Assignment for PGPM 33

ASSIGNMENT NICMAR / CODE OFFICE 1. 2. 3. 4. 5. Course No. Course Title Assignment No. Date of Dispatch Last Date of receipt of Assignment at CODE Office PGPM 33 Material & Logistic Management PGPM / M57 / 2011-12 / 03 November 14, 2011 January 31, 2012

ASSIGNMENT You have been appointed as manager of materials management department of a construction firm. The Company is asking you to prepare a manual on procurement of materials. Prepare a manual on procurement of materials by covering the following:1. Factors to be considered for purchasing 2. Source Selection 3. Selection of Suppliers 4. Scrutiny of offers 5. Final Purchase 6. How to develop purchasing policies and procedures 7. Formulate strategies for improving efficiency of procurement of materials department.

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Assignment for PGPM 33

1.

OBJECTIVE The Material Procurement Manual spells out the procedure and guidelines for procurement of materials, plant and machineries. The objective contained in the Manual is to streamline the procurement procedure by the Materials Section and to acquaint others with the said procedure so as to enable them to work in tandem with the Material section for procuring right quality and quantity of materials at the right time and at the right price from the right source with minimum investment for the materials inventory without affecting production. The main objectives of the Material Procurement Manual is: To arrange for steady flow of materials to ensure uninterrupted construction work. To procure right quality of materials in right quantity at the right price from the right source at the right time. To reduce blocking of working capital through scientific inventory control. To preserve / conserve materials kept in stock so that losses due to deterioration / obsolescence are minimized.

2.

IMPORTANCE Materials are the inputs to the construction activity on, which certain operations are performed using the other resources to create a facility. Material Management is very important for timely completion of the projects. A delay in providing the materials for construction will naturally put the project behind schedule from which it may never recover or the cost of bringing it back on schedule may be very high. Such shortages disrupt the work flow and apart from the lowering morale, need additional organizational efforts to generate the flow again. Men and machines remain idle while they await the arrival of materials. These delays are not simply a matter of few weeks or

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days, they have a cascading effect on the entire project performance. Because the construction is delayed, the billing gets held up and affects the cash flow. Added to it, the additional overheads that will be required to carryon the project to its final completion and the liquidated damages that a contractor may have to pay for exceeding the time limit or the loss in production and revenue for the owners. These are but direct and visible effects of the delays. Invisible effects are much more devastating and long lasting. Internally, it may create friction among the various departments or work units and generate widespread discontent among the employees. This is caused by the feeling that while the other departments, specifically materials management department is taking things easy and creating avoidable pressures on the schedule. Externally, it may cause embarrassment to the organization and dissatisfaction among its customers. This loss of face may take a long time to heal. Thus, considerable managerial skill must go into ensuring the time provision of variety of materials to be used in Construction.

3.

SCOPE OF MATERIALS MANAGEMENT Material Management covers a wide scope. It includes procuring ,materials, their transportation, storage, issuing materials to various sites for use in construction, maintaining records and data for effective control and to provide useful guide for future. Though it is distinct from other activities, it is closely related to planning, design and estimating, construction accounting, etc. Some important functions are briefly described below:3.1 Procurement

It deals with acquiring materials necessary for construction from suitable sources. Though, basically it is concerned with buying or purchasing and is concerned with the relevant aspects like identifying sources, determining the prices, etc., it has a wider scope of identification of better substitute materials as well as helping in arriving at decisions as to whether to buy or to produce certain items. Its aim is to contribute to the overall reduction in material cost through efficient procurement processes. 3.2 Transportation

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Materials used on construction site undergo considerable movement. Beginning with transport from source to stores it includes:(a) Transport from main stores to sites / site storages. (b) Transport from site storage to place of processing (mixing of mortar, concrete). (c) Transport from processing places to work place. Materials management has to clearly identify the movements which they are concerned and to ensure transportation is done quickly and economically and at the same time ensure that there is no adverse change in characteristics or performance of the material due to transportation. 3.3 Inventory Control

Inventory control is mainly concerned with laying the policies regarding how much quantity of a material should be held in stock so that the aim of material management viz. ensuring continuity of the construction with the minimum investment in materials is fulfilled. 3.4 Storage

When certain materials have to be held in stock before they are used, it is necessary to store them properly to guard against deterioration, pilferage etc. In a construction organization storage needs to be carefully considered depending or factors like number of construction works, their nature, magnitude and locations. Nature of material decides type of the storage (open, closed etc,.).

The scope of materials management extends over other areas like search for new materials of construction, identify new sources, controlling the consumption by minimizing wastages introducing a proper recording and reporting system disposal of scrap, carrying out value analysis where the construction is mechanized. Materials management is also concerned with the purchase of equipments, fuels, spares etc.

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4.

SOURCE SELECTION In order to obtain the best results, the purchasing activity must be based on a systematic procedure which covers all the aspects related to purchasing. Normally, each organization established a purchase procedure. Depending on the nature and size of the organization and also depending on the magnitude and variety of materials handled by the organization the purchase procedure may be formalized in the form of codes manuals. Small and proprietary organizations may follow an informal procedure.

Selection of the source begins with the knowledge of the sources of supply. Depending on the material to be procured, information about the sources of supply can be collected from a number of sources as described below:(i) Personal knowledge of the purchase officer. This is satisfactorily in small purchases and when a few items of simples nature are involved. Information is available on the basis of memory of the purchase officer or his personal inquiries. (ii) Catalogues, trade journals, trade directories The manufacturers or distributors of materials supply the relevant information in the form of catalogues, trade journals, directories, which serves as a useful guide for the purchase department. Precautions needed while making use of these reference sources are: (a) The latest catalogues have to be referred to, (b) The quality (specifications etc.) of the material have to be thoroughly ascertained and (c) Terms and conditions need to be studied carefully. (iii) Advertisements of the manufacturers or suppliers Manufactures and suppliers often advertise their materials in newspapers or magazines. Though the details given in the advertisement may have a considerable element of exaggeration to influence the prospective buyer, the advertisement would serve the purpose of identifying the source of materials.

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(iv)

Advertisement by the purchasing organization This is considered to be the most reliable source of knowing not only the sources of supply but getting all the relevant details such as quantity available, delivery time, price, terms and conditions of payment, guarantee given by the suppliers in the event of any default such as delay in deliveries, supplying sub-standard, materials etc. Organizations may invite the offer from various suppliers either through public advertisement or sending inquiries to selected sources obtained after reference to catalogues, journals, directories etc., mentioned above.

It is desirable that an organization maintains a register of suppliers for different materials and updates it from time to time adding new names and deleting those who either no longer in the business or whose performance was not found satisfactory.

5.

SELECTION OF SUPPLIERS The purchase department is interested in buying materials of the required quality in the required quantity at particular time and at the most competitive price. Though the price is an essential criterion, it cannot be the only criterion of selecting a supplier as a good and satisfactory supplier. Perhaps, a possible and objective approach to this problem would be to introduce quantitative. Perhaps, a possible and objective approach to this problem would be to introduce quantitative assessment of the various factors other than price into the purchase formula. This approach is known as vendor rating or supplier quality assurance scheme. This approach helps in evaluating the factors of quality and delivery time offered by the supplier and evolving an objective rating for the supplier.

So far as quality is concerned, a method that could be followed may consist of recording the material (quantity and value) received from the supplier over a

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certain period say a year at regular intervals. The quantity and value of the material rejected in each consignment is carefully noted. The rate of rejection can also be noted and the suppliers can be assigned suitable rating. Some of the aspects that need to be considered are: Delivery met without any follow up? Reliability as regards the quality of the material delivered Promptness in attending to any complaints etc.

6.

QUALITIES OF A GOOD SUPPLIER A good supplier will material of specified quality observe meticulously the delivery schedules and will not need any

expediting from the client caution the user ahead of time of the shortages of materials etc. in the

market take initiative in acquainting the client with new / substitute materials try to help the client in the event of unexpected situations by supplying

the materials in short notice. Promptly attend to the complaints of the client Always quote competitive terms and conditions for supply of the

materials

7.

QUALITIES OF A GOOD PURCHASER The purchaser in turn has also to follow certain ethics. A few important points to be noted are: Realistic quantity of the material to be purchased. Sometimes the

purchaser indicates that a large quantity is to be purchased to attract low offers of price. Actually, however, the quantity purchased will be very small. Prompt payment of the suppliers bill

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Just as the purchaser would expect the supplier to help him in the case

of emergency requirements, the purchaser should also help the supplier in the event of genuine difficulties like, shortages of the materials, strike etc. over which the supplier has no control The purchaser should avoid frequent changing of suppliers for no

justifiable reasons

Thus for the smooth working, a healthy relationship between the purchaser and the supplier has to be developed and both the parties have to contribute towards achieving this goal.

The purchase department should maintain a list of suppliers and regularly update it. The past performance of the supplier must be carefully observed and recorded. All the aspects like technical, financial and time have to be considered. The purchase department should bet regular feedback from the concerned department like site, accounts department etc. assess the suppliers performance.

Rating of the suppliers on the basis of the performance may result in black listing some names, which means the concerned suppliers name may be removed permanently or at least for a certain temporary period from the approved list of suppliers.

For important works relying only on one supplier may not be advisable and particularly if the quantity of the material to be purchased is large. Selection of two or more suppliers may be desirable. Depending on the magnitude of materials, it might also be desirable to explore the possibility of buying directly from the manufacturer rather than from distributor.

8.

PRICE OF THE MATERIAL The terms price, cost and value are used almost synonymously but in reality they have different meaning.
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Price would normally refer to the amount paid for the materials and is expressed as Rs. per unit measure.

Cost though loosely used as a synonym for price should be used to cover other relevant expenses over and above the price. Thus price is a component of the cost. The expenses would include transport, storage, wastage, overheads etc. strictly speaking, the cost of a material at the main storage would be different that its coat at the site storage or the cost of material used in the construction, for obvious reasons.

Value actually has a conceptual notion attached to it. Value would depend on the need of the material, its urgency and the ease or the difficulty with which it is available. The user may not have a value ( or at least immediate value) for a material, though he has to incur cost (which includes price as its component) for the same. As an example we may consider the construction of a building where there is no item to reinforced cement concrete. The reinforcing steel will have no value (though he will have to incur cost in purchasing, transporting, storing etc.). Similarly, if an item is to be taken up at the end of the work and if the material required for the same would be easily available in the market, he would not be interested in investing at the beginning of the work, which, in other words means he does not have value for it and would not like to spend at the start.

9.

CENTRALISED AND DECENTRALISED PURCHASING Centralised purchasing indicates that the entire purchase is done at one place. This method has its advantage particularly when the various projects are located within reasonable distance. Discounts available over the bulk purchase could be availed of while control over the quality and quantity is also better. Site storages could also be kept down to the minimum. Site storage could also be kept down to the minimum. The method however may not yield the desired benefits if (i) the works are scattered over a large area as a result

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of which it involves a longer transportation of materials, (ii) the works are of a different nature or magnitude requiring different materials.

Decentralisation on the contrary indicates that materials are purchased at different places (regional offices< project sites etc.) on the basis of their needs. The method involves purchase of smaller quantities and as such, may result in retail purchasing. The entire procedure is duplicated at each purchasing centre. It may involve varying efficiency, inevitable wastage / surplus at each centre. There are however situations where decentralization may be a necessity mainly because of the scatter of works, dissimilar nature etc.

In actual practice, neither a totally rigid centralized method or a totally decentralized method would be suitable. Perhaps a judicious blending of centralizing and decentralizing would answer the need. Certain materials could be purchased through the centralized method while the purchase of remaining materials could be decentralized. The factors to be considered in deciding which items to be centralized and the extent of centralization ( or decentralization) are : (a) Materials required (b) their quantities, total and for each project (c) phasing of the requirement for each project (d) sources of the supply for centralized purchase and decentralized purchase and relative prices, (e) cost of transportation (f) cost of storage etc.

10.

FACTOR TO BE CONSIDERED FOR PURCHASING After the method of purchase is determined and after the requisition from all consumer centres (projects) are obtained, a decision to purchase the materials is taken. It involves factors like (i) quantity of materials to be purchased (ii) time of delivery (iii) place of delivery (iv) the price (v) receiving and inspection and (vi) transportation. i. Quantity of the material to be purchased depends

on stocks in hand and inventory policies

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ii. a.

Time of delivery depends on: The time the purchaser needs to complete the like preparing detailed documents, inviting

formalities order. b.

quotations, scrutiny and acceptance of the offer and placing the

The time the supplier needs to arrange for the

supply, which involves the acceptance of the order from the purchaser, procuring the material from the manufacturer / its source, and processing it if necessary. c. The time involved in loading, transporting and

uploading, if the supplier is not delivering the material at the finally indicated place and therefore involves transport, the purchaser has also to arrange for the transport. d. At times, the materials (or sample thereof) have to

be tested before finally accepting them and it also involves time and has to be considered.

The total duration is the sum of the duration involved in (i) to (iv) above and the purchasing department required to obtain requisitions and initiate purchasing procedure to provide adequate time for these items.

iii.

Place of delivery

The place of delivery would be the main storage, regional, storage or site storages. This would depend on the location of the source and cost and time of transport.

iv.

The Price

The aim of the purchaser should be to purchase the materials at the most competitive prices. This is usually achieved by inviting open quotations. In some organizations, one of the requirements is to invite public quotations from the interested suppliers. This results in (a)
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expenditure incurred in publishing advertisements, (b) possible delays and (c) some unknown or un-resourceful suppliers submitting offers. Where Public advertisement Is not a necessity, advantage of competitive rates can be obtained by sending out inquiries to suppliers who are known or dependable.

v.

Receiving and Inspection

In a large organization separated section may have to be created for this function, but obviously the function is closely related to purchasing. The person responsible for this function is closely compare the material received with details mentioned in the orders placed with the supplier, of the samples of the same. They must therefore have with them an authentic copy of the order and samples, if any. The points to be noted will be (a) quantity, which may involve counting, weighing or checking dimensions, (b) colour, (c) finish, (d) size and / or gradation, (e) strength or some other attributes. In some cases tests will have to be carried in the laboratory as per prescribed procedures.

The material received may (a) be as per the order placed and samples specified, (b) not conform to order and may be : of different specification; short in quantity or in damaged condition

In all such cases, a report is prepared and copies are sent to the accounts department and stores department.

In case the material is not in the acceptable form, the purchase department (or the receiving and inspection section) sends a Rejection

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Advice to the supplier who has to make good the discrepancy which may include collecting back the materials and arranging fresh supplies. Only after the receiving and inspection sends the Acceptance Note in respect of the materials to the concerned departments, the bills are paid to the supplier.

vi.

Transportation

Depending on the terms of agreement the materials obtained from the supplier will have to be transported to the place of storage. Purchase department has to organize the transportation. Transportation from stores to worksites is generally looked after by the construction unit / contractors. Depending on the quantity of the materials and their sources of supply, a separate transportation unit may have to be created but it is closely related with purchase department. The main responsibilities connected with transportation are: Selecting mode of transport and routes Fixing of agencies Fixing rates Auditing freight charges Minimizing transportation costs by arranging the various supplies so as to synchronize their transportation

11.

SCRUTINY OF OFFERS After the quotations are received from a number of suppliers, they are carefully compared. It is necessary to look out for (a) conditions for payment; (b) place of delivery; (c) whether the supplier has proposed any change by way of modification, deletion or addition of any condition specification. The effect of these changes in terms of money has to be evaluated so that a realistic comparison of the rates can be obtained. Normally the lowest rate is accepted.

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It must be mentioned here that a mere offer of supply in response to invitation from the purchaser is not binding on both the parties. Only when as offer is accepted and the order is communicated (in writing) it constitutes as agreement and is binding on both the parties i.e. purchaser and supplier.

12.

MISCELLANEOUS FUNCTIONS These include obtaining licenses and permits; or issuing certificates whenever necessary, payment of frights, lodging claims in case of damages or short supplies; arranging for insurance during transit, etc.

13.

PURCHASING AND OTHER DEPARTMENTS Though a supportive activity, materials is an important function in the construction. It is closely related to a number of departments. The various departments and its relationship with the purchase department are briefly mentioned below: (a) Engineering department / design department Purchase department has to obtain advice as regards the quality of the materials to be used in construction, their specifications, tests etc. These two departments can also explore the possibility of using new materials which are easily available and economical. (b) Tendering and / planning department This department will help purchasing department as regards the works proposed to be taken up, their nature and magnitude. Planning department will also assist in working out the phasing of the purchase on the basis of construction programmes. (c) Stores department Purchase department is closely related to store department. Materials received from suppliers after inspection and testing are sent to the stores and there has to be a close coordination between these two departements. (d) Transportation department

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When a separate transportation department is provided the purchase department has to advise the transportation department in time for arranging the transport. It must also get compliance reports from the transport department. (e) Accounting department This department is mainly concerned with processing and clearing the bills of suppliers and transporting agencies. Purchasing department has to advise the accounts department about the arrival of the material, its quantity, the acceptance of the materials after the inspection and tests etc. as well as the satisfactory transportation of the material. Whenever a separate transportation department exists there has to be a proper coordination between purchase, transportation and accounting department. (f) Stock / Inventory This is the brain of the materials management department and monitors the functions of its other departments like purchase, transportation and storage etc.

In conclusion, it must be noted that there has to be perfect co-ordination between all the sub-departments / sub-sections of the materials management and the other related departments. 14. SWCVDWC

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