PEM M C07

Project Materials Management

Session 5
Deepak Sundrani
 Reminder

MCQ Test in the next

session
 Purchasing under different
circumstances
1) Buying under certainty
Replenishment
(a) Fixed order quantity, variable duration
and
(b) fixed interval, variable quantity
2) Buying under risk
3) Buying under uncertainty
 a) Fixed order quantity
Procurement costs Carrying costs
(Ordering costs) (Holding costs)
1) Cost of printing and 1) Interest on capital
stationery invested
2) Telephone 2) Storage and handling
3) Postage costs
4) Travelling charges 3) Loss due to
5) Running expense of deterioration
transport
Economic Order Quantity (EOQ)
 Example
• Monthly consumption of an item costing
Rs. 300 per unit is estimated as 100 per
month.
• Inventory carrying cost (holding costs) is
computed at 15 % on average inventory*
• Procurement cost (Ordering cost) is computed
at Rs. 3000 per order.
a) Calculate Annual procurement cost
( Ordering cost) assuming different
values of order quantities in steps of 100
b) Calculate annual inventory carrying cost
(Holding costs) for different order quantities
c) Determine EOQ
(i) Graphically
(ii) By formula
Order Annual Procurement Annual Inventory carrying Annual total cost
Quantity cost (Ordering cost) cost (Holding cost)
(Rs.) ( Rs.) (Rs.)

100 36000 2250 38250

200
300
400
500
600
700
800
900
1000
1100
1200
Order Annual Procurement Annual Inventory carrying Annual total cost
Quantity cost (Ordering cost) cost (Holding cost)
(Rs.) ( Rs.) (Rs.)

100 36000 2250 38250

200 18000 4500 22500
300 12000 6750 18750
400 9000 9000 18000
500 7200 11250 18450
600 6000 13500 19500
700 5143 15750 20893
800 4500 18000 22500
900 4000 20250 24250
1000 3600 22500 26100
1100 3273 24750 28023
1200 3000 27000 30000
 Formula
2.S.Cp
EOQ = -------------
Cu .i
S = Annual consumption of item (units)
Cu = Unit price ( Rs.)
Cp = Procurement cost per order (Rs.)
i = inventory carrying cost expressed as a
fraction of the inventory investment
 Assumption in EOQ
1) Price per unit is independent of order size
( no discount)
 Assumption in EOQ
1) Price per unit is independent of order size
( no discount) is unrealistic, so compare
the annual total cost of the EOQ, with the
costs at each succeeding discount point and
thereby select the best quantity to order.
Suppose in previous example,

If the supplier gives discount of 5 % if you

buy 1200 units at a time, should you buy ?
 Considering that discount of 5 % if buying 1200 units

Assume 1200 units are purchased instead of EOQ (400)

Annual Ordering costs = Rs. 3000 ( as in earlier table)
compared to Rs. 9000 if buying EOQ
Discount of 5 % means material will be available at
Rs. 285 per unit
Annual Carrying cost will be 1200 x 0.15 x 285
2
Thus the Annual Carrying cost will be Rs. 25,650
compared to Rs. 9000 if buying EOQ

Annual Total cost will be Rs. 3000 + Rs. 25,650 = Rs.

28,650
Case 1 : Cost Rs. 300 per unit Case 2 : Cost Rs. 290 per unit
if buying EOQ of 400 units if buying 1200 units
Annual Ordering cost Rs. 9,000 Annual Ordering cost Rs. 3,000
Annual Carrying cost Rs. 9,000 Annual Carrying cost Rs. 25,650
Total Inventory cost Rs. 18,000 Total inventory cost Rs. 28,650

Decision ?
In the previous example,
was Case 1 better than Case 2 ??????
Total Purchase Quantity per annum
= 100 x 12 = 1200
 Total Price Total
requirement per unit amount of
per annum (Rs.) materials
(units) (Rs.)
Case I (400 units at a 1200 300
time)
Case II 1200 285
(1200 units at a time)
 Total Price Total
requirement per unit amount of
per annum (Rs.) materials
(units) (Rs.)
Case I (400 units at a 1200 300 3,60,000
time)
Case II 1200 285 3,42,000
(1200 units at a time)
 Total Price Total Total GRAND TOTAL
requirement per amount of OC+CC
per annum unit materials (Rs.)
(units) (Rs.) (Rs.) (Rs.)
A B C D=BxC E F=D+E
Case I 1200 300 3,60,000 18,000
( 400 units at a
time)
Case II 1200 285 3,42,000 28,650
(1200 units at a
time)
 Total Price Total Total GRAND TOTAL
requirement per amount of OC+CC
per annum unit materials (Rs.)
(units) (Rs.) (Rs.) (Rs.)
A B C D=BxC E F=D+E
Case I 1200 300 3,60,000 18,000 3,78,000
(400 units at a
time)
Case II 1200 285 3,42,000 28,650 3,70,650
(1200 units at a
time)
 Conclusion from the example

Case II is better, provided that

• company has liquid money to buy
• Company has big enough godown and
• chances of obsolescence are not there.
Re-order level ( no safety stock)
However many times :
1)Demand/ Consumption may increase
2)Lead time may not be adhered ,
which may lead to stock-out

So , what can be done ?

safety stock ( buffer)
 Factors influencing safety stock
1) Category of item ( A, B, C)
keep large safety stock for C category items
moderate safety stock for B category
low safety stock for A category
2) Lead time : longer the lead time, the higher
is the uncertainty, so keep higher safety
stock for those with longer lead time
3) Number of suppliers : More the suppliers,
lesser can be the safety stock, because if
failure ..... Approach another
If single supplier , keep higher safety stock
4) Criticality of the item : For Customised items
higher safety stock, for standard item can
have low safety stock
5) Availability of substitutes : Higher safety stock
if no substitute
6) Possibility to do the job at the home plant :
Small safety stock required
7) Service level desired by management
8) Order quantity : Large order quantity
purchases reduce the danger , so for such items
safety stock can be less ( percentage wise)
9) Risk of obsolescence and deterioration : if shelf
life is less, low safety stock
10) Space restriction : Lesser safety stock can be
kept for bulky items, to reduce space
requirements
11) Stockout cost : basic raw materials very
important, without which large number of
people may remain idle : for such items keep a
large safety stock. For non-production items,
low safety stock
 For the same example, taken
earlier, assuming no discount
• Monthly consumption of an item costing
Rs. 300 per unit is estimated as 100 per
month.
• Inventory carrying cost (holding costs) is
computed at 15 % on average inventory
• Procurement cost (Ordering cost) is computed
at Rs. 3000 per order.
 If Stock records show that the item can be
procured within a period of one month.
Calculate :
1)Re-order quantity
2)Re-order level
3)Minimum level
4)Maximum level
5)Average inventory
1) Re-Order quantity : 400 units
2) Minimum level = safety stock = one month’s consumption =
100 units
3) Reorder level = Safety stock + lead time consumption
= 100 + 100 = 200 units
4) Maximum Level = safety stock + Order Quantity
= 100 + 400 = 500 units
5) Average inventory = safety stock + ½ reorder quantity
= 100 + 200 = 300 units
 Basic requirements to operate
fixed quantity system
1) Cycle time of consumption should be more
than the lead time
2) The consumption rate should be fairly
uniform
3) Stock records must be accurate
 b) Fixed interval system

( Fixed duration ) (periodic re-ordering)

Order interval is fixed
( Similar to monthly purchase of groceries by a
housewife)
Forecast is made of the average consumption during
review period and Lead time
Safety stock is added to above stock
Stock of a item is reviewed at periodic interval and
quantity which will bring the `stock on hand’ plus the
`stock on order’ upto maximum level is ordered
• Average inventory in this system equals safety
stock plus ½ (average usage during one cycle)
 Suitability of fixed interval

1) Establishments ( eg. Retail stores) procuring

large number of items from one supplier
where a fixed duration ( weekly/monthly)
re-order period is useful
2) Items which have many sizes, and are
procured from one supplier
3) High value items (A category) requiring a
strict control of stock level
 Purchasing under different
circumstances
1) Buying under certainty
Replenishment
(a) Fixed order quantity, variable duration
and
(b) fixed interval, variable quantity
2) Buying under risk
3) Buying under uncertainty
 2) Buying under risk

• Those purchase situations and items whose

demand is not known with certainty.
• Demand can be arrived at from
(i)Historical data
(ii)Market survey
(iii)Past experience and judgement
(iv)Payoff matrix
Example : Spare part of a equipment
 Payoff matrix method
• A Construction Company is making a dam. A
particular equipment is critical for operation.
At the time of original order, the spares for
this equipment can be purchased for Rs. 2,000
per unit.
• The probability of failure of this equipment
during the duration of the project is
Failure Probability
0 0.35
1 0.25
2 0.20
3 0.15
4 0.05
• If a spare is needed and is not available, the
total cost of idle time and replacement cost
will be Rs. 15,000.
• Determine the optimal number of spares to
be ordered
 Step 1 : Identify set of order
quantities
There are 5 possible choices
1) Buy zero spare
2) Buy 1 spare
3) Buy 2 spares
4) Buy 3 spares
5) Buy 4 spares
 Step 2 : List all possible demands
1) Zero spare is actually required
2) One spare is actually required
3) Two spares are actually required
4) Three spares are actually required
5) Four spares are actually required
 Step 3 : List the probability
corresponding to each demand
1) Probability of usage of zero spare = 0.35
2) Probability of usage of 1 spares = 0.25
3) Probability of usage of 2 spares = 0.20
4) Probability of usage of 3 spares = 0.15
5) Probability of usage of 4 spares = 0.05
 Total cost
• Let s = Quantity of spares stocked
• Let r = Quantity of spares actually required
• Cu = Cost of each spare
• Lo = Down time cost per occasion due to
immobilization of equipment for want of
spare including cost of getting the spare
• Lifetime cost = Cu x s …. if r is less than or equal to s
= Cu x s + Lo x ( r-s) …… if r > s
Example : If s = 2 , r = 1
Life time cost = Cu x s (Since r is less than or equal to s)
= 2000 x 2 = Rs. 4000
Another example : If s=1, r = 3
Life time cost = Cu x s + Lo x ( r-s) …. Since r > s
= 2000 x 1 + 15,000 x ( 3-1)
= 2000 + 30,000
= Rs 32,000
 Life time cost

Spares required
0 1 2 3 4
Spares
stocked

0 0 15,000 30,000 45,000 60,000

1
2
3
4
 Lifetime cost

Spares required
0 1 2 3 4
Spares
stocked

0 0 15,000 30,000 45,000 60,000

1 2,000 2,000 17,000 32,000 47,000
2
3
4
 Lifetime cost

Spares required
0 1 2 3 4
Spares
stocked

0 0 15,000 30,000 45,000 60,000

1 2,000 2,000 17,000 32,000 47,000
2 4,000 4,000 4,000 19,000 34,000
3
4
 Lifetime cost

Spares required
0 1 2 3 4
Spares
stocked

0 0 15,000 30,000 45,000 60,000

1 2,000 2,000 17,000 32,000 47,000
2 4,000 4,000 4,000 19,000 34,000
3 6,000 6,000 6,000 6,000 21,000
4
 Lifetime cost

Spares required
0 1 2 3 4
Spares
stocked

0 0 15,000 30,000 45,000 60,000

1 2,000 2,000 17,000 32,000 47,000
2 4,000 4,000 4,000 19,000 34,000
3 6,000 6,000 6,000 6,000 21,000
4 8,000 8,000 8,000 8,000 8,000
Lifetime cost ( added probability)

Spares required
0 1 2 3 4
Spares
stocked Probability of usage of spares
0.35 0.25 0.20 0.15 0.05

0 0 15,000 30,000 45,000 60,000

1 2,000 2,000 17,000 32,000 47,000
2 4,000 4,000 4,000 19,000 34,000
3 6,000 6,000 6,000 6,000 21,000
4 8,000 8,000 8,000 8,000 8,000
 Step 5 : Calculate expected value
of payoff for each order quantity
Expected life time cost = Sum of products of
possible values of life time costs and corresponding
probabilities

If s= 0,
Payoff = 0 x 0.35 + 15000 x 0.25 + 30000 x 0.20 + 45000 x 0.15 +
60000 x 0.05
= 0 + 3750 + 6000 + 6750 + 3000
= 19500
• If s = 1 then Payoff = Rs 11,750
• If s = 2 then Payoff = Rs 7750
• If s = 3 then Payoff = Rs 6750
• If s = 4 then Payoff = Rs 8000
 Step 6 : Select optimal strategy
Since expected value of life time cost of 3 spares
is lowest, optimal strategy is to stock 3 spares
 3) Buying under uncertainty
• Even the probability cannot be estimated.
• Occurs when no past experience or historical
data
• Cannot compute pay-off for order quantity

Decision is based on company’s policy and

judgement of decision maker
 RECEIVING AND STORAGE
• Storekeeping deals with the physical storage
of materials under the custodianship of a
person called storekeeper.
• Store functions concerns receiving,
movement, storage and issue of items : raw
materials, bought-out parts, tools, spares,
consumables etc. required for production and
maintenance.
 Responsibilities of
store management
1) To receive materials,
2) To protect them while in storage from
damage or unauthorised removal
3) to issue materials in the right quantities, at
the right time, to the right place, and
4) To provide these services in the least cost
 Functions of
scientific store management
1) Requisitioning from Purchase Department an
economical quantity of material for delivery at
the most appropriate time
2) Exercising control on quantity of materials
received
3) Storing and protecting materials against
hazardous conditions, weather, deterioration
and pilferage contd…
 Contd…. Functions of
scientific store management
4) Issuing materials against properly authorised
material requisitions
5) Maintaining exact records of all receipts, issues and
balances to facilitate ordering of required materials.
6) Maintaining adequate records of receipts and
expenditures
7) Maintaining adequate stocks of material to serve
production needs
8) Keeping inventory investment within desired limits.
 Benefits of scientific storekeeping
1) Scientific stores control reduces losses which
would otherwise result from accumulation of
inventories
2) Efficient issuing from stores reduces
downtime in production and increases profit
3) Periodic reviews detects obsolete and non-
moving items and helps the firm to get rid of
unproductive inventory contd…
 Contd… Benefits of scientific
storekeeping
4) Follow up with Purchase helps to avoid
stockouts and production losses
5) Proper record-keeping provides exact picture
of inventory in store to higher management.
 Store Location
• Choosing site for stores building, to provide
efficient and prompt service to user
department.
 Principles of good store location
1) Economy of transportation : store near place
where it is to be used, avoid unnecessary
material handling
2) Approachability by road
3) Reduced fire risk : Flammable materials like
petrol, diesel should be stored separately.
Combustible materials such as paints, timber,
plywood should be kept away from general
stores contd…
 Contd… Principles of good store location

4) Security : Store room should be away from

main gate. It should not be located near
boundary wall as they are likely to be broken
into by outsiders. Suppliers representatives such
as drivers should not have easy access to stores
where expensive items are stored.
5) Minimization of risk of spoilage and
deterioration ( temperature, humidity, light)
6) Flexibility ( for future expansion)
 Identification of materials
• Tagging/ labelling
• Writing ( eg. On drums)
• Engraving
• Stamping (punching)
• Etching
• Color coding
 Preservation ( from nature)
• Protection of stores from heat, moisture, dust,
corrosion, rust, fire etc. so as to maintain
materials in their original form.
• Timber, plywood etc. may get deteriorated
due to rain/ water and also by termites, white
ants, etc.
 General rules for preservation
1) Do not store on earthen floor , use raised
platform especially for cement, etc.
2) First In First Out (FIFO) system especially those
items with limited shelf life such as cement,
paints, silicon sealant, etc.
3) Inform user department of expiry date, if stock
is unlikely to get consumed then negotiate with
supplier for replacement ( give him
now and take from him later)
 Security of stores
Measures against theft by outsiders, pilferage
by employees, fire, pest
1) Daily closing of stores and custody of keys
2) Marking of stores ( such as towels in trains)
3) Storage of expensive and scarce material under lock
and key
4) Movement control of vehicles
5) Enquiry and disciplinary action against defaulters
6) Fire fighting equipment
7) Pest control measures
 Receiving
1) Delivery Challan
2) Cash memo
 Receiving procedure
1) Inwarding at Security Gate
2) Verification of correctness of paper work
3) Inwarding
4) Verification of quantities
5) Notifying indentor
6) Preparation of Goods Receipt Report
7) Inspection
8) Delivery to appropriate stores
9) Return of defective materials to suppliers
10) Returning all chargeable empties back to suppliers
( such as empty gas cylinder)
 Issue of materials
• Timing
• Only if requisition, verify them, update issue
column and make entry
• Gate pass if taken out of company
• Get signature of indentor that he has received
 Stock taking
• If physical stock tallies with balance shown in
records.
• To check discrepancies
• For certification of financial statements
• Early detection of obsolete stocks
• To deter store personnel against fraud
• Indicator of efficiency of stores department
• Selective control of inventory : All items
should not equal attention.
 Selective control of inventory
1) ABC Analysis
2) HML analysis
3) VED Analysis
4) SDE Analysis
5) GOLF Analysis
6) S-OS analysis
7) M-N-G Analysis
8) F-S-N Analysis
9) X-Y-Z Analysis
 1) ABC Analysis
Based on usage value (i.e. Consumption per
period x price per unit)
 Annual
consumption
Item Price per unit Annual usage
Sr.No. description ( units ) ( Rs) Value (Rs) Rank
1 G 20 500
2 H 110 10
3 I 150 1
4 j 400 100
5 K 200 5
6 L 20 10
7 M 500 10
8 N 25 4
9 O 65 20
10 P 16 25
11 Q 300 100
12 R 10 140
13 S 10 50
14 T 450 2
15 U 25 2
16 V 20 150
17 W 20 30
18 X 20 40
19 Y 40 50
20 Z 100 15
TOTAL
 Annual
consumption
Item Price per unit Annual usage
description ( units ) ( Rs) Value (Rs) Rank

j 400 100 40000 1

Q 300 100 30000 2
G 20 500 10000 3
M 500 10 5000 4
V 20 150 3000 5
Y 40 50 2000 6
Z 100 15 1500 7
R 10 140 1400 8
O 65 20 1300 9
H 110 10 1100 10
K 200 5 1000 11
T 450 2 900 12
X 20 40 800 13
W 20 30 600 14
S 10 50 500 15
P 16 25 400 16
L 20 10 200 17
I 150 1 150 18
N 25 4 100 19
U 25 2 50 20
 Annual
consumption
Item Price per unit Annual usage
description ( units ) ( Rs) Value (Rs) Cumulative

j 400 100 40,000 40,000

Q 300 100 30,000 70,000
G 20 500 10,000 80,000
M 500 10 5,000 85,000
V 20 150 3,000 88,000
Y 40 50 2,000 90,000
Z 100 15 1,500 91,500
R 10 140 1,400 92,900
O 65 20 1,300 94,200
H 110 10 1100 95,300
K 200 5 1,000 96,300
T 450 2 900 97,200
X 20 40 800 98,000
W 20 30 600 98,600
S 10 50 500 99,100
P 16 25 400 99,500
L 20 10 200 99,700
I 150 1 150 99,850
N 25 4 100 99,950
U 25 2 50 1,00,000
TOTAL 1,00,000
 Annual
Usage Cumulative Cumulative %
Rank (Rs.) annual usage age of value Category
1 40,000 40,000 40
A
2 30,000 70,000 70
3 10,000 80,000 80
4 5,000 85,000 85
B
5 3,000 88,000 88
6 2,000 90,000 90
7 1,500 91,500 91.5
8 1,400 92,900 92.9
9 1,300 94,200 94.2
10 1100 95,300 95.3
11 1,000 96,300 96.3
12 900 97,200 97.2
13 800 98,000 98.0
C
14 600 98,600 98.6
15 500 99,100 99.1
16 400 99,500 99.5
17 200 99,700 99.7
18 150 99,850 99.85
19 100 99,950 99.95
20 50 1,00,000 100
TOTAL 1,00,000
Similar to ABC Analysis is the Pareto Principle
of 80 - 20
 2) HML analysis
High, Medium, Low
Based on unit price, not on consumption
Similar to ABC Analysis except for the difference that
instead of `usage value’ the `price criterion’ is used.
To classify, the items are listed in the descending
order of their unit price.
The cut-off lines are then fixed by the management
for deciding the three categories
• Example : Management may decide that all
items of unit price above Rs. 1000 will be H
category
• Those with unit price Rs. 100 to Rs. 1000 will
be M category and those having unit price
below Rs. 100 will be Low Category.
 HML Analysis helps to :
(i) Access storage and security requirements
(example : High priced items like furniture
accessories, electric fittings, plumbing fittings
etc.) require to be kept in cupboards.
(ii) To keep control over consumption at
Manager level
(iii) Determine frequency of stock verification
Expensive items checked more frequently
contd….
 Contd…. HML analysis
(iv) To evolve buying policies to control
purchases , example excess supply than the
order quantity may not be accepted for H and
M groups, while it may be accepted for
L group
v) To delegate authority to make petty cash
purchase , eg. H and M category to be
purchased by senior people and L by juniors
 3) VED Analysis
Vital, Essential, Desirable
(based on the criticality i.e. loss of production)
`Vital’ category encompasses those items for want of
which production would come to a halt
Essential group includes items whose stockout cost is very
high
Desirable group comprises of items which do not cause
any immediate loss of production or their stockout entail
nominal expenditure and causes minor disruptions for a
short duration.
VED Analysis is carried out to identify critical
items. An item which usage-wise belongs to
C-category may be critical from production point
of view if its stock out can cause heavy
production loss.

( Example : water for casting RCC slab)

An item may be vital for a number of reasons,
namely
a)If the non-availability of the item can cause
serious production losses
b)Lead time for procurement is very large
c)It is a non-standard item and is procured to
buyer’s design
d)Source of supply is only one and is located far
away from the buyer’s site.
 4) S-D-E analysis
Scarce, Difficult and Easy
Based on procurement difficulties, namely :
Non-availability
Scarcity
Longer lead time
Geographical location of suppliers and
Reliability of suppliers
• Scarce : items which are in short supply, imported or
channelized through government agencies. Procure it
few times in a year because of effort that it takes for
import
• Difficult : not easy to procure , long distance and for
which reliable sources do not exist, difficult to
manufacture and only one or two manufacturers are
available. Suppliers may require several weeks of
advance order.
• Easy : those items which are readily available
SDE analysis is used by Purchase Department
(i)To decide on method of buying : Forward
buying for scarce group, scheduled buying and
contract buying for easy group
(ii)To fix responsibility of buyers : Senior people
for S and D , and junior people will handle E
group
 5) GOLF Analysis
Government, Ordinary, Local and Foreign
( based on source of procurement)
G : items procured from Government, transaction with
this category of supplies involve long lead time and
payments in advance
O : items procured from Non-Government (or Ordinary)
suppliers.
L : items bought from Local suppliers ( cash purchase)
F : items purchased from Foreign suppliers
F group : transactions with such suppliers
-Involve a lot of administrative and procedural
work
-Necessitate search of foreign suppliers
-Require opening of letter of credit
-Require making of arrangement for shipping
and port clearance
 6) S-OS Analysis
Seasonal – Off Seasonal
Especially for agricultural products
 7) MNG Analysis
Moving , Non-moving and Ghost items
(Based on stock turnover rate)
M : Moving items : those items which are consumed from
time to time
N : Non moving items : are those items which are not
consumed in the last one year
G : Ghost items : are those items which had nil balance,
both in the beginning and at the end of the financial year
and there were no transactions ( receipts or issues)
during the year.
 8) FSN Analysis
Fast moving, Slow moving and Non-moving
(based on consumption)
When it was received and when it was issued
The analysis helps to identify :
-Active items which require to be reviewed regularly
-Surplus items whose stocks are higher than their rate
of consumption
-Non moving items, which are not being consumed
• Surplus and non-moving items are reviewed
further to decide on disposal action to deplete
their stocks and thereby release company’s
productive capital.
 9) X-Y-Z analysis

• Based on value of stocks on hand. ( Inventory

investment)
• Items whose inventory values are high are
called X items while those whose inventory
levels are low are called Z items
• Y items are those which have moderate
inventory stock
• Usually X-Y-Z analysis is used together with
ABC analysis or FSN
 Strategies for XYZ analysis
combined with ABC analysis
Class of
A B C
items
X Efforts to be Efforts to be Steps to be taken
made to reduce made to convert to dispose off
stocks to Z them to Y surplus stock
category category
Y Efforts to be Control may be
made to convert * further tightened
these to Z
category
Z Stock levels may
* be reviewed *
twice a year
 Strategies for XYZ analysis
combined with FSN analysis
Class of
F S N
items
Tighten control Deplete stocks to Dispose off
X very low level immediately at
optimum price
Deplete the Dispose off as
Y * stocks further at early as possible
good price
Liberalise control Dispose off as
* early as possible
Z ( to reduce even al lower
clerical cost) prices
X Y Z analysis therefore helps to identify a few
items which account for large amount of money
locked up in stock and take steps for their
liquidation/ reduction.
XYZ when combined with FSN analysis helps to
classify non-moving items into XN, YN and ZN
groups and thereby identify a handful of non-
moving items which account for bulk of non-
moving items which account for bulk of non-
moving stock. This can be studied individually in
details to take decisions on their disposal or
retention.
 Summary
• Selective control advocates control by
exception.
• Uniform treatment of all items gives diffused
effect, besides being expensive.
• Items should be classified so that a major
portion of effective managerial time is spent
on materials which are more important than
others
 Combinations
• ABC + VED classification is best used for spares
• X Y Z + FSN classification to reduce
obsolescence.
 Session 8
Thursday 11 February 2016
Codification
 Codification
Some times a product may be there in the stores, but
the user is told that it is not available : because of
improper nomenclature.

Word description many times may be too long.

Similar to Roll numbers of students, subject code, PAN

card number, account number in banks, vehicle
number, phone numbers, library , retail mall
 Codification
• Is the systematic, concise representation of
equipment, raw material, tools, spares, supplies, etc.
in an abbreviated form employing alphabets,
numerals, colours, symbols, etc.

• Example colour coding is used in G.I. pipes

A class (light) yellow
B class (medium) blue
C Class ( heavy) red
 Codification
• Is a process of representing each item by a
number, the digits of which indicate the
group, the subgroup, the type and dimensions
of an item.
• 8 to 13 digits
 Advantages of codification
• Accurate and logical identification
• Avoidance of long and lengthy descriptions
• Prevention of duplication
• Avoids confusion
• Starting point of simplification and standardization.
• Accurate records and accounting
• Efficient purchasing
• Minimization of clerical work
• Efficient storekeeping as it is easy to locate
• Easier computerisation
• Example ; colour coding is used in pipes
Standardisation
 Standard
• A standard is defined as a general agreement
of a rule established by authority, consensus,
or custom,

• Yellow Bulbs : 25, 40 , 60 , 100 Watts

• LED bulbs : 7 W, 12 W, etc.
It could be
(i)Dimensions : to ensure interchangeability
(ii) Performance : eg. specs for cement/ steel
(iii) Design : eg. Mix design
(iv) Safety requirements
(v) Code of practice : eg. IS 456 : RCC
 Levels of standardisation
• Individual level, industry level, national level,
international level

• Size of brick 9 inches

• Paper size A4, A3, A2, A1
• Spanner ( Paana) eg. 10 number, 12 number
 Advantages of standardisation
• (Page 282 Jhamb)
• Clarity to suppliers
• Specifications can be easily spelt out
• Eliminates need to prepare company’s
specifications
• Allows accurate comparison of quotations
• Reduces unnecessary varieties , enables
economical sizes, etc.
contd…
 Contd… Advantages of
standardisation
• Ensures interchangeability.
• Easy to locate suppliers
• Since more than one manufacturer can supply
standard items, it will imply better
availability, better price and better delivery
• It routinizes purchase efforts, less stock and
hence less obsolete items
contd…
• Less inspection efforts, eg. ISI mark no need to
inspect
• Can enter into rate contract with standard items
• Spare parts required less
• Simplification
• Reduces obsolescence
• Forms basis for inventory analysis
• Easy for buyers to replace spares
 VENDOR
DEVELOPMENT
 Source selection
Why source selection ?
Reputed suppliers are intangible assets to any
organization.
They not only supply materials but are also
extremely important sources of information,
with regard to market conditions, price trends
and general industrial climate.
• Source development is also important for
import substitution, cost reduction and quality
improvement,
• Source selection and development is a
continuous activity.
 Stages in Source Selection
1) Searching : Need for material is the starting point.
Some companies use forms. The search process
begins with the finalization of specifications in
consultation with technical department. It consists
in identifying the sources of supply – the initial
survey should be exhaustive. ( Yellow pages, etc)
2) The routine sales calls by suppliers’ representatives
is another important source of information.
• Salesmen should be encouraged to present
the products in which the organisation is
presently interested, and their company’s
entire product line.
• Trade shows, technical exhibitions and
samples are other important source that assist
the search process.
 Selection
( identify best source to meet delivery and quality
requirements in the long run at competitive price )
Supplier’s financial strength, quality, facilities,
efficiency, industry relations, technical excellence and
position in the industry.
Inspect plant of vendor to access the technical
capabilities, efficiency, equipment, financial viability,
quality control, raw material practices, etc.
 Buyer consolidates the information in a
systematic manner :
1) Building and General Impression of good maintenance
2) Production and technical competence
3) Quality control and inspection facilities
4) Financial Resources
5) Other companies supplied to
6) General Observations
7) Conclusion : Should the vendor be added to our list of
approved suppliers : Yes/No
• The buyer may also ask some organisations
which may be using the materials supplied by
the vendor in order to assess vendor’s rating
with his clients. The information thus
collected provides basis for preliminary
selection of suppliers.
 Negotiation and trial orders
• After the preliminary screening and selection,
negotiate with vendors for placing trial orders.
• Various aspects such as terms of delivery,
price and quality are finalised and then the
purchase orders are released for the initial
trial.
 Rating
• After trial orders, it becomes necessary for the
buyer to rate the vendors to enable him to
determine how he should apportion his
requirements among the vendors.
• Continuous rating should be utilised.
 Rating
• A vendor’s performance in meeting the
quality, delivery and price standards set by the
buyer has to be assessed in a systematic
manner.
 Vendor performance rating
Name of vendor PO No.
Date
Item
Value Cat.
1 Delivery performance:

(a)Adherence to time schedule (Weightage 40%)

No. of deliveries made on scheduled date x 40
Total number of scheduled deliveries

(b)Adherence to quantity schedule (Weightage 20%)

No. of correct lot sizes delivered ____ x 20
Total number of scheduled deliveries
2. Quality performance ( Weightage 40%)
Quantity accepted____ x 40
Total quantity supplied
Total
Assessed by Approved by
Special aspects in source selection
1) Local sources : Generally local sources
preferred ( Eg. Hotel construction)
2) Subcontracting ( Make or buy)
3) Small or Big ? ( small orders : small supplier,
large orders : large supplier)
Material
handling
 Material handling
• Can be defined as the function dealing with
the movement, handling and storage of
materials during different stages of
manufacturing considered as material flow
into, through and away from the plant.

• Cost of coolie / hamaals

Materials handling takes place at various stages
1)Unloading at Goods inwards stores
2)Loading on an internal transport
3)Movement to stores for purpose of storage
4)Movement from store to place of work
• Material handling is about 10-15 % of total
cost of product, hence it warrants sufficient
consideration.
• Unlike many other operations, Material
handling adds to cost of product and not to its
value. Try to eliminate or atleast minimise
• Ideally there should be no handling at all
• Poor material handling may result in delays
leading to idle equipment
• Considerable reduction in cost possible
• "Demurrage" means the charge levied for the
detention of any rolling stock after the expiry
of free time, if any, allowed for such
detention.

"Wharfage" means the charge levied on goods

for not removing them from the railway after
the expiry of the free time for such removal.
 Symptoms of
poor materials handling
1) Production losses due to delays in trucking,
handling and supplying material to the point
of use
2) Long queues of vehicles at supply point
3) Congestion at receipt areas / production
areas and lack of activity at such areas
4) Frequent cases of materials damages in
handling ( breakage of tiles/pipes/ glass etc)
 Suction cup
for lifting glass manually
• If use Hooks for cement , some quantity of
cement is lost
 Contd… Symptoms of poor
materials handling
5) Skilled workers performing jobs concerning
movement, storage and handling
6) Badly damaged floors and passages
7) Piling of work-in-progress
8) Overcrowded floor area
9) Large number of unskilled contract labourers for
handling materials
10)Frequent cases of material mix-up
contd…
 Contd… Symptoms of poor
materials handling
11)Frequent breakdown of material handling
equipment
12) Excessive loading/ unloading time
13)Frequent cases of rework and rejection due
to handling defects.
14)Frequent blocking of passages
15)Difficulties in locating items when required
16)Evidence of spillage, wastage
 Objectives of
well planned material handling
1) Speed and economy in movement of
materials
2) Prevention of damages to materials
3) Safety in material handling (prevention of
accidents)
4) Minimisation of fatigue and drudgery
5) Improvement in productivity
contd…
 Objectives of
well planned material handling
7) Higher plant efficiency
8) Greater utilization of material handling
equipment
9) Good housekeeping
10) Efficient storekeeping
11) Lower investment of work-in-progress
Session 9
 Factors to be considered in analyzing
material handling problem
1) Engineering factors :
a) layout, load bearing strength of floors
b) Process : sequence of operation
c) Nature of materials and products to be
handled : large /small /singly /together/
heavy/light/ unbreakable/ fragile, distances
d) material handling equipment factor : type of
equipment suitable , capacity, space required for
operation, power requirements, adaptability
contd…
 Contd.. Factors to be considered in
analyzing material handling problem
2) Economic factors
Initial cost, interest , depreciation
Cost of installation
Cost of maintenance and repair
cost of power
cost of labour required to operate equipment
licence fees ( eg trucks)
salvage value
savings / increase in production
 What should be done
• Unnecessary movement damages material and
causes loss of manhours in shifting materials. When
layout design is being developed, try to reduce
handling
• Consult production department
• Study movement of material at the outset
• Use bins rather than storing on floor
• Use trolleys, use racks
• Conveyors/ lifts to be used
• Minimise re-handling
• Work study technique ; avoid duplicative
movements
• Use gravity , (tipper trucks, chutes)
 Guidelines
1) Eliminate handling wherever possible
2) Sequence operations in a logical manner so that
handling is unidirectional and smooth
3) Standardise handling equipment to the extent
possible, less spares will be required
4) Install preventive maintenance so that downtime is
less
contd…..
 Contd… Guidelines
5) Versatility and adaptability
6) Maximum unit load so that trip is productive
7) Work study
8) Non productive operations should be minimum
9) Location near usage point
10) Application of OR techniques
11) Safety aspect : system should be simple and safe
12) Proper coordination by training.
 Types of equipment
Fixed path : Tower Cranes

Variable path : wheel barrow , Earth moving

equipment, trucks, forklifts, mobile cranes
Purchasing of
Capital
Equipment
 Purchasing of Capital Equipment
• Non repetitive , usually once in ten years
• Large investment
• For accounting purpose it is considered as
fixed asset, to be capitalised and depreciated
over the economic life of the equipment.
 Purchase versus lease
The question of leasing equipment arises
because of
(i) Availability of funds
(ii) Duration for which equipment is required
(iii) Urgency to obtain equipment
International
Purchasing
• Cement : ISI mark compulsory

• The government has made ISI mark

mandatory for sale of cement in India,
whether it is manufactured locally or outside
the country.
 Steel
• IS 1785(Pt 1)
Specification for plain hard-drawn steel wire
for pre-stressed concrete
Part 1Cold-drawn stress relieved wire
• IS 1786
High strength deformed steel bars and wires
for concrete reinforcement
of sizes 16 mm and above
• According to the new guidelines of Quality
Control Order (2nd Amendment), all
manufacturers, foreign or domestic, cannot
manufacture, import, store for sale or
distribute reinforcement steel bars used in
construction activities which do not conform to
IS 1786 standards and which do not bear the
standard ISI Mark. BIS Authorities have the right
to seize such spurious reinforcement steel bars.
• Foreign cement makers line up for BIS
approval
• Shilpa Shree and Jeetha D’Silva
• First Published: Wed, May 16 2007
• Two Pak cement firms clear BIS standards
check
• Sanjeev Choudhary, TNN Aug 23, 2007,
• NEW DELHI: Cement from Pakistan has finally received the ISI mark and
can land in India. The Bureau of Indian Standards (BIS) has given its nod to
Lucky Cement and Maple Leaf, the first two Pakistani manufacturers to
obtain the certification. A third manufacturer, Pakistan Cement, is likely to
get the certification by next week.
• Cement from Pakistan may come at a substantial discount to the prevailing
domestic prices. Consumers, mainly the builders, are hopeful that
domestic prices, which have risen by nearly 45% in the past one-and-a-half
years, would align itself with import prices.
• Import policies are not static and changes and
policies and procedures are very important.
• First check whether the item is allowed to be
imported
• Letter of credit LC : arrangement whereby
obligation to pay an exporter is undertaken by
a bank.
Computers in
Materials
Management
 Activities of Materials Management
covered by computerisation
1) Purchasing
(i) Preparing forecasts of materials based on
their past usage
(ii) Providing historical information on
suppliers, prices, past Purchase Orders
(iii) Selecting the most efficient sources of
supply based on analysis of quotations,
etc. Contd…
 Contd… Activities of Materials
Management covered by computerisation
(iv) typing PO and Delivery schedule
(v) Providing control on receipt of quantities
higher than order quantity and/ or delivery
schedule
(vi) Comparing actual receipts against delivery
schedules and producing memos and
reminders to vendors for pending delivery of
materials contd…
 Contd… Activities of Materials
Management covered by computerisation
(vii) Keeping uptodate records of receipts of
materials and providing information on
outstanding orders
(viii) Matching suppliers’ invoices with Purchase
Orders and Goods Receipt reports.
(ix)Verifying price, discount, freight, taxes,
payment terms, etc.
 Contd… Activities of Materials
Management covered by computerisation
2) Stores Management
(i) verifying that quantities received from
suppliers are adhering to delivery schedule
(ii) prepare Goods Inward Note ( GIN) for
materials received from suppliers
(iii) update inspection results and pending
items with inspection/ QC Deptt
(iv) compute pending quantities contd..
 Contd… Activities of Materials
Management covered by computerisation
(v) Update stock ledger
(vi) Compute stock on hand, compare against
re-order level and generate purchase
indents
(vii)Prepare consumption statements and
month end stock ledger (inventory report)
(viii)Effect stock adjustment based on physical
stocktaking.
 Contd… Activities of Materials
Management covered by computerisation
3) Inventory Control and Materials Planning
(i) Replace manual inventory valuation by
computer
(ii) carry out planning and materials budgeting
activities
(iii) Fix operating levels of inventory such as
minimum, maximum and re-order levels
( eg. In Walmart)
 Contd… Activities of Materials
Management covered by computerisation
(iv) generate exception reports, consumption
reports and stock reports
(v) carry out ABC, FSN and XYZ analysis on
periodic basis
(vi) analyse the consumption data and
forecast future requirements
(vii) study past data on prices to forecast
future trends.
Management Reports on Materials
To keep track of the various operations going on,
different types of reports are required :
1)Purchase history
2)Vendor delivery record
3)Price variance in purchased material
4)Vendor wise purchase
5)Items below re-order level and above maximum
level contd…
contd… Management Reports on Materials

6) Material consumption for the period

7) Expenditure due to materials at different sites
8) Inventory transaction and stock status
9) Amount payable (agewise)
 Specific Reports
1) Pending Purchase indent report ( indents yet
to be converted to Purchase Orders)
2) Pending Purchase order reports ( supplies yet
to be received against orders already placed)
3) PO released during current month
4) Pending GR Report ( material received but
yet to be taken into stock, maybe due to
Inspection , QC) contd…
 Contd… Specific reports
5) Price variance report ( variance in price of an
item ordered on different suppliers)
6) Stock transaction Report ( consumption and
stock on hand)
7) Low stock item report ( so that it can be
expedited to avoid stockout)
8) High stock item report
contd….
 Contd… Specific reports
9) List of inactive items
10) List of surplus items
11) Physical Inventory slips report ( to correct
discrepancy in physical stock and book
balance)
12) ABC Classification.
Purchase and
Stores Manual for a
Construction Organisation

( Standard Operating Procedure)

 Reference
• Chapter 6, Handbook of Construction
Management
• P.K.Joy
• Second edition
 1) Policy
• The organization shall purchase only those materials
and equipment which cannot be economically made
by itself.
• At every site there will be a workshop to undertake
small-scale fabrication, machining and rectification
work
• Indents raised by Project Management department
for procurement shall be sorted by the Planning
Manager between `buying’ and `making’ and action
taken accordingly contd…
 Contd… Policy
• Purchases should be made economically with strict
adherence to quality specifications.
• Materials and equipment should be available at the
right time at the site without causing any hold-up of
work.
• The right quantity of materials shall be purchased so
that there is no wastage nor shortage nor any
emergency purchases.
• Store-keeping shall give efficient service to support
the operation of the organization.
 2) Purchase Procedure
(i) Materials Scheduling
Where there is a supply of direct materials and
equipment ( as in a turnkey contract) , the
organization’s Project Manager shall prepare
a descriptive list of such materials and
equipment with specifications and give it to
the Planning Manager for Procurement.
contd….
 Contd…Materials Scheduling

• This apart, the Planning Manager shall himself

prepare separate lists of indirect materials,
tools and construction plant and equipment
to be procured for executing the erection and
installation part of the contract in hand.
 Contd…Materials Scheduling
As the next step, the Planning Manager shall
prepare schedules of supplies of the 4
categories of materials, namely :
-Direct materials and equipment
-Indirect consumable stores (consumables)
-Tools, and
-Capital plant and equipment needed to carry
out the contract work
 Contd…Materials Scheduling
• The schedules should contain material
description and specifications, total quantity,
the required starting date of supply,
sequential distribution of quantity over weeks
or months.
(ii) Indents
After ascertaining as to what can be either made
inside or transferred from other sites , the
Planning Manager shall raise
(a)Indents for `purchases’
(b)Internal job-orders for `making’ and
(c)`Transfer advices’ for transfer
 Contd… (ii) Indents

Indents indicating the most suitable delivery

schedules shall be sent to Materials Department
for procurement.
Internal job orders shall be sent to site
Transfer advices’ copies shall go both to the
transferring and receiving sites
(iii) Indents registration
The Materials Manager shall record all indents
in an indent-register or a computer file .
(iv) Market searching and registration of sellers
Using personal knowledge and with the help of
trade journals, market directories, yellow pages, (
maybe online on computer) , a market searching
and registration of sellers should be done.
Criteria to be considered for registration:
reputation, availability of credit and shipping &
transport convenience
• Suppliers register shall be updated from time
to time, striking out names of parties who fail
and adding those of new and more reliable
ones
(v) Sending out Enquiries
The Materials Manager shall send out enquiries
using a preprinted `enquiry form’ to the
registered sellers inviting offers, giving full details.
Sketches / drawings may be attached to enquiry
wherever relevant
Wherever necessary a free sample shall be asked
for
(vi) Receipt and comparison of offers
On receipt of offers, the essential terms and conditions
shall be compared by using a pre-printed form of
comparative statement.
Factors to be compared are : seller’s standing and
history of past performance , specifications and make
offered (esp. if he has asked for any deviation from
description or specifications), delivery period, warranty,
terms of payment, price, escalation terms, packing,
freight, insurance , servicing offered for installation and
commissioning
• After preparing the comparative statement,
some sellers may be called for negotiations on
price, delivery period, deviations, etc.
• Price alone shall never be the sole basis for
purchase decision.
• In case, there is a sole source , because of
absence of competitors for any particular
product, the question of comparision does not
arise.
(vii) Selection and Recommendation
A Purchase committee consisting of Project
Manager, Planning Manager and the Finance
Manager shall select the best offer considering
not only the factors mentioned earlier but also
prime cost provision and budget and record
their recommendation.
Model of Industrial Buyer Behaviour
by Jagdish Sheth
(viii) Decision
Based on the recommendation of the
committee, the Managing Director or Chief
Executive may signify his decision to place
order.
(ix) Placement of orders
Care shall be taken to place orders within the
validity period of offers.
A Purchase Order being the last document of
commitment in the Purchasing process, care
should be taken to ensure that it is complete
and free from defects.
Essential contents of a Purchase Order ( PO) are :
Material description, quantity, Price per unit,
discount, escalation terms, time of delivery,
place of delivery, terms of payment, inspection,
testing and test certificate, packing and
despatching instruction, invoicing instruction,
freight , insurance, servicing and warranty
• Even if cash purchase is made, it is advisable to issue
a Purchase Order for better accounting.
• Only those few persons who are authorised shall
sign the Purchase Orders.
• Orders for capital assets shall only be signed by the
M.D. / C.E.O.
• Copies of PO shall be given to Project Manager,
Planning Manager and Finance Manager. One copy
shall be given to Inspecting Officer
• Order Number and date shall be entered
against the respective terms in the indent-
cum-order register.
• Order confirmation should be obtained from
seller.
 3) Follow up
• The Materials Manager shall follow up
purchase orders to expedite manufacture
and/ or supply.
• Any delay in delivery of materials can lead to
corresponding delay in the site execution with
serious consequences and financial loss.
• If necessary Materials Manager shall visit
sellers’ factory/ godown.
• The Materials Manager shall make monthly
reports on the position of pending supplies and
send copies to Planning Manager, Project
Manager and MD. The report shall indicate if
there is any likelihood of a delay and in that
case what preventive measure is being taken.
• If a seller is found to be failing, immediate
cancellation of the order on him and
alternative arrangement must be made
without losing time.
• If any supplier commits breach, risk purchase
from any available alternative source, at
possibly higher price shall be made after
giving the original supplier a legal notice that
the excess expenses shall be recovered from
him.
 Risk purchase
• The risk that is unexpected changes in the
prices would penalize an purchaser. Since the
purchaser knows that there is risk in
purchasing the product as the prices would be
fluctuation, still he purchases the same. It is
the unexpected changes that produce this
risk.
 4) Stage Inspection
• If seller is manufacturing an item to the
organisation’s order stage inspection shall be
carried out with a view to ensuring quality as
well as timely completion.
• Wherever relevant, the specified tests shall
also be carried out.
 5) Final Inspection
• A final inspection and/or testing of materials
shall be carried out by Inspection Officer along
with the seller’s representative.
• Certificate of such inspection shall be made on a
preprinted form.
• The essence of the certificate shall be that the
item has been checked, measured and tested,
and found to be in conformity with stipulated
description and specifications
• The final inspection before despatch shall not
absolve the seller from his warranty
obligation.
 6) Packing and dispatching
instructions
Safety of materials in transit depends on packing
and despatching instructions.
Examine and confirm.
If delivery is to be taken personally , intimate
seller in advance name, title and identification so
that there is no chance of some unauthorised
person taking delivery of materials and
misappropriating.
7) Sales Tax/ VAT Applicability and
documentation
• Materials Manager should consult Finance
Manager / tax practitioner before stipulating
instructions.
• If inter-state buying works out to be cheaper,
( C form) then buy inter-state
• Sales Tax/ Purchase tax/ VAT Tax on sale or
purchase within the State.
• Central Sales Tax Tax on sale or purchase in the
course of interstate trade.
• Works Contract Tax Tax on transfer of property
in goods used in execution of a works contract.
• Lease Tax Tax on transfer of rights to use goods
or lease.
 8) Delivery challan
• Delivery Challan or packing list should contain
full description of item delivered tallying with
the Purchase Order.
 9) Lorry Receipt/ Railway Receipt
• Carrier’s receipt is a valuable document. It is
sent through courier/ personally by the seller
to the buyer. The consignment will be
delivered to the consignee against return of
this receipt at the destination. The Materials
Manager should keep a photocopy of the
receipt.
 10) Transit Insurance
• As far as possible, insure all materials
 11) Arrival Intimation
• Materials Manager shall ensure that his
representative makes regular enquiries about
arrival of every consignment and takes
delivery expeditiously.
• If any consignment does not arrive in a
reasonable period, a claim should be made to
the carrier for compensation of non-receipt
 12) Freight to pay/ Pre-paid
• Generally road carriers take better care of `to
pay’ consignments
 13)Demurrage / Wharfage
(Detention charges)
• If consignment is not cleared within the given
free days, carrier will levy detention charges
as it blocks the carrier’s space unnecessarily
 14) External damage to packing
External damage to packing ( such as hooks on
cement bags) is indicative of a possible
damage to the contents – even a partial loss.
Carrier liable for transit damage or loss.
 15) Open delivery
under carrier’s inspection
• When any damage to package is noticed, the
consignment shall be taken open delivery of,
by opening it in the carrier’s presence and
giving him the opportunity to inspect the
damage or shortage.
• The insurer may be called to survey the
damaged consignment, wherever relevant, at
the carrier’s godown or dock.
 16) Transit damage/shortage/
loss certificate
• A consignment may be lost in transit.
• If damage/shortage , get carrier’s certificate on the
spot after opening the packing.
• If lost, carrier will delay in giving certificate. The delay
will cause delay in ordering replacement and thereby
hold-up in construction work, hence Materials
Manager should lodge a claim on the carrier even
before getting a transit loss certificate and initiate
insurance claim and replacement action. Get carrier’s
endorsements with dates that consignment has `not
arrived’
 17) Claim on carriers
• Immediately after getting a transit damage/
shortage/ loss certificate , a claim shall be lodged on
the carrier by addressing a letter giving the
particulars of the consignment involved and the
reference of the certificate issued by him and asking
him to pay compensation at once. Claim letter shall
be served by hand and acknowledgement received
or sent by registered post with acknowledgment due
• In case of missing consignment, transit loss
certificate is not essential.
• Where cost to be incurred for repairing the
damage has not been assessed by experts, a
claim intimation without monetary value shall
be served on the carrier with the mention that
the repair cost is being assessed and it shall be
intimated later on for payment.
 18) Claim intimation to insurer
Send claim notice to Insurer, giving reference of
the policy
 19) Formal financial claim
Formal financial claim to be prepared by Site
accountant and handover papers to carrier/
insurer
 20) Checking of the materials on
receipt
• Storekeeper shall unpack and check materials,
tallying with delivery challan or packing list
and note down shortage or damage if any.
Intimate seller.
 21) Technical inspection and
testing
• Planning engineer shall inspect items from
technical angle.
 22) Notify defects to the seller
• Any defects found shall be intimated to seller
for his inspection and rectification or
replacement free of cost. Rejected material to
be removed by seller at his cost.
 23) Order replacements
• Where seller is not obliged to give free
replacement, replacement should be ordered
at once by Materials Manager so that
construction work does not suffer. Supply
should not be delayed for sorting disputs.
 24) Order repairs to transit
damage after insurance survey
• If damaged material can be used after repairs.
Estimate of cost of repair should be given to
insurer.
 25) Prepare material receipt or
check report-cum-goods-inward note
• After checking and inspection, Storekeeper
shall prepare a material receipt which can be a
combination of check report and goods-
inward note.
• Send copies to Materials manager and site
accountant for passing seller’s invoice
 26) Take the receipt into store
account
• Materials Manager shall get copies of material
receipts. He shall enter particulars in indent-
cum-order register/ computer
 27) Follow special handling and
storing instructions
• Example cement, asbestos sheets, tiles, glass
panes, insulation material, etc ; follow
instructions of special care in handling and
storing
 28) Protection during storage
• Most materials will require protection from
rain, flood, moisture fire, theft, burglary.
 29) Issues procedure
• Preprinted issue vouchers
 30) Who are authorised to draw
• Project Manager may authorise his
supervisors.
• For expensive items Project Manager should
himself sign
 31) Physical issuing
• ( Construction Equipment, contract materials,
tools, consumables)
 32) Issues counter
• From guarded issues counter
 33) Pricing
• Follow various methods for different purposes
(a) For contract costing
• (b) own construction equipment
• (c) making components at site
• (d) Recovery from subcontractors
• (e) Escalation claims on owner
• (f) Valuation of future resources
 34) Physical inspection and
verification
• To ensure book balance and physical stock
tally.
• At different intervals , expensive items daily.
 35) Watch and ward
• Sufficient security guards
 36) What to do if a theft or
burglary or fire takes place
Security guards should know :
- whom to inform ( 2-3 alternatives)
- Meanwhile what to do and how to do it
- Where are the means and how to access
- How to use the means
 37) Fire protection
• Keep alarms, sand-filled buckets, portable fire
extinguisher, wter connection
• Call fire brigade
 38) Insurance formalities
• Insurance formalities should be known to
storekeeper
 39) Re-ordering of consumables
• Based on review chart , ensuring that
unnecessary inventory is not carried
 40) Fixation of re-order level
Will vary

• Minimum and maximum stock levels

• EOQ
 41) ABC analysis for special care
• Committee shall do ABC analysis
 42) Inventory control
• Continuous review,
 43) Treatment of slow-moving and
non-moving ( or inactive ) materials
• Send to other site where they are needed or
sell them
 44) Write-off procedure and
authority
• Finance and Account Department shall decide
 45) Owner’s ( Client’s) materials
• If supplied at issue rate, then if market rate is
lower , overall economy shall be examined
• If free supplies, give full account to Owner’s
engineer including scrap, otherwise Owner
will ask for recovery
 46) Construction equipment
• Storekeeper shall keep account
 47) Accounting for `made items’
• Find out cost incurred .
• Treat at par with other bought out items.
 48) Material handling
• Unloading : equipment, avoid damage
 49) Standardisation
• Variety reduction, interchangability in spares
 50) Warranties
• Preserve and take advantage of
 51) Malpractices
• Excess rates allowed to suppliers
• Inferior goods
• False store entries
• Underhand sale of tools and expensive consumables
• Omission of store recoveries
• Diversion of inward bound goods to others
• Selling if scrap/ surplus without record or at very low
prices
 52) Pilferage
• Security measures
• Perpetual inspection and physical verification
• Unwanted entry into store to be prohibited
• At exit point checking by security
 53) Scrap
• If not of the owner (client), then dispose of at
site at maximum available price.
• Auction
• Make register
 54) Codification
• Evolve coding system
• Educate staff who are to allot and use the
codes
55) Record keeping and accounting
• Record keeping Lots of records such as PO
copies, Delivery challans, etc.
• Accounting