PROF.

VINAY PANDIT

PURCHASING AND PRODUCTION SCHEDULING

In the supply chain management the inbound logistics system is frequently referred
to as material’s management and the outbound system is usually called physical distribution.
The integration of the inbound and outbound system is extremely important to the efficient
and effective management of the logistics supply chain.

Materials management involves the planning and control of the flow of materials that
are a part of the inbound logistics system. It includes the following activities: Procurement
(or purchasing), Warehousing Production planning (or scheduling), Inbound transportation
Receiving materials. Quality control, Inventory planning and control all Salvage and Scrap
disposal.

PROCUREMENT OR PURCHASING

Procurement or purchasing which is also known as supply management encompasses

any activity involved in moving goods into a firm. It aims at anticipating requirements,
sourcing and obtaining supplies, moving supplies into the firm and monitoring the status of
supplies as current asset.

ROLE OF PURCHASING IN LOGISTICS MANAGEMENT

Logistics spans both inbound and outbound relationships and flow of materials.
Effective Procurement of goods and services enables an organization to achieve competitive
advantage. The procurement process links members in the supply chain and assures the
quality of suppliers in that chain. The quality of materials and services which are inputs to
the production process affects the quality of finished goods which in turn affects customer
satisfaction and revenue for the firm and its profitability. Since cost of inputs is a major cost
in many manufacturing firms, Procurement function acts as a determinant of revenues, costs
and supply chain relationships. Purchasing is the act of buying goods and services for the

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firm in the narrow sense, while Procurement consists of all those activities necessary to
acquire goods and services consistent with user requirements. Procurement has a strategic
importance in the value chain because it includes activities such as qualifying suppliers
procuring various types of inputs, and monitoring supplier performance. As such,
procurement serves as a vital link between members of the supply chain.

Purchasing is important to a firm because of two reasons: (i) cost efficiency and (ii)
Operational effectiveness. Purchase managers have a major responsibility of safeguarding
the financial interests of their firms by economizing on the cost of purchased goods and
services thereby creating a competitive advantage for their firms. Efficient purchasing
optimizes inventory holding and avoids production stoppages (due to shortages of materials)
thereby maintaining operational effectiveness of the firm.

The role of purchasing in the supply chain is illustrated

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Purchasing Activities: In earlier days, purchasing was looked upon primarily as a

service function, having responsibility to meet the needs of the manufacturing or other
internal functions for which it buys. This was a narrow perspective limiting the contribution
that purchasing could make to the firm. Nowadays purchasing focuses on getting the right
product or service to the right place at the right time - in the right quantity, in the right
conditional or quality and from the right supplier at the right price the internal customer
decides what is right at each step and purchasing ensures that the internal customer’s
expectations are met. However purchasing has the responsibility to keep the Operation of
the firm running smoothly by ensuring a reliable source of supply at the lowest total cost.

PROCUREMENT (OR PURCHASE) PROCESS

The purchasing function has gradually evolved. As organizations increasingly

outsource many activities and introduce automation the money spent on purchases increase
as compared to expenditures on labors. Hence purchasing activity is receiving more and
more attention.

Because of the advancement in computer and information technology many routine

purchasing activities such as purchase order placement expediting matching documents and
calling to check stock have either been eliminated 0r arc now possible on-line with
electronic data interchange.

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The following figure illustrates the procurement process.

The activities involved in the procurement process are briefly discussed in the
following section.

a. Identify (or reevaluate) need: The procurement activity is usually initiated in response
to a new or an existing need of user. In some instances existing needs may have to he
reevaluated because of change in them.

b. Decides and evaluate user requirement: The requirement to satisfy the identified need
must be defined in measurable terms. For example the technical specification must be
established so that the procurement professional can communicate the same to potential
suppliers.

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c. Decide whether to make or buy: The firm should first decide whether to make or buy
the product or service to satisfy the user's needs. Even to make a product the firm may
have to purchase some inputs from outside suppliers (for example. raw materials or
components).

d. Identify the type of purchase: Three types of purchases are: (a) straight buy or routine
purchase, (b) modified rebuy which requires a change to an existing supplier or input, (c)
new buy which results from a new user need.

e. Conduct a market analysis: Market analysis will help the buyer to determine the
number of suppliers available in the rt1arketand to decide the method of buying viz
negotiation Competitive bidding and so on.

f. Identify all possible suppliers: All possible suppliers that might be able to satisfy the
user's needs must be identified. Possible new suppliers maybe included in the list of
potential suppliers.

g. Prescreen all possible sources: Prescreen reduces the number of possible suppliers to
those that can satisfy the user's demands. (Demands for a product or service are those
Characteristics that are critical to the user) whereas desires arc those that arc not so
critical and are negotiable.

h. Evaluate the remaining supplier base: From the pool of suppliers that can meet the
user's demands, choose the supplier or suppliers that can best meet the user's negotiable
requirements or desires.

i. Choose a supplier: The actual choice of the best supplier is based upon criteria to be
discussed subsequently such as quality reliability total required price and so on.

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j. Receive delivery of the product or service: This activity occurs with the first attempt
by the supplier or suppliers to satisfy the user's needs upon completion of supply. The
performance data regarding the supplier or suppliers is generated to be used for
evaluation of the supplier or suppliers.

k. Make a post purchase evaluation: The supplier's performance must be evaluated to

determine whether it has truly satisfied the user's needs. If the supplier's performance did
not satisfy the user's needs, the causes for this variance must be determined and proper
corrective actions implemented.

OBJECTIVES/GOALS OF PURCHASING:

The overall objective/goal of purchasing is the efficient acquisition of products or

services. This requires the right materials, in the right quantities, in the right condition, at the
right time, from the right source, with the right service, and at the right price (referred to as
the seven 'R's of purchasing) Purchasing is expected to accomplish the fol1owing.

a. Provide an uninterrupted flow of materials, components, Suppliers and services for the
Smooth operation of the firm.
b. Minimize inventory investment and inventory costs.
c. Maintain adequate quality standards in the purchased items.
d. Develop or find competent suppliers.
e. Purchase the required items at the lowest price.
f. Improve the organizations competency in the market.
g. Coordinate with the department and make harmonious relationship.
h. Accomplish the purchasing objectives at the lowest possible administrative costs.

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ROLE OF PURCHASING IN TOTAL CUSTOMER SATISFACTION

Traditionally, purchasing has been separated from the firm's final customers or end
users. However, customer satisfaction is directly affected by the receipt of high quality,
reliable goods and services on a timely basis at a reasonable cost. The following figure
illustrates the effect of supplier performance on total customer cost.

The quality of goods and services a firm provides its ultimate customers cannot he
better than what it receives from 1mits suppliers. Any delay in supply of inputs to the firm
from its suppliers or any quality problem in the inputs will affect the operations of the firm
unless the firm carries higher inventory. An increased inventory will increase the cost of
production and hence that of the product produced by the firm. Hence, it is important that

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the purchasing professionals understand the needs of their firm's customers so that they can
make the "right" decisions to meet the firm's needs.

STRATEGIC ROLE OF PURCHASING

Purchasing has a strategic role to perform activities related to sourcing in a way that
supports the overall objectives of the firm. Purchasing can support the firm to achieve
strategic success through its key role as one of the firm's boundary-spanning functions.
These functions are as below:

a. Access to external markets: Purchasing can establish and maintain contacts with the
supply market and can gain vital information about new technologies, potential new
materials or services, new sources of supply and changes in market conditions. This
competitive intelligence gathered by purchasing can be communicated to the top
management of the firm so that the firm's strategy can be reshaped to take advantage of
the market opportunities.

b. Supplier development relationship management: Purchasing can help support the

firm's strategic success by identifying and developing new and existing suppliers.
Purchasing can help in getting suppliers involved in the development of new products
and services or modifications to existing offerings which can reduce new product
development cycle of the firm. This compression of time - getting to market quickly with
new ideas - can be vital to the success of those ideas and it also helps the firm to retain
its position as a market leader or innovator.

c. Relationship with other functions: Almost every department within the firm relies on
the purchasing function for some information or support. Purchasing role ranges from a
support role to a strategic function. Purchasing will be taking part important decisions of
the organization as long as it provides value to other functional areas. Being well
informed permits purchasing function to better anticipate and support the needs of other

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functional areas. Purchasing and logistics need to work closely in coordinating inbound
logistics and associated material flows.

MANAGING THE PROCUREMENT PROCESS

A four step approach can be used and adapted to a firm's particular needs of
managing the procurement process. These steps which can be used to maximize
effectiveness of the procurement .process can be as follows:

a. Determine the type of purchase: Identifying the type of purchase is the most complex
activity in the entire procurement process. For example, a straight rebuy situation will
mean that all the procurement activities were completed previously when the purchase
was either a new buy or modified rebuy.

b. Determine the necessary level of investment: Two major types of investment required
in the procurement process arc (i) time and (ii) information which arc expended by the
individuals involved in purchasing. When the purchase is a new buy more time must be
spent on it and both internal and external information may be required. More
information is needed for more complex and important purchases. The levels of
investment necessary in the procurement process can be determined by determining the
type of purchase. The investment needed in terms of time and information must be
adequate to meet the user's requirements.

c. Perform the procurement process: It includes performing those activities necessary to

effectively make a purchase and satisfy the user's requirements. The procurement
professional collects data on the time and information actually used in making a specific
purchase.

d. Evaluate the effectiveness of the procurement processes: This step involves finding
answer to the following two questions: (a) were the user's needs satisfied? And (b) Was

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the investment necessary? If the procurement was not effective, the cause could be
traced to inadequate investment or not performing the proper activities or mistakes made
in performing some of the activities. The manager must determine why the procurement
process is not effective and take appropriate corrective actions to ensure that future
purchases will be effective.

SUPPLIER RELATIONSHIP

A key factor in achieving efficiency and effectiveness in implementing the

procurement process is the development of successful supplier (vendor) relationships.
Developing strong supplier relationships is crucial to create and sustain a competitive
advantage in today's global market place. When vendors are partners, firms tend to rely
more upon them to provide input into product design, engineering assistance. Quality
control and so on.

Vendor Selection Criteria – The following figure illustrates the vendor selection criteria

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These factors considered in vendor selection are briefly discussed in the following section.

1. Quality: It is the most important factor in vendor selection. Quality often refers to the
Specification that a user desires in an item such as technical specifications, chemical or
physical properties or design. The actual quality of a vendor's product is compared with
the specifications desired by the user, other additional factors related to quality are: (a)
life of the product, (b) Ease of repair and maintenance, (c) ease of use and (d)
dependability.

2. Reliability: It comprises delivery and performance history. Consistent en-time deliveries

are required to prevent production shutdowns resulting from extended supply lead times.
The performance life of the product such as a machine or equipment and the vendor's
warranty and claim procedure are considered as part of a reliability measure.

3. Capability: This is concerned with the potential vendor's production facilities and
capacity, technical capability, management and organizational capabilities and operating
controls. These factors indicate the vendor's ability to supply materials of needed quality
and quantity in a timely manner. The vendor must demonstrate this capability
consistently over an extended time period.

4. Financial consideration: This includes the price charged by the vendor and the vendor's
financial position. (i.e., financial stability). Financially unstable vendors pose possible
disruption in the long-run continued supply of materials.

5. Desirable qualities: These factors may be desirable but not essential. One such factor
that affects vendor selection decision is vendor’s attitude. Also, the impression or image
that the vendor project has a similar effect on vendor selection. Training aids, packaging
and availability of repair service are the other desirable qualities that affect vendor
selection decision. The geographical location where the vendor is located affects the
transportation cost. Other factors include (a) Ability to fill rush orders (b) Meet deli very

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dates (c) Provide shorter delivery lead-times and (d) Utilize greater vendor-buyer co-
operation and so on.

The relative importance of the vendor selection factors will depend upon the material
the buyer is purchasing. For example: When a buyer purchases a computer technical
capability and training aids may be more important than price, delivery and warranties.

Procurement Price or Cost: Of all the factors that will be considered in the vendor
selection decision, price or cost is one significant factor that is widely discussed by
purchasing professionals.

Sources of Price: Four basic procedures used 10 determine potential vendor's price
are: (a) Commodity markets, (b) price lists. (c) Price quotations and (d) negotiations.

For the buyer, the total procurement price is more than just the basic price. The
following figure illustrates the components of total procurement price.

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Basic input cost: In the primary price of the product or materials as paid by the
buying firm. This price is sought by buyers by bidding, negotiating or in requests for quotes.

Direct transaction costs are the costs of detecting. Transmitting the need for and
processing the material flow in the process of acquiring the goods. It includes the process of
detecting inventory need, requisition, placing the order, receiving order acknowledgement,
and handling shipping documents etc.

Supplier relationship costs are the costs of creating and maintaining a relationship
with a supplier. These include travel: supplier education, traffic engineering research and
product development in both firms.

Transportation Costs: Two key cost aspects of the inbound transportation flow are:
(i) the actual transportation cost and (ii) the sales/FOB terms. Four transport options are:
supplier - selected for - hire carrier or private carrier and buyer selected for - hire carrier or
private carrier. The sales terms define the ownership of the firm during transportation as
well is invoice payment requirements.

Quality control costs include the cost of conformance, non-conformance, appraisal

and ultimate use costs.

Operations/logistics costs include four key areas: (a) Receiving and make-ready
costs. (b) Lot - size costs. (c) Production costs and (d) Logistics costs. These four key areas
are briefly discussed in the following paragraphs. Receiving and make-ready costs are the
costs of those flow activities that occur between the inbound transportation delivery of a
good and it availability for me in production processes, the costs considered arc cost of
unpacking, inspection, Counting, Sorting, grading, removing and disposing packaging
materials and moving the good to the point of use. Lot-size costs directly affect space
requirements, handling flow, unit price and the related cash flows (i.e. cost of inventories).
Production costs arc affected by quality of raw material nature of production processes etc.

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Logistics costs arc cost factors which are affected by product size, weight, volume and
shape and their resulting impact upon transportation, handling, storage and damage costs.

Other Materials-Management Activities

The materials management activities other than procurement arc: (i) Warehousing, (ii)
Production planning and control and (iii) Transportation. (iv) Receiving. (v) Quality control.
(vi) Salvage and scrap disposal.

Warehousing: This function is concerned with the physical storing of raw materials and
other parts and components until they are used. Storage of raw-material and storage of
finished goods differ in terms of the type of facility each requires, the value of items stored
and the perish ability of the product. Raw materials such as coal, sand, Iron ore, or limestone
normally are stored in open-air warehouses and the warehousing cost will be lower than that
of finished goods and components. Value of raw materials is usually lesser than that of
finished goods. Also basic raw materials are less susceptible to damage and loss as
compared to finished goods.

Production Planning and Control: This function involves coordinating product supply
with product demand. The following figure illustrates production planning and control.

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Transportation: The transportation function is concerned with the inbound transportation

of materials. It originates with the material suppliers and ends in the buyers premises.
Transportation provides time, place and possession utility to the buyers. Transportation
manager must decide about the mode of transport, the routes, the freight rates, claim
handling, carrier service, cost analysis and regulation.

Receiving: This process involves the actual physical receipt of the bought-out material from
the transport carrier. The receiving stores person compares the materials indicated on the
buyer's purchase order and the supplier's packing slip with the material the buyer has actual
received. The materials received are examined for any physical damage.

Quality Control: This function attempts t0 ensure that the items a firm receives arc those
the firm ordered. However the quality control function is directly concerned with defining
the product's quality in terms of dimensions, design specification, physical and chemical
properties reliability, ease of maintenance, ease of use etc.

Salvage and Scrap Disposal: It is the last activity in the materials management function
involving disposing of wastage, scrap and obsolete materials. The scrap and salvage
materials which can be recycled are sold, thereby earning some income to the firm, whereas
certain scrap materials which cannot be sold must be disposed of in a safe and prescribed
manner. (Example: hazardous, toxic, corrosive materials).

PRODUCTION SCHEDULING

Production scheduling determines what will be produced and shipped when.

Scheduling is affected by marketing, human resource management, finance, accounting and
integrated logistics. Sales, forecasts help to schedule production and co-ordinate material
flow into, through and out of a production facility. Integrated logistics deals with
production, scheduling in the area of inventory control for MRP I, MRP II, JIT and DRP.

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Production Scheduling and Marketing

Marketing information based on market analysis or marketing research and sales

forecasting initiate the scheduling activity in a firm. The master production schedule is
prepared based 0n customers' firm orders and on the sales forecast put together. The
accuracy of production scheduling depends on the accuracy of sales forecasts and market
analysis.

Production Scheduling and Integrated Logistics

Integrated logistics interfaces with operations, especially with materials management

to ensure that the right materials are available for manufacturing. It is necessary to have
efficient and effective flow of inbound materials so that products can be manufactured to
meet customer requirements. To achieve this, integrated logistics must coordinate with
production (or operations) in the following key areas:

a. Integrated logistics supports investment in production equipments and computers

which can lead to more flexibility in operations and shorter manufacturing lead times.

b. Integrated logistics must coordinate with scheduling of operations to minimize the

planning cycle time.

c. Integrated logistics can also help in better production scheduling.

d. Integrated logistics and operations should eliminate the need for long production
runs by reducing the production run times and lead times resulting in lower inventory
levels and reduced stock-outs.

e. Both integrated logistics and operations must establish strategies to decrease supplier
lead times for parts and suppliers.

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PACKAGING

INTRODUCTION

The material flow concept instructs us that industry that industry can be regarded as
a series of pipelines (flows) of materials. Starting with the retrieval of the basic raw
materials from the mines, forests, fields and sea, converters and manufacturers produce a
variety of materials and products, distributed to a variety of customers; through a variety of
channels. The concept also embraces the possibility for reverse flows (disposal, recycling,
recalls, etc.).

While the material flow concept has been around and accepted for some time, its
translation into managerial concepts of material management, physical distribution and
logistics has a shorter history. Flows require movement; movement is achieved, in large
part, through material handling and material handling requires efficient packaging and
unitizing methods for best performance.

The question to be answered while designing packaging includes:

• How do we package and unitize the product for best handling?
• How do we handle the packages or unitized product for least damage and best
utilization of labour, equipment, and space?
• How do we package/unitize and handle for best interaction with other flow systems
functions (i.e. transportation, warehousing, inventory control etc.) for best overall
system performance?

IMPORTANCE

Packaging is an important function in logistics ensuring not only protection to

materials and goods in the logistics process to ensure maintenance of the right condition
until delivery, but also facilitating the other logistics functions of transportation, storage and

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handling. Packaging also enables communication regarding the contained materials or

products. It also helps in improving the appeal of the product to the customers.

TYPES OF PACKAGING

Packaging can generally be categorized into two types: consumer packaging, which
has a marketing emphasis and industrial packaging which has a more of logistics emphasis.

• Consumer Packaging

Consumer – oriented packaging is a packaging which is designed for consumer

convenience and appeal, marketing consideration and display. The main emphasis is on
marketing. The marketing manager is more concerned with the consumer packaging because
it provides information important in selling the product, in motivating the customer to buy
the product or in giving the product maximum visibility when it competes with others on
retail shelf.

• Industrial Packaging

Industrial packaging focuses on the handling convenience and protection during

transportation, material handling, and storage. The main emphasis is on logistics. Logistics
or industrial packaging is of primary concern to the logistics manager. This packaging
protects the goods that a company will move and store in the warehouse and also permits the
company the effective use of transportation vehicle space. It also has to provide information
and handling ease. However, we cannot design the interior (consumer packaging) without
considering the exterior or the industrial packaging.

Industrial packaging is performed at various stages. The first stage is packaging for
the product itself. For example, soft drinks are packaged in cans. The next stage involves
packaging these products into larger cartons for enabling quantity handling. The carton is

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referred to as the Master Carton. The next stage of packaging involves unitization. In this
case, the master cartons are consolidated into a single, larger unit to facilitate handling,
transportation, protection and storage. The next stage of packaging is containerization. Here
the unit loads are placed in rigid containers for protection and handling – facilitation. This
enables efficiency in transportation. An important aspect of packaging is the ability of reuse
and the disposal facilitation and environmental effects of packaging material. For example,
the environmental impact of using plastics and wood as packaging materials.

FUNCTIONS OF PACKAGING

Packaging serves three functions in the context of the product

• Protection

This involves protection from damage, pilferage, contamination, physical effects and
environmental conditions. It is generally not economical to provide absolute protection to
the product from all possibility of damage and environmental conditions. Hence, packaging
design and material utilized is a balancing of economic considerations and adequate
protection. The higher the value of the product, the more protection it deserves; and so on,
the more expensive the packaging. During the logistical process, a packaged product can be
damaged in transportation, handling and storage. The physical effects that cause damage are
impact, vibration, piercing and crushing. The environmental conditions that can affect a
packaged product are temperature, humidity and contamination. Packaging provides
protection against physical effects. Protection from environmental conditions can only be
achieved by maintaining the product in the right environment during the logistics process.

• Utility

In this functionality, packaging helps in improving efficiencies of material handling

procedures, transportation, storage and order picking. Packaging the products in the form of

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master cartons, unit loads and containers, promotes handling, transportation, and storage
efficiencies by speeding up handling, enabling higher quantities to be transported, more
quantity storage in the same space and faster retrieval from storage. Packaging facilitates
securing and stacking during transportation, storage and handling.

• Communication

Packaging enables product identification and tracking and displays product care
information. This is facilitated by labels on the packages. Product identification improves
logistical efficiency. Packaging also provides the facility of displaying handling instructions
to ensure proper care of the product during handling, transportation and storage. In case the
product is hazardous, requiring special handling, this functionality becomes critical.

PACKAGING MATERIALS

Many different exterior packaging materials are available to the logistics manager.
At one time the use of harder materials such as wood or metal containers was widespread.
But these added considerable shipping weight, which increased transport costs since
transportation companies’ bill customers for total weight, including packaging.

In recent years, companies have tended to use softer packaging materials. Corrugated
materials have become more popular, particularly with respect to package exterior.
Cushioning materials are used to cushion the product inside the box. Cushioning materials
protect the box from shock, vibration and surface damage during handling. Cushioning
materials include shrink-wrap, air bubble cushioning, cellulose wadding, corrugated paper
and plastics. Plastic materials utilized are expanded polystyrene, polyurethane, foam-in-
place and polyethylene.

While selecting packaging materials, companies today must consider environmental

protection. Packaging waste is also a concern. One way to reduce this waste is to reduce the

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overall packaging a company uses. Another way is to recycle the packaging materials in
such a way that there is no harm to the environment.

VALUE ADDITION

Value addition can be categorized into two parts: value addition in marketing and
value addition in logistics.

Value addition in Marketing: Value–added is a relatively new term in direct marketing

jargon. Simply put, it means processing or modifying the product. Some ways to add value
to a product include:

• Growing something in a way that is acknowledged as safer, or

• Adding a component of information, education or entertainment.

The customer is spared the additional work and the producer charges extra for adding
value. Adding value holds the promise of additional income, but it is certainly more labor–
intensive and requires more management, more investment in equipment, and an awareness
of legal and regulatory issues pertaining to processing. Value–added products do not have
the same economies of scale as mass–produced goods, and their success hinges heavily on
the producer's retail strategy, especially advertising and promotion.

There are additional value-added marketing opportunities available to suppliers.

Supplier events include the trade show with open floor hours as well as the popular
roundtables. Value added products offer more exposure to any company.

Value Addition in Logistics: In the age of networking, the traditional ideas about value
chain and the activities comprised thereof have undergone a change. The activities such as
procurement, manufacturing (operations), marketing etc., were traditionally considered as

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primary activities and were deemed to be of crucial significance for the business operations.
So, corporate preferred to perform these activities themselves.

Logistical process adds value across procurement with the inventory flow providing
the right material, at the right time and at the right place for manufacturing. Further,
manufacturing adds value to the raw materials and components procured to convert these,
through work-in-process into the right products required by the customer. The logistical
process also adds value to the product during the physical distribution.

The concepts of value system entails the process of conversion of resources i.e.
inputs to the outputs i.e. products or offerings resulting out of value addition.

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