as the new secretary. The President of the club, Mr. Raja Reddy had briefed Kavi about various things. He had stated, ‘The Charminar Club has been the prime club of the Hyderabad State and was included among the prestigious institutions in south India, The Charminar Club had affiliations with the best clubs in India, Europe and the USA. The active membership of the club was frozen at 7,400. Outstation members totalled 2,500. The club had received generous donations from the administration during the British regime and 80 per cent of the members were Europeans. This continued till the merger of the State and the formation of Andhra Pradesh. The environment of the club and the mindset of the staff were, therefore, oriented towards lavishness.
Unfortunately, financial support to the club had stopped some years ago. The administration of the club managed to survive and practice the old system for these past years due to accumulated assets of the previous years. We have now scrapped the bottom of the barrel and reality must take over. The staff is very good. They were very attached to the Captain, but are aware of our predicament. They are frightened about the unknown so must be handled with tact. It is up to you to conserve the resources, restore the financial health of the club but maintain the good name of The Charminar Club.’
Kavi was maintaining a low profile and generally walked around to get the feel of things. One night, at about 9 p.m., he was startled to see a horse-drawn cart parked in front of the back staff entrance of the library. Kavi knew that the staff of the club did not like him, so he just watched from a distance. Shortly, the cart started being loaded with old newspapers and magazines. It drove away when it was fully loaded. Security staff stopped it at the gate. The coachman made appropriate entries in the security register and drove away. Kavi checked the security register the next morning and learnt that the cart had made two trips. The entries showed that old magazines and newspapers had been taken away in the cart. Security supervisor confirmed that this usually happened once a month. Magazines older than 9 months and newspapers older than 3 months were taken out for sale. Kavi was impressed with such a clean and transparent transaction. However, his sixth sense kept nagging him that all was not well.

He waited for a month for the credit from the library for the sale of these newspapers and the magazines, but no such voucher passed through his desk. He had instructed that all credit and debit vouchers should be shown to him. The staff had ridiculed these instructions, ‘. . . after all, a Charted Accountant’. He discretely inquired and learnt that no such credit ever came from the library. These inquiries were obviously communicated to old Mr Richard, the librarian. Within 15 minutes, there was a knock on Kavi’s door. Mr Richard entered and with an elaborate show of respect, placed a neat copy in front of Kavi. The copy contained the income from the sale of old papers. It totalled to Rs 4707 for the current financial year. The sales were done by Mr. Richard and the club ‘purchaser’ (materials executive) had no involvement with these transactions. Kavi was informed that this amount was used for one picnic of the entire library staff and one set of clothes to the families of the staff on Christmas! Diwali. Mr. Richard bowed his head and almost whispered, ‘Captain Sahib knew about this.’

Kavi was stumped. The Chartered Accountant in him recalled “ the words of the President’. . . conserve the resources, restore the financial health of the Club.’ But the manager in him warned, the staff is frightened, . . . they were very attached to the Captain’. Kavi also realized that this story will be repeated in other departments too. The funds from the disposal of the scrap will not be coming to the coffers of the club. The total could add up to a substantial amount. Simultaneously, financial accountability for the sale of scrap would involve virtually the entire staff. They will further cling to the memories of the Captain and Kavi will continue to be unaccepted as their leader. What should Kavi do?
Questions

1. List the other items of club scrap (besides old newspapers and magazines) that can be sold. Estimate  approximate quantum of income from each head of scrap sale?

2. What should the new secretary do about the sale of scrap?

3. Draft a set of guidelines if Mr. Kavi chooses to regularize the sale of scrap material?

 

Group B

CASE-5                                                                                     

 Bharat Metal Works, Gwalior

(A case of mahe or buy devision in material management)

Gwalior, a town in Madhya Pradesh, India, is well connected by rail and road. Ms Shobha Talwar, a mechanical engineer from Pune, operates a medium-sized industrial unit there, called Bharat Metal Works. This unit is basically a workshop, fabricating items normally for exports against orders. The unit also has other sections such as commercial, for purchases and handling export- related formalities, carpentry shop for packing, quality assurance, stores, etc. The functioning of the industrial unit received a boost when Lalit, Shobha’s brother-in-law, joined a firm in Germany. This firm imported ferrous castings from India. Lalit suggested to Shobha to handle operations in India for this German firm. He explained that the importers often suffered heavily due to quality of the products and excessive delays in delivery schedule. Lalit argued that Bharat Metal Works could at least double its income if Shobha accepted to handle responsibilities for his firm in India. Shobha had three daughters; Malti, Meera and Mitali aged 24, 22 and 19, respectively. Funds would be needed shortly to marry these girls. This tempted Shobha to accept the proposal.

Shobha reinforced the commercial section by recruiting a senior manager, Inder Mohan, for handling additional export related tasks but decided to handle the technical tasks herself. Lalit telephoned about an order for 500 castings for a gear box as soon as he got the green signal from Shobha about her readiness. Drawings and specifications were received by FAX two days later. Shobha had 4 months to load the castings on a ship sailing from Mumbai. She travelled extensively in the northern state of Punjab to identify a suitable and reliable supplier. She was not satisfied with the results, because bigger foundries making ferrous castings were too occupied and placing an order with a small foundry would require too many trips by Shobha to ensure the quality of products. Ludhiana, where these foundries were located, was too far from Gwalior for Shobha to travel without effecting her other tasks. Shobha was almost going to quit when she chanced to meet Col. Mahesh Kumar, who had set up a foundry at Guna, a small town 30 kilometres from Gwalior. Col. Mahesh Kumar came out as a professionally competent and reliable person during Shobha’s visits to his foundry. The colonel wanted a 5 per cent higher price than that quoted at Ludhiana but agreed to deliver 500 gear box castings in 90 days. Shobha Taiwar was very happy with the arrangements and accepted the order from Lalit. A 101-paged formal order came by post from Germany a few days later. Shobha had already formalized the order on Col. Mahesh Kumar based on the telephonic talks with Lalit. Shobha was unable to read the mammoth order because she received a rather large fabrication order from France, which was to be delivered 10 days after the dispatch of castings to Germany.
Shobha’s assessment was that she would earn a clear profit of Rs 1,58,000 after allowing for all the expenses from the German order. Shobha directed Inder Mohan to go through the German order and that placed on Col. Mahesh Kumar and initiate actions for exporting the consignment. She cautioned him against any delays because she would lose 50 per cent of her earnings for every week of delay. They calculated that Bharat Metal Works will have exactly 21 days after receiving the items from Col. Mahesh Kumar and placing these on board the ship at Mumbai. Delay in deliveries from the suppliers would not hurt Shobha financially since penalties from the German company would be passed on to the colonel. It was, however, essential that there was no slip up between taking deliveries and loading on the ship.

Inder Mohan got busy with the paperwork for completing the export formalities. As soon as all the work was over, Shobha sent Inder Mohan and the Quality Assurance Inspector to Guna to make arrangements for the receipt and dispatch of the castings as only 23 days were left for deliveries. A very worried Inder Mohan reported to Shobha the following morning. It appeared that her commercial manager had not slept the previous night. Inder Mohan slowly revealed the problem. On reaching Guna, Inder Mohan had found no evidence of packing the consignment. The German order had specified crating of the gear box castings, but the colonel stated that he was only required to wrap/pack the castings in gunny bags. The foundary had placed an order for the packing material accordingly, which was due any day. Inder Mohan went through both the orders on reaching Gwalior and his fears were confirmed. There was a difference between the orders; while Col. Mahesh Kumar had been asked to pack the castings in gunny bags, the Germans had wanted these to be crated. He estimated that this will involve an expenditure of at least Rs 30,000 at the rate of Rs 60 per crate. Shobha accepted that the fault was hers and agreed to bear the expenses. But the major cause of worry was that crating should not delay the consignment and bring in penalty for delayed delivery. Shobha instructed Inder Mohan to investigate and suggest the best solution. Inder Mohan reported two days later, the following facts:

  1. Guna was too small a township and there was no possibility of the crating job being done by a local vendors.
  2. Mahesh Kumar was willing to do the crating for subsequent orders after making necessary arrangements. But he firmly declined to handle this task for the present order even if he was given additional money. He, however, offered to make space and other facilities available to an outside party for executing the task.
  3. The carpentry shop of Bharat Metal Works may be able to do the job by stretching its resources. The workers understood the difficulties being faced by the company and would rise to the occasion for their Shobha didi. The workers will have to be based at Guna and paid substantial outstation and overtime allowances. Materials will have to be purchased and taken to Guna. Lastly, the occupation of the carpentry shop with German consignment will most likely effect the crating/delivery of the fabrication order from France.
  4. The packers in Gwalior were not very keen to do the job in Guna. They submitted that they would be happy to work for Bharat Metal Works at Gwalior, but would need at least 50 per cent additional payments for the rush job at Guna. Both the contractors approached by Inder Mohan had good reputation and were confident of completing the job in time. They, however, declined to accept any penalty clause for delay.
  5. The expenses of doing the packing internally and through either of the contractor were comparable. The contractors had wanted Rs 84.05 and Rs 82.95 per crate, while in- house cost was estimated to be Rs 84.0 per crate. The contractors would do the assignment only if the order for all the 500 crates was given to them.
  6. It would be necessary to take the decision as soon as possible since the time was at premium.

Shobha spoke to Lalit and explained the position. She pleaded that as an engineer, she had not considered it necessary to crate the castings since these are made of hard material and would have to be finished in Germany. Lalit explained that the castings are very brittle and, therefore, must be crated in order to avoid damage during shipment. Shobha offered to bring down the price if the Germans would accept gunny bag packing. Lalit promised to try to get her some additional incentives if the crated consignment was loaded as per the promised delivery. ‘Delay in delivery would be viewed seriously by my management,’ Lalit had concluded.

Shobha and Inder Mohan would really appreciate your guidance. They not only have to worry about the crating of the castings for Germany but also the fabrication order from France.

Question                                                                                         

Q.1) Summarize & analyze the case with reference to the principles of material management?

 

CASE-6                                                                                                

HAMCO
A case of Integrated Materials Management
Hindustan Aircraft Manufacturing Company (HAMCO) was an old multi-product multi-location company with its headquarters in the south Indian city of Mangore. Golakh Nath Shetty, a young mechanical engineer, graduated from Manchester in the UK. He had designed a simple aircraft as his summer vacation project. This had fetched him an A plus grading and created a keen Interest in him in the aircraft design. Aircraft design and manufacture was a new subject then and young Shetty studied a lot about aircraft during his spare time. He set up a manufacturing unit in the garage of his father’s bungalow after returning to India. It was seen that this aircraft had many buyers, young rich enthusiasts, flying clubs (which were just being set up in India), etc. The year was 1943. HAMCO was thus born. Some more aircraft were produced by HAMCO. All this did not fetch much financial or commercial success for Golakh, but his reputation as an engineering genius spread far and wide. It also earned him the title of Rai Bahadur from the government.

Rai Bahadur Shetty had to soon move to a bigger estate with a runway for testing his aircrafts. The financial crunch caused due to these investments resulted in HAMCO taking up overhauling of big and expensive imported cars. The company also purchased cheap war-used vehicles, overhauled and sold these at huge profits.

Rai Bahadur built the tools, jigs, fixtures measuring devices, etc., in house. These were based on his own design and expertize. He would use items from his scrapyard for these requirements and the company learned the philosophy of never throwing away anyscrap/unwanted material. The general thinking was, You never know when this item may be needed: don’t scrap it.’ India’s independence, followed by the foreign exchange crunch resulted in exponential growth of HAMCO. This also reinforced the popular belief of preserving all the materials not presently needed. An item not needed today may prove to be a replacement for an imported item tomorrow; thus saving foreign exchange.
HAMCO started the manufacture of more complex aircrafts under licence from foreign companies. Manufacture of jet aircraft, helicopters, aero-engines, instruments fitted in the aircraft, electronic equipment needed in the aircraft, etc., followed. Plants were set up at various locations for the manufacture of these products. Rat Bahadur Shetty became an authority in aviation in India. He dropped the title of Rai Bahadur given by the British Government and was soon awarded the Bharat Bhushan by the Government of India. Unfortunately, Golakh Nath Shetty died early in 1963 and his only son Alok Shetty took over as the Chairman cum Managing Director (CMD) of HAMCO. Young  Alok was a Ph.D. in Commerce and MBA from the USA. Dr Shetty, as he preferred to be addressed, soon realized that almost 40 per cent of premium space in all the company plants was taken up by different types of stores. He ordered an evaluation and analysis of the inventory and was shocked to find that imported raw materials purchased from the principals abroad had been lying in the stores for years after the production of the main item/aircraft had been discontinued. Maintenance spares for plant and machinery alone accounted for 40 per cent of the total working capital and a very high percentage of the total inventory. Within seven months of his taking over, Dr Shetty ordered that all raw materials and components not used for over 18 months be sold. He ordered the maintenance inventory for the plant and machinery to be halved in one year and so on. There were protests from various sections of the company and maintenance departments at many places concealed the spares. This came to light and three maintenance chiefs were suspended from service. HAMCO experienced its first strike. The Government of India was forced to nationalize the company since many of HAMCO’S products were required for national defence, the public sector airlines, state governments, etc. HAMCO   was made into a Public Sector Undertaking (PSU) under the Ministry of Defence.

The PSU title helped HAMCO and it could dictate the prices to government departments and other PSUs. There was no competitor to HAMCO within the country. Imports, even when cheaper than the prices of HAMCO, were not allowed so as to conserve foreign exchange. The turnover and the profitability increased at a fast pace because HAMCO started offering products on ‘Cost plus’ basis. Additional capital had to be injected by the government almost every year to enable the required growth. Steep hike in the prices of the petroleum products, due to sudden increase in the international prices of the crude oil, changed the scene substantially. Shortly, the government started feeling the pinch. The funds were just not available. Questions began to be asked about the returns being obtained from the PSUs where huge investments had been made by the national exchequer. 1-{AMCO became very vulnerable, since the investments here were very heavy indeed. Finally, performance figures for the year 1986-87 shook the government. These were:

  1. Turnover for the year                                    Rs 634.1 crore
  2. Profits for the year                                         Rs 5.8 crore
  3. Closing Inventory, i.e. at the

end of the year                                              Rs 1346.8 crore

  1. Inventory-carrying cost per year  20%

A consultant was engaged by the government to devise ways and means to bring down the inventory. His important findings for this state of affairs were:

  1. The culture of the company from the very beginning had been to keep the scarp and unnecessary items for possible future use. This afforded some advantage when the company was small and Golakh Nath Shetty was available, to use many items from the scrap innovatively.
  2. The company has grown too fast and had not had time to adjust to the status of multi-product, multi-location company; a premium institution of the country. The employees still thought like the workers of a privately owned company.
  3. HAMCO had six production divisions, which were responsible for all the manufacturing activity of the company. Each division was headed by a General Manager or GM. Six Deputy General Managers or DGMs (or equivalent level) were in charge of different functions of production, marketing, finance, Administration and HRD, R&D, etc. They all reported to the GM. The divisions reported to the Corporate Office at Mangalore.
  4. There was no single person responsible for materials management function in the company. The con sultants noted the organizational control of the following sections:
  • Raw Materials and Scrap Stores, reported to Deputy General Manager Production, DGM-P.
  • Materials Forecasting and Planning Depts reported to DGM-P
  • Purchase (including vendor’s bill payment cell) reported to DGM-Finance.
  • Inward goods inspection reported to Chief of Quality Assurance.
  • Transportation reported to DGM-Administration and HRD.
  • Finished Goods Store reported to DGM-Marketing.
  • Production Planning Group reported to DGM-P
  • Import Substitution Cell reported to DGM-R&D.
  • Contract Manager was based at the Corporate Office and reported to the Company Secretary.

The consultant recommended the creation of six posts of Deputy General Manager-Integrated Materials Management, DGM-IMM; one in each production division. Another post of a General Manager 1MM was suggested to be set up at the corporate office in India to provide functional guidance to the DGMs being established in the productions divisions. At the first instant, DGM1MM should control the following sections:

  1. Materials Forecasting and Planning.
  2. Purchase minus the vendor’s bills payment cell. The cell will continue to report to DGM-Finance.
  3. Raw Materials Stores and Scrap Stores.
  4. Finished Goods Stores.
  5. Transportation.

Suitable chief managers from any of the depts, such as production, R&D, purchase and Stores, with a minimum qualification of an engineering degree could apply to become a DGM-IMM. If selected, they should undergo a four weeks’ training programme at the training college of the company before being promoted and appointed as DGM-IMM at a production division. A GMIMM should be recruited from outside to bring a fresh approach to the problem. A new stream of managers called materials managers should be setup. Fresh engineering graduates be recruited and trained for nine months at the company’s training college. They be thereafter posted to one of the five departments under the DGM-IMM’s at the divisions. After three years of the fieldwork, these materials managers were to be brought back for four weeks of training. At that stage, these materials managers be posted to production planning or import substitution cells. These two departments should also be shifted so as to report to DGM-IMM. The complete flow of materials from forecasting to planning stage onwards till the delivery of the finished goods to the customers should be controlled by one manager, thereby creating the structure of Integrated Materials Management. This would mean forecasting, planning, purchase, raw materials stores, flow of materials through production facilities, finished goods and scrap stores and transportation would be part of 1MM. Vendor’s bills payment and inwards goods inspection should continue to be under finance and quality assurance, respectively, so as to have some check on the purchases by independent agencies. A contract manager should be available to all the production divisions from the corporate office. This was due to the quantum of workload not justifying an independent manager at each division.

This proposal was presented by the consultant at a meeting of all the directors of the company, general managers of the six production divisions and a representative of the ministry of defence. The discussions lasted for eight hours and at times became acrimonious. The main objections to the proposals were:

  1. Additional posts were being created, which would add to
    overhead costs. Profits were already low, at about. 0.9 per cent and additional costs should be avoided.
  2. Shifting of finished goods store away from the marketing department should be avoided. It could hamper the efficient and quick supply of goods to the customers, especially those located abroad.
  3. Transportation also looked after the conveyance for personnel including senior officers’ cars.
  4. This was a theoretical concept and there was no guarantee that it would work in HAMCO and bring down the inventory pf the company.
  5. Shifting away the materials forecasting and planning, stores and production planning groups would make DGM-P jobless.

The consultant responded by stating that even a 5 per cent reduction in inventory would save more than Rs 13 crore, which is more than double of the current level of profits. DGM-IMM would be head of a function and a company employee. They can be given targets like all other managers and their performance could be monitored. DGM-P would be responsible for production by maintaining and operating all the production facilities at optimum efficiency. Finally, the proposal was accepted after some arm twisting by the government representative. GM-IMM, 6 DGMs-IMM and 30 fresh engineering graduates were recruited. Syllabi for the four weeks’ training programme and nine months’ course for the freshers were formulated and training courses started. GM-IMM and DGMs-IMM became effective at their posts in September 1987. The company set the target of bringing down the inventory by 7.5 per cent by 31 March 1988.

Question   

Q.1) Discuss the merits of the proposal of introducing the concept of IMM in HAMCO. Would you agree that the apprehensions of the participants at the meeting were correct?  Do you feel that the introduction of IMM would achieve the target of 7.5 per cent of inventory reduction in six months? Give reasons to justify your opinion.

 

CASE 7                                                                                                            

Decentralized Materials Department:

The Libra Corporation has four divisions at a location. Each division manufactures different product like washing machines, refrigerators, TV sets and control panels.

There are different purchase departments and stores for each of the product line since these businesses have grown sufficiently. However company has intentions to keep good homogeneity in the four divisions and maintain a centralized materials department. Mr. Ranade heads this department. Mainly company expects him to spearhead the activities, rules and regulations relating to the four materials departments. Mr. Ranade has common activities under his command. These are planning/ budgeting, Standardization/codification, planning common items like maintenance items and hardware items, etc. Mr. Ramanujam is looking after the planning of commonly required items. This department is coordinating needs of the four divisions. Mr. Ramanujam got the requirement of the hardware item a screw, M8 x 40 mm long, from the four divisions as follows:

Planner Product Quantity
1 Washing machine 25,000
2 TV sets 53,000
3 Refrigerator 2,50,000
4 Control Panels 40,000
Total   3,68,000

Mr. Ramanujam took action and planned for total quantity of 36800l numbers. This quantity has to be procured in 4 lots since the lead-timer for this screw is of the order of 4 wks. Each time he gets quantity of bout 90,000 numbers in the stocks and he rests happily in his chair.

The requirement of the washing machine by marketing department was doubled. One fine morning planner Mr.Varma drew extra quantity of 5t000 numbers due to production change. There was no feeling of any error from the side of Mr. Varma. He thought this I a hardware item and big stocks are in the stores.

This brought all the planners in trouble, when the stocks went down. Mr. Ramanujam came to know about the shortage of the item when Mr.Ranade called him. They came to know the real problem. About the common required items this was their experience. At times some one else draws the item for some need at their place, which do not use the item regularly, thinking that it is hardware item there  is no problem to draw it. In their day-to-day business no one feels that they must draw any item only when they have planned for it.

  • Ranade and Mr. Ramanujam had been facing this type of problem in past. The reasons as are follows.
  • The item users different than the planner. Their bosses are different, with different goals and commitments.
  • The items, which are planned by Ramanujam are of common nature. Many people need them at some or other purpose.
  • When any one is drawing the item, it is difficult to keep control/ check whether it was planned in the beginning of the year.

It was decided to find some relief for the problem by following methods.

  • The respective planner should see and authorise the material request before it is released to stores. He will verify the item is planned in the beginning.

Question

Q.1)  Discuss with en or to reduce the lead-time to almost to zero level. This can avoid the situation of the stock  outs.

 

 

CASE 8                                                                                           

Transport Corporation                                                                      
CORPORATE SCENARIO  Prof. Ganapathy Ram, the managing director of Ganapathy Ram Bus Transport Corporation, has invited Prof. Gopalakrishnan to study the company’s operations and identify the problems faced by the company with a view to suggesting suitable solutions, For this purpose, Gopalakrishnan interviewed the officials and collected relevant information from files, manuals, records, and press briefings, a summary of which is presented below.
The central government, realizing that the transport industry should help achieve the laudable national objectives, enacted the Road Transport Corporation Act in 1950. By this act, each state has been asked to establish its own road transport corporations as a state government undertaking. The present major objective is to provide adequate, economic, efficient and well-coordinated transport services to the travelling public and at the same time ensure that the operations are run on sound commercial lines. Till 1950, the passenger transport industry was concentrated in the hands of a few private operators, whose only object was to make profit. But the state transport undertakings have been set up to open up communications and thus contribute to the development of backward/tribal/hilly regions of the state.
Ganapathy Ram Bus Transport Corporation has a fleet strength of 12,500 buses organized into 15 divisions. This accounts for about one- tenth of the fleet strength in the entire country. The number of buses in this corporation has been gradually increased due to availability of financial assistance from the government in the past. One division caters to the needs of the state capital, with about 2000 buses and each of the remaining divisions handles about 1000 buses. Over 2000 vehicles are more than eight years old and hence rickety, dilapidated and scheduled for scrapping; buses have been purchased during the last three years and the remaining buses have been working between there to eight years.

Half of the fleet consists of Tata diesel vehicles and the other half is from Ashok Leyland. To enable greater control on operations and inventory, seven divisions operate exclusively with Tata vehicles, leaving remaining for the other divisions. Each division has been organize into 7 to 10 depots and in all, the corporation has 125 depots — spread throughout the state. The total route length is about six lakh kilometres and during the last year about 80 crore kilometres have been covered by the buses of the corporation. Complete nationalization of all the buses in the state is yet to be achieved and this may involve an expenditure of Rs. 30 crores — half of which could be borrowed from the central and state government organizations and financial institutions, while the balance is to be found internally within the organization’s depreciation/reserves fund. The company employs nearly 60,000 persons, which includes 2,000 officers.
Even though the company has two models of vehicles, the manufacturers do not make any advance commitment of change of models to the road transport corporations. According to the senior officials, the models are changed by the manufacturers periodically, without caring for customer’s economies of continuing the existing models and ensuring the supply of spares for old models. This results in difficulties in standardization and cost reduction in the organization.

CORPORATE STRUCTURE

The company’s board of directors is headed by a part-time chairman. Professor Ganapathy Ram, the vice-chairman and the managing director — a senior Indian police service officer, is the chief executive of the organization. The board also consists of three full-time directors in charge of operations, finance and personnel. Besides, four senior officials of the state government and four politicians form the part- time members of the board. The board gives broad policies in its quarterly meetings. The operations director, is in charge of routing, traffic, cost control, performance of divisions, purchase, stores, maintenance workshop, safety, civil works, mechanical engineering, industrial engineering and quality control. The finance director is in charge of money management, capital investment decisions, account. ing, electronic data processing, financial control, and strategic planning, source and application of funds, costing and other conventional finance functions. The personnel director is in charge of selection, recruitment, training, promotion, grievance handling, suggestion schemes, canteen, administration, labour welfare, union matters, industrial relations, legal aspects, public relations, etc. The company has a fourth generation computer which is used by all sections. Weekly coordination meetings are held at different levels in the headquarters, divisions and depots to ensure a smooth working of all departments.

Each division is headed by a general manager and each depot is looked after by a depot manager. All divisional headquarters and all depots have a workshop and a store each. At the state headquarters, there is a well-equipped central workshop under the control of a general manager. The general manager, purchase. and stores, in the headquarters reports to the director operations. The main operations are carried out by divisional general managers and depot managers and are supported by functional specialists at the headquarters.

CORPORATE STRATEGY

According to the managing director, the complexity of the road transport industry stems from the extremely perishable nature of the final product, namely seat kilometre. It follows, therefore, that the supply and demand should be perfectly matched, in order to reduce waste, which is to be the goal of the corporation. In order to ensure that the demand does not go uncatered for, planning the route timings, an economic fleet-utilization and upkeep of healthy fleet are the major prerequisites for the undertaking’s success, according to the managing director. The fleet can be healthy if the materials that go into it are available when required, are of right quality and at the same time reasonably priced.

The corporation has been making losses, while a few private operators still make substantial profits. The average earning per kilometre is Rs.-5.80, whereas the expenditure per kilometre, including wages, fuel, tyres, spares, maintenance, depreciation, interest, etc. is six rupees. The cost of operation has started going up in the recent past, due to price increases in fuel. Added to the high oil prices, the cost of us bodies, chassis, tyres, and other spares have registered steady creases, approximately by 100 per cent in the last three years. Trade union activities have also intensified due to general inflationary conditions, in spite of declining profitability owing to political and labour pressures, wages have been periodically enhanced and the statutory bonus is being paid. The present wage of the lowest paid worker is about Rs. 1000 per month.

In order to eliminate the leakages in revenue collections, a five per cent incentive on daily ticket sales is paid to the bus crew. The social responsibilities, without bothering about the financial viability, that have to be home by Ganapathy Ram Bus Corporation include the following: (a) concessions to school children, journalists, politicians, policemen, government employees, handicapped persons and other stipulated categories of persons; (b) operating loss-making city services and providing connections to rural/tribal/hilly/backward areas; (c) maintaining the services during monsoon, when volume of traffic is low; (d) purchasing material from small-scale units located in the state, with high price and low quality.
Increases in the fares to compensate for the higher expenses, however, need the approval of the state government. When some elections are always around the corner, for fear of political repercussions, the state government has been reluctant to increase the fares. To make matters worse, the taxes to be paid to the state government have doubled fi the last five years. During political agitations, particularly in sensitive areas, every year a few buses are burnt by the infuriated mob. Occasional pilferage—in -diesel and ticket collections has also been report’d. The pollution control board has also drawn the corporation’s attention to the noise and smoke in the buses.
Out of the 35,000 kilometres of the national highways, only 2000 ) kilometres pass through the state and are maintained excellently by the centre. The state highways and urban roads, even though blacktopped, are full of pot holes and uneven. Buses also have to pass through roads without black top, feeder roads, kutcha roads linking villages, etc. which constitute more than 50 per cent, and it will be very difficult to negotiate these roads in the monsoon season. The culverts on some of the canals are so weak that the buses have to crawl. Due to road-building repair activity, diversions, which are permanent in nature, are to be used.

The urban passenger pays subsidized fare in the city areas. Similarly, the rural agricultural labour always agitates whenever slight increases are introduced in the subsidized fare. The urban commuter blames the organization for not providing shelters, while he waits for the bus. Due to appalling road conditions, heavy overloadings, poor driving habits, use of spurious spire parts and inadequate skills of maintenance, there are always problems of off-road vehicles requiring spares for repairs. The depot managers are primarily responsible for meeting the transportation demand in a geographical area and are usually preoccupied with social/political pressures to increase the frequency of services, particularly in marriage seasons and summer holidays. Added to this, the operating staff consists of barely literate workers of agricultural origin who are seldom amenable to proper work discipline. The threat to industrial peace is never absent.

FINANCIAL STRATEGY

The finance director, while agreeing with the role played by transportation in the development strategy of the state, however, has pointed out that the demand will be very low in hilly terrain, forest areas, backward regions and monsoon seasons, necessitating the fares being heavily subsidized, for economic viability. The poor road conditions adversely affect the  fleet performance. He has also pointed that to build one kilometre of a new pucca road, it costs the exchequer rupees one crore, and no department in the state is interested in improving the road conditions.
The finance director has felt that the continuous loss in the corporation affects the morale of the employees of the organization. The loss in the major city transport system of the corporation alone works out to about rupees three lakh per day, whereas the fare revenue contributes only 50 per cent of the operating cost!

Suggestions for using aluminium body or long-lasting, light stainless steel body, realignment of some routes, use of natural gas instead of fuel oil, etc. have been examined as possible strategies for better. viability, but these could not be implemented on a commercial scale, The introduction of a split-shift system of working instead of a continuous eight hour shift in urban areas, also has not brought the desired results and there has been resistance among the crew, who have been pleading for a reduction in working hours and better standards of living. Further, the politician members in the board of directors at times interfere with the recruitment o personnel, purchase of materials, transfer and promotions.

While discussing the strategy, the managing director has often been wondering whether to regroup the activities, as in TamilNadu, into small road transport corporations of a fleet of 1000 buses each. He has also been toying with the idea of suggesting to the board to hand over the heavy, uneconomical feeder routes to private parties. He is also thinking of diversifying to other areas, like freight traffic, manufacture of spares, etc. He is very keen to develop operational indices for each depot, based on (a) market potential, (b) present market efforts, (c) economic viability, (d) maintenance/safety, breakdowns, (e) morale of labour, (f) daily kilometre per bus, (g) earnings per seat, (j) contribution by each bus/route, (i) fleet performance, profitability etc. in order to streamline the overall effectiveness. The managing director has been thinking of buying some new buses, after scrapping 500 old buses, which have put in ten years or more of service. He felt a new bus would cost less on maintenance, compared to a ten year old bus. A new bus would have less frequent breakdowns and would consequently be on the road for a much longer period than the old bus at a cheaper operational expense. It has also been pointed out that most private operators find it cheaper and more economical to dispose of buses after six years and replace them with new vehicles. This provides them with the maximum income, reduced operating costs, a good resale value, less cost of service and a better public image.
From the economic investment point of view, it is obvious that the capital investment on an asset should, during its lifetime, earn not only its running expenses, but also its maintenance, repairs, depreciation charges and interest on the capital. The series of returns which the asset gets during its life must compensate for all those expenditures and should earn higher than an investor could get at any place. Secondly, these economics have nothing to do with the efficiency of an asset from the engineering point of view. The price of a new bus is around rupees five lakh, which can be depreciated in three to four years period. In its effective life, the bus is engaged to earn a constant net maximum return, after allowing for the relevant cost of operation. After the fifth year, the return would show a downward trend, when the maintenance and repair cost would increase about two-fold. The bus is likely to be overhauled after 30 months or after two lakh kilometres. The managing director is keen to raise the capital needed for buying the buses through public bonds, bank loans, rural credit corporation loans, World Bank loans, non-suppliers loans from private sector parties, etc.

The State chief minister, while inaugurating a new divisional headquarters of the corporation in the state, has appealed to the corporation to extend its services to reach all corners of the state. About 70 per cent of the population of the state lives in villages and about 30 per cent of villages is yet to be connected by bus routes, according to him. He has further emphasized that the development of backward areas can be expedited only if punctual, reliable, safe, regular and comfortable bus services could be provided to link all villages adequately., in a time-bound fashion, particularly before the next elections. The chief minister has also exhorted the corporation to complete the task of nationalization of buses in the next few years.
The state transport minister and some board members feel that the cause of inefficiency and accumulated losses of the corporation is lack of commitment, discipline and delegation. He has suggested that the corporation be spilt into ten independent self-sufficient profit making organizations, following the TamilNadu pattern. The managing director is conscious of the need for some drastic changes, but feels that the time is not yet ripe for dividing the corporation into separate entities. He is keen that ways must be found to avert the present crisis. But the minister for transport wants to gain publicity by a dramatic announcement of splitting the corporation into ten cohesive units in the last session of the legislature before the next elections.
MAINTENANCE POLICIES
Over 2000 buses of the corporation are more than eight years old and are scheduled to be scrapped. About 500 buses on the road are more than ten years old. In view of the stringent financial situation, the scrap kilometre limit has been raised a year ago, from the desirable six lakhs kilomefres to eight lakh kilometres. The old buses consume more spare parts and give inefficient service. Hence, the challenge to the maintenance staff has been tremendously increasing, while the burden on maintenance ha doubled because of flogging the bus and no extra staff has been provided to meet the challenges in main tenance systems. Even the existing staff norms in maintenance are being scaled down to effect more economy on personnel! Inadequate maintenance has resulted in cancellations, unpunctuality, and breakdowns in the middle of the road, thereby affecting the image of the organization. Sometimes, the drivers exceed the prescribed speed limit, resulting in more wear and tear.
A general manager, maintenance, reporting to the operations director is in charge of the overall maintenance and the central workshop in the headquarters. He is assisted by a group of five maintenance engineers on various special activities such as mechanical, civil, electrical, etc. These maintenance engineers located at the divisions periodically visit the depots. Ten mechanics are attached to each depot. All maintenance engineers have been trained in various plant engineering concepts.
The preventive maintenance system expects the spares to be checked and replaced before they cause breakdown. The day-to-day maintenance is carried out by fitters and mechanic’s attached to the depots/divisions. A set of tools is carried in the bus for rectification of very minor defects. Minor repairs are attended to at the depot level; for major repairs, the defective assembly/module is replaced by a fresh assembly from stores, or through the cannibalization of standby buses in the depot/division. The defective assembly is then sent to the central workshop for rectification. The central workshop has facilities for overhauling, heavy repairs, electrical repair, heat treatment, tool repair, foundry forgings and reconditioning. After two lakh kilometres or 30 months’ running, the engines are completely overhauled in the workshop. The overall maintenance expense works out to Rs. 1.50 per kilometre, half of which is accounted for by spare parts alone. Maintenance job history cards for each bus are slowly being introduced and there are plans to computerize them in the future. The engineers also admit that the maintenance function needs improvement, as there had been two major accidents in the recent year.
A few maintenance engineers have complained about the poor after- sales service and that during the guarantee period by the vehicle manufacturers. The maintenance engineers claim that they spend a lot of time in identifying the indent status, follow-up, etc. They also complain that due to faulty planning of central purchase, spares intended for one depot are sent to another. Non-availability of correct quality spares is a common cause for delays in repairs in depots. Another complaint is that some retired defence personnel and MBAs have joined the organization. The political members of the board sometimes interfere with recruitment of personnel, transfers, promotion and purchase of materials.

SPARES INVENTORY
It is generally said that an aircraft is a combination of spare parts flying in formation — a bus is no less, if operating on the surface. Almost each part has a life of its own and is affected by the conditions of wear and tear, unless the defective part is replaced by a new one, it may give way and result in a possible breakdown. The fixed cost for holding a bus from plying the route, or the stock-out cost, has been estimated as Rs. 5000 per day. This is the loss if a breakdown results in the non-operation of a bus for a single day. The stock-holding charges, including storage charges and capital cost, is 30 per cent per annum. Major tyre companies have opened their depots near the central stores. The ordering cost per order works out to Rs. 750 per order. The total inventory in the organization, other than fuel is about Rs, 20 lakh, while the annual consumption is about Rs. 50 crore, comprising 25,000 items. Rupees ten crore worth of non-moving items and rejected items worth a similar sum are lying in all stores.
A ten-digit codification has been introduced with the last digit serving as check digit. But according to materials executives, the maintenance people indent only by part numbers, like V-belts manufactured by Fenner India Ltd. According to the materials department, the company faces typical spare parts problems as faced in other organizations. In some categories of spares like piston, thin wall bearing, etc., acute shortage is experienced due to lack of good manufacturers. The materials officials are not sure as to how much of spares could be centralized and how much decentralized in the organization. The traditional ABC categorization has been done; A items with annual consumption of more than rupees one lakh, are kept in the central stores, B items with consumption above Rs.10,000 in division stores, and C items below Rs. 10,000 in depots. One super A item, accounts for 20 per cent consumption in the fuel oil, for which arrangements have been made with the Indian Oil Corporation and one week’s stock is kept. The stock level of lubricants and tyres are maintained at about one month’s level and monitored periodically. The buses also carry tool kit and emergency items on an imprest basis. It is aimed to have a maximum stock level of three months for A items and six months for all other categories, including critical items.
The spares which are generally required for the purpose of reconditioning of assemblies, building bus bodies, etc. are stocked in the central stores, where such activities are carried out. All items pass through the central store for accounting purposes. The surplus material held by the divisional stores is also sent to the central stores, which is to be redistributed to the needy divisions in future. The type of maintenance carried out at the depot level is only to the extent of daily and weekly maintenance, consisting of oiling and greasing, engine oil change, docking of vehicles and day-to-day service repairs. The spares required for such purposes are kept at the depot level and the vehicles are serviced after about 10,000 kilometres. At the divisions, replacement of major assemblies like engine/starter/dynamo! fuel injection pump, 30,000 kilometre docking and reconditioning minor items are taken up and all necessary spares for the same are maintained at the divisional level. The central workshop does major repairs like body building/reconditioning, overhauling of vehicle bodies! assemblies/engines/fuel injections/pumps/starters/dynamos, retreading tyres and adequate spares are maintained there.
In addition to the scheduled preventive maintenance inspection, top overhauling of engines is required to be done, after 30,000 kilometres for new engines and after 60,000 kilometres for old engines. Vehicles are scrapped only after 15 years presently, due to the financial constraints. It has not been possible to forecast the exact requirement of spares in view of non-availability of data. In view of heavy expenses and lack of staff, records on the consumption of spares vehicle- wise and assembly-wise are not available, and hence it is difficult to estimate the future consumption of spares. As a result, when purchase is effected on the basis of previous year’s consumption, sometimes there is an acute shortage if more spare parts become due for replacement in the following year, and sometimes there is an excess if fewer parts become due for replacement. The consumption also fluctuates due to varying quality of spares, as facilities for testing the metallurgical quality of spares is not available in the company.

PROCUREMENT METHODOLOGY
Ganapathy Ram Bus Transport is a member of the association of the State Road Transport Undertakings in Delhi and enters into rate contracts with spare parts manufacturers. The rate contracts are signed after the testing of samples in the laboratories of the association, and the quality and price are negotiated. Deviations from the rate are done, only in emergency and crisis situations. As far as possible, preference is given to buying the spares from the original equipment manufacturers, while taking purchasing decisions. There have been several instances where the original equipment manufacturer is unable to supply as he has stopped manufacturing the item.

In view of the large number of tyre manufacturers, the corporation has been expecting a good competition in the tyre industry. But very recently, a cartel was formed, which denies the advantages of competition and has been dictating terms to bulk buyers, like the Association of State Transport. Further, the local joint sector springs manufacturing company has been turning out substandard material and is exercising powerful political influence to palm off its substandard products on the Association of Transport Undertakings. The association, however, has made representations to allow imports in these two categories of items. The government has constituted a committee to go into the question of manufacturing, pricing and ready availability of auto spared.

The general manager, materials reporting to the director, operations, is the competent authority of the corporation for all purchases. There are 10 officers and 20 other category staff in the central purchase. He is also in charge of the central stores and the central workshop and controls the same with adequate staff. The general manager, materials has powers of up to rupees one lakh per item, but his authority is subject to the approval of the finance department. The purchases are mostly by limited tenders and finalized by a committee consisting of user, finance and purchase. The director, operations has powers of up to rupees one million per order. All capital machinery is purchased by the hoard. The board also purchases other items within a maximum of rupees one million. Advertised tenders are resorted to only when necessary. Emergency powers have been given to the field staff in exceptional cases. Indents are prepared by the stores, divisions, depots and sent to the materials department. Procedures for indents, budgets, placing orders, lead-time budgets, follow-up, inspection, pre-qualification of suppliers, etc. have been specified in the materials manual prepared about five years ago. The general manager, materials constitutes a committee with the other general managers before placing an order. The lead-time of placing an order is six months and the total lead-time goes up to one year. One month is required for the preparation of indents and estimates by divisions, one month for consolidating the requirements, four months for purchase departments’ activities for placing the order and follow- up and the remaining time for external lead-time.
The depot manager can ratify any expenditure incurred in the purchase of spares parts and their powers extend up to Rs. 1000 per bus per year. For the divisional manager, this emergency power is Rs. 5000 per bus per year. This implies that the division can incur an expense of only about rupees five million over and above supplies from the central materials department, subject to the condition that there is a nil stock certificate from the central stores or an emergency. However, the divisional managers feel that the materials department is insensitive to the operating environment and play safe by hiding that local powers have been delegated, primarily to tide over unforeseen gaps in supply and operational fluctuations. But the line managers feel that the job of the materials department is to provide
the required quality materials at the right time to the operational units. Resorting to increased local purchase is a direct reflection on the inefficiency of the materials department. Some of the line managers feel that complete decentralized purchase will wind up the materials departments. It is the line managers, not the inefficient materials department, who are questioned for the losses due to non-operation of the fleet. Further, the material bought by line managers from the open market to meet the crises, is overpriced and of inferior quality. In their anxiety to put the fleet on the road, they may overlook some procedural aspects, like getting three quotations for the same item, perhaps from the same typewriter; but they complain that the audit does not take any such lapse kindly.

Questions:-

Q.1) Summarize and analyze the above case with reference to the principles of material management?