Purchasing Objectives

Materials management brings together under one manager all the planning, organizing, and control activities associated with the planning, organizing, and through an organization. Physical distribution is even broader, encompassing managing materials flow of materials into and through an organization. Physical distribution is even broader, encompassing managing materials storage and transportation flow out as finished products. In the context of operations management, we focus here on the narrower purchasing function, which provides materials, supplies, and services from outside vendors (suppliers). Accordingly, purchasing in an important boundary function that supports operations by acquiring major resources for the conversion process for manufacturing firms involved in assembly, it is not unusual for the cost of purchased materials to exceed, as a percent of total product cost, the value added internally to the product through manufacturing and assembly. The importance of the purchasing function to the firm’s performance and to operations performance is substantial.

• Raw materials and brought-out components usually constitute a high proportion of the total cost of sales of most manufacturing organization. Depending upon the industry, the ratio of materials costs to labor costs varies from 2.5 to 4.0. Manufacturing activities where material is 33 percent or more of total production costs are quite common. The productivity of materials could be more significant than that of labor in reducing overall costs. It justifies a correspondingly high degree of analysis and control.
• Where a concerted effort to improve materials productivity has not been made in the last five years, gains of 3 to 8 per cent of the total materials bill have been achieved frequently.
• The demanding nature of current production problems leads production and technical management to concentrate nearly inevitably on industrial relations, payment problems and related output. Investigations to improve materials productivity do not – normally – raise emotional or fundamental industrial relations problems. In practice, therefore, materials improvement is one of the most easily achieved major savings, even in the most belligerent industrial relations environments.
• Experience also suggests that the measurement of materials productivity is best done as ‘material yield’. ‘Yield’ is the weight of finished products accepted by customers when compared with the weight of all materials issued for production purposes. Percentage yields should be calculated both for individual operations and for each production line being studied.

 Materials Productivity – relationships with other measurements and activities:

• Improving materials productivity is one of the most direct and important ways of enhancing added value.
• Gaining information on material losses can help in establishing general data for production control and costing purposes, so providing the means to improve the planning and control of production resources generally.
• Material losses can be related to incentive payments and help to increase their effectiveness.

The importance of data in improving materials productivity

The data book: Usually where materials productivity has been improved considerably the first step has been to record how much and at what stage in the manufacturing process material loss occurs. Such information is often entered in a ‘data book’ containing other relevant manufacturing information, which is basis for standard costs. (So considerable relevant information could already be available)

Use of materials productivity data

• By highlighting anomalies that would remain hidden otherwise, data collection often produces immediate benefits. While line managers are usually aware of their materials productivity in some degree, the ‘data book’ should provide a studied record and practical evidence of where an immediate improvement could be made.
• Materials productivity data should also provide a means for initiating and guiding action and for measuring and recording improvements.
• The use of information on materials productivity is therefore invaluable in setting objectives and measuring production performance generally.

Considering improvements in materials productivity: Types of information required

Material losses mainly result from two causes:

• Technical losses – these are considered to be part of the production process (grinding, pressing, cutting, trimming, etc).
• Operational losses – these occur during the process of manufacturing and can be due to material quality defects, poor workmanship or machine/manufacturing deficiencies. Information should be collected under these two main headings, as the approach to improving materials productivity could be substantially different in each case. Problems intrinsic to the production activities may require technical improvements to the plant. Operational losses may emphasize the need for tighter control over production and product quality than has existed hitherto and a systems approach may therefore be appropriate.

It is further suggested that data should be collated to answer three questions:

• Do we have a problem? – Often the problem is hidden by a lack of data. For example, ‘Yield figures’ are not regularly produced. Occasionally the comparative costs of labor and material are not known by the managers who control these resources.
• Where do we have a problem? – Pinpointing where material losses occur is usually halfway towards improving materials productivity.
• Why do we have a problem? – Frequently by far the most difficult question to answer.

Do we have a problem?

A broad indication of materials productivity and the degree of possible improvement can be acquired by obtaining the value of various major materials from their use, the associated lab our cost and eventually the materials yield. This information could be particularly valuable if it could be calculated for the key products which the organization manufactures

Where do we have a problem?

Technical and operational losses usually occur unevenly both throughout the product range and at operations or processes in manufacture. It is important to determine which products have least yield and at what operations or processes most loss occurs.

• Technical and operational losses usually occur unevenly both throughout the product range and at operations or processes in manufacture. It is important to determine which products have least yield and at what operations or processes most loss occurs. There is a need to categorize why material losses occur to gain a rough first indication of ‘where do we have a problem’ – e.g.:

Technical losses                                                          Operational losses

Machine limitations – (due to machine design)            Operative errors

Methods failure                                                           Machine faults

Raw Material quality losses

General material chemistry

Products design

Standards too high for material and products

• Possibilities of obtaining speedy results only the products comprising eighty percent of the product range should initially be measured as proposed. Sampling should be carried out to indicate where main product losses occur. (Process or operation losses should be obtained). All available data should be used to indicate the areas where materials productivity can be improved. (Costing information could be an obvious starting point.) Obtaining appropriate information can be a lengthy and laborious process, but without it signposts will be missing which can direct effort to the most likely opportunities for improving materials productivity. In practice up to one man year has been spent in preparing appropriate information for one product line of twelve operations with approximately 8,000 part numbers. It is possible that experiments will have to be made to provide accurate information.

What do we have as a problem?

To determine why material losses occur and establish a cause for each loss is not always as easy as it sounds. The real cause may be hidden until a fairly lengthy technical evaluation has been made. A project team of production, production engineering, quality control and systems / costing personnel is often needed for a ‘reasons why evaluation’.

Considerable engineering and technical problems may have to be overcome if materials productivity is to be improved. Many of the solutions will need capital expenditure and the process of implementation may be slow. The total savings to be made will depend upon the type of loss, whether substantial or only minor parts of the loss can be saved and the amount of capital and other expenditure needed to achieve the savings.

However, production personnel with comparatively slight technical know-ledge have made significant savings without help once they have produced for themselves, or have produced, appropriate information.

• The product mix and materials productivity: Often the product mix and the size of orders have an important effect on materials productivity. One type of produce may, owing to difficulties in making it, have a higher material loss than others. Appropriate information is needed.
• The team approach to improving materials productivity: The mixture of ‘technical’, ‘operational’ and ‘mix’ classes of material losses which are usually found suggests that as multi-discipline team will have most immediate and long lasting benefit.

Approaches to Improving Materials Productivity

Materials productivity: Materials productivity is the responsibility of production line managers. It should be one of their principal objectives and appropriate targets should be set up. Their responsibilities should include their establishment of materials productivity improvement assignments.

Usually a material record card can travel with the batch or order so that an accurate record can be made of material losses. Sequence numbers can be used to ensure that all material issues have been accounted for.

Batch control is recommended – i.e. one batch or load of a particular weight is monitored and the resulting material yield calculated. A count of work in progress, therefore, becomes less of a problem in providing control over weekly or monthly material issues and receipts.

Control over raw material issues must be efficient. No material should be issued without the sanction of a responsible individual and never in excess of that required by the orders being produced.

• Material utilization reports: Weekly or monthly reports are required which will record material variances from standard. The input-output records should be used to provide input data for this purpose.

Records providing Information should be produced at intervals which enable managers to increase their performance by taking action to improve materials productivity. Timing therefore is very important in producing control information.

Operational Approaches to improving materials productivity

Quality Control: Enhancing the policeman role of inspection or quality control will have benefits if the enforcement of well-defined quality rules is needed. This could have limited value, however, if the more fundamental causes of quality defects are not tackled. Preventing poor quality products reaching a customer is often a negative approach. A positive method of determining why products are rejected and what can be done to achieve higher materials productivity is often decisive in making quality control a key influence in reducing material losses. The following questions should be answered to provide an appreciation of the effectiveness of the quality control function:

• Do we carry out quality control at the key points in the production process which maximize the possibility of preventing material losses, particularly by operative error?
• Is the quality control process geared to catch rejected material early enough in the manufacturing process to ensure that the maximum amount of recycling of material occurs?
• Are reasons for quality failure so recorded that line managers can take action from time to time?
• Do line managers carry out corrective action once they have been told of causes of rejection?

Are rejections brought to the attention of operatives? Is any disciplinary action taken as a Consequence of major rejects being caused by operative error?

Control of Operative performance: The control of operative performance is another vital element in reducing material losses. The following questions ne3ed to be answered to ensure that appropriate control is in operation.

• Is materials productivity part of the bonus system? Do we use standard scrap allowances indiscriminately so that some operative performance is hidden?
• Do we always know which department, shift and individual have caused reject material?
• Are agreed disciplinary procedures activated when operative error causes material losses? Do operatives appreciate the value of material? Is operative training conducive to reducing material losses?

‘Participation’ in improving materials productivity is often beneficial.

Technical approaches to improving materials productivity: Taking a technical view alone of material losses will be ineffective if operational losses are more important and only a small proportion of time is spent on these latter. Often the results of a technically orientated approach to materials productivity are requests for substantial spending on capital equipment or on plant modifications. This may be wrong if output and other factors are not taken into account.

Use of value analysis and value engineering: Value analysis and engineering are philosophies, rather than techniques that can be applied to materials productivity. Their intention is to question all facts of products and how they are made, and to determine whether all costs incurred contribute to the final value of the product

“Ten tests for value” have been determined which ostensibly challenge all non-essential product characteristics and operations. However, the following questions may be more relevant.

• Does every facet of the product produce value? Is ever one necessary?
• Do we use materials which are too expensive?
• Is every operation performed essential? Could nay operation be combined with another? Why do we need to make the product in the way we do? Are there cheaper ways?

Some of the possibilities of applying value analysis might be:

• To challenge the need to add on material, initially, merely to be ground off at a later stage
• To challenge the finish of a product For example, should the top and bottom surfaces of a product be treated in the same way although the bottom one is hidden in use?
• To challenge the need to carry out ‘finishing operations’ at a stage in the process when material recovery is impossible – i.e. after a product has been baked

Product geometry: In many production processes sheets or blocks are first made from which products are then pressed, stamped or cut. Product geometry analysis should ensure that sheets or blocks are of optimum size i.e. Minimum waste ensures from production processes.

As a rule of thumb it is likely that, for the top eighty percent of the product range, product geometry calculations to provide maximum material yield will be needed.

However, there may be a wide range of products absorbing marginal production time which could be made from a standard range of blocks or sheets from which two or more products can be made.

‘Standard sheets’ should be used where the gain in production efficiency exceeds in value the loss in material when using a tailor – made sheet. Such calculations will need the following information:

• Material losses – weight or square meters of standard material value taking account of related factory marginal costs.
• Cost of handling materials lost in production (dust, off cuts, etc.)
• Value of recoverable material when standard items are used.
• Gains in efficiency by using standard material, probably measured in better machine and labor utilization.
• Cost of stocking standard materials and risks of obsolescence.
• Gains and losses should be calculated in contribution terms if possible. Use marginal costs in any calculation made.
• Yearly off-take for each item will also be needed and calculations of annual losses and savings made before a product geometry decision is taken.

 Scrap control and recovery: In many production units a scrap control and recovery unit is usually extremely valuable in reducing material losses. Its main functions might be:

• To provide a scrap collection service to analyze scrap, grade it and store it for future use, recover it, or dispose of it.
• To know what scrap occurs, its costs, weight, shape, size, type and possible treatment which will ensure its profitable use. To understand why scrap occurs and to suggest changes which will improve materials productivity?
• If material is to be lost inevitably during the production process, production engineering and production planning should ensure that its future use and / or recovery is, in some way, facilitated.

Standardization and variety reduction: Reducing material qualities and product sizes should have an inevitable result on materials productivity. Fewer tools, fewer changeovers and set ups will be required, standardized methods of material utilization and control will be possible

• Leaving the ‘cosmetic’ operations on a product until the latest possible point in the production process
• Ensuring that the product mix is based (Partly) on contribution earnings.
• Ensuring that product rationalization is based on gradually widening (or enlarging) product sizes – e.g. using sixteenths instead of thousandths of an inch, providing minimum size tolerances, etc.
• Eliminating as far as possible, low volume and ‘one-off’ products (volume being one of the many factors in determining the product range).

The comparative importance of each method will differ according to the situation being investigated.

Tool control: Properly sharp tools should be available always. Tool control is vital for this purpose. The relationship between tool control and conversion/yields should be known.

Tool control should cover all items likely to have any effect on materials productivity, including:

• Jigs and fixtures
• Grinding wheels
• All cutting equipment used generally in production
• Drills etc

Engineering / machine improvements: New machines and equipment can often be justified by the material savings potential alone.

However, it would be erroneous to believe that this should have a high priority in materials productivity. Steps which might be taken are:

• Review machine/equipment standards. What was the material utilization standard envisaged at the introduction of the equipment?
• What modifications are possible to improve materials productivity equipment? What will they cost? How long will they take to introduce?
• What new equipment is desirable?

 Materials handling / method study: Handling of materials is often a direct cause of low materials productivity. Products are often chipped, broken or scratched through inadequate materials handling methods. Allied to this will be methods study and how products are handled when in process. Methods study should be used to improve productivity of labour, machines and materials.

Materials Cash Loss: The stores are often causing of materials cash loss. Some of the reasons for this are:

• Stocks are too high when measured against demand, cash flow requirements or return on stores investment.
• Stocks are too low for the service levels offered and the restrictions or stoppages in production caused by too little stock of some or all stock items.
• Too much writing off of stock through deterioration caused by poor stores control, bad housekeeping or inadequate storage area resting, breakages, materials going beyond normal standing time may all occur.
• Ordering of wrong stores, resulting in obsolescence
• Frequency of ordering too great and administration costs consequence too great and administration costs consequently too high.
• Loss of cash discounts, demurrage, loss or returnable packages, etc. owing to inefficient system.
• Pilferage: The stores are usually a happy hunting ground for the light fingered.
• Excessive control Too much control can often be as bad as too little. Too elaborate stock control systems may be expensive to administer. But it is better to have a complicated but goods control if these complete the store man’s normal working time.
• Over issues: Frequently material is over issued but unused material not returned to stores.
• Wastage caused by poor stores layout excessive heating and lighting is always a possibility.
• Wrong type of storing and materials handling systems, which are too costly for the use to which they are put Space planning and location is often a key factor in ensuring that the stores will give an appropriate service to production.

Security: It is sad to record that one of the most important aspects of storekeeping will be to minimize pilfering. Often the ‘shrinkage’ among tools usable at home is in excess of 20 percent and is very costly to the organization. The objects of stores security will be

• Not to put temptation in the way of employees.
• To protect stores so that there is an irreducible minimum of loss.

The various elements in ensuring stores security might be:

• Choose stores personnel of good character, known honesty and trustworthiness.
• Physically isolate all stores vulnerable to theft. This may mean erecting wire mesh or even brick and steel partitioned stores which can only be entered through a lockable door.
• Employees other than store men should not be allowed into the stores. (Occasionally stores are used as a canteen area during lunch breaks and at other times. This should be forbidden).
• All receipts and issues should be covered by proper receipted and numbered records with duplicates.
• As far as possible standards, preplaced quantities should be received and issued to perform a minimum load of stores which need not be opened before use and so should reduce possibilities of theft.
• If possible, a continuous inventory system (where a number of stock items are checked each day of each week) should be introduced, especially on items where pilferage is likely.
• The number of people who can sign requisitions for stores items should be a minimum. Operatives should not be allowed to draw items on their signature alone.
• The senior storekeeper should have clear cut accountability for his stores and their losses.

Purchasing Objectives: The objectives of purchasing can be summarized thusly; to efficiently provide fairly valued materials, supplies, and services in a timely manner. The following objectives are particularly important to operations:

• Good value: Value is the combination of price and quality. Good value means a competitive price, though not always the lowest one.
• Reliable schedules: One time, just in time delivery means schedules are reliable, a crucial quality.
• Minimized investment: Through careful analysis, the economics of order size, caring costs, and stock out costs determine the investment level. For example, quantity discounts must justify the larger investment (for a larger order) or investment unnecessarily increases.
• Efficient administration: Included here are executing a low-cost purchasing function, effectively coordinating activities with other internal functions (operations, engineering, etc), and maintaining good relations with vendors.
• Effective Purchasing: Effective purchasing means learning the purchase requirements, identifying qualified sources of supplies, minimizing the total cost of supplies and administering the purchase.