You can buy this here: http://imojo.in/27gu1t This ebook is aimed at helping small and medium businesses in their Purchase Management. The module starts with an introduction to the function, Roles and Responsibilities of executives in the function, Key tools and methodologies, covering ABC Analysis, Various Ordering Techniques like Re-Order Level & Two Bin System and various templates for MIS analysis.

2. Introduction
Not quite sure if this book would be useful for you?
If you belong to any of the category of people mentioned below, then this book
is for you.
• Manufacturing Sector expects the engineers to be Job-
ready. However, the engineering curriculum does not
cover some of the basics required in the manufacturing
sector. This book would help in understanding the
basics, so that a fresh engineer can perform his role
immediately aCer joining the company.
Fresh Engineers
interested in joining
Manufacturing Sector
• This book can serve as an “InducIon Manual” for the
new Supervisors and Engineers in the shop floor. Job
ResponsibiliIes, Do’s and Don’ts for each role, Tools
and Techniques and MIS reports are explained for each
department. This would help in faster career growth.
Supervisors / Engineers
in the Shop floor
• This book can serve as a Quick Guide to teach you and
your employees, the basics of manufacturing
organizaIon. This would also help you in managing your
people, building the organizaIon to the next level by
creaIng strong processes.
Second GeneraIon
Entrepreneurs

3. Why this book?
• In India, several studies conducted on the employability skills state that
only 5% to 10% of the Engineers graduating from the Institutions are Job-Ready
/ Employable.
• Industries require workforce which are readily employable, so that they
do not have to spend a lot of money and effort on providing basic skills and on-
the-Job training
• While large organisations have Induction training for their employees,
many medium and small scale companies do not have proper structure to
provide this training
• Their employees work with very little awareness of the best practices of
the industry, making them frustrated, fire-fighting for day-to-day activities and
results in a lot of stress
• This also makes the companies uncompetitive, leading to poor business
performance, resulting in poor motivation of the people, and this becomes a
vicious cycle
• This publication is aimed at providing the fundamentals of manufacturing
management which are not offered by any of our institutions/curriculum to
Engineers and Diploma Holders who are joining Manufacturing Industry
• This is our initiative to empower the professionals in performing more
efficiently and effectively helping the organization and the nation
• In addition, this gives us immense satisfaction that we are giving
something back to the ecosystem we are working in and are able to challenge
the traditional way of thinking and practices.

4. What do we cover in the book?
A typical manufacturing company has Production, Production Planning,
Quality, Stores, Purchase, Maintenance, Finance & Accounts, Marketing,
Human Resources, Admin , Information Technology and Sales functions.
However, we would cover
1. Production
2. Production Planning
3. Purchase
4. Stores
5. Quality
6. Maintenance
functions in this book, since these are the major areas, an Engineer or a
Diploma/Degree Holder joins after his/her degree.

5. Structure of the contents
Each department / function is explained in the following structure:
• General Introduction to the Function / Department
• Organization Structure of the function
• Roles and Responsibilities of the key incharges
• Process Flow in the function
• Tools and Techniques required in the function
• Pictures and tables to demonstrate the activities (wherever applicable)
• MIS Reports and the Analysis to be done
• Key Result Areas (KRAs) and Key Performance Indicators (KPIs) for
each function

6. Chapter 1
Introduction

7. Introduction to Manufacturing
Company
A manufacturing company produces goods (or materials) using tools, machines,
chemical processing, biologic processing or formulation and with the use of
people. Manufacturing ranges from small hand-made products (Handicrafts
industry) to large / Hitech products (Aircraft / Bullet Trains).
A typical manufacturing company procures many parts/raw materials from
various suppliers (or Vendors), process them (discrete manufacturing or flow
manufacturing) and sell to its customers. These customers may be the end users
of the product or may use the products to make other products. For e.g. A glass
manufacturing company procures silica and other raw materials for making
glass. This can either be sold as end product to consumers (for home use) or to
an Automotive factory to use these glass for cars (of course, the grades would
be different).
In this book, we consider a typical manufacturing company consisting of a few
discrete manufacturing processes (e.g., Turning, Milling, Polishing, etc.).

8. There are various functions (or departments) in organisations, each focusing on
a few major activities.
1. Production Function - Focuses on the manufacturing of the product
2. Purchase Function - Focuses on purchasing / buying the raw materials
and consumables required for the production
3. Stores Function - Focuses on the receiving the incoming raw materials,
holding them properly and issuing them to the user department when there is a
need for the materials
4. Maintenance - To keep all the machines ready for production. To prevent
break-downs of machines,
Each function consists of a group of persons (or a single person) performing
their tasks.
A company is headed by the CEO / Directors / Owners depending on its
structure. Various levels of managers across various functions report to the CEO
/ Directors. Supervisors / In-charges report to the managers and they manage the
operators (shop floor employees across various levels)
Pic: 1.1 - Various Levels of Employees
CEO / VP / Promoter
Process steps that take time,
(VA)
A process step that transforms or
shapes a product or service, which is
eventually sold to a customer.
resources, or space, but do not add
value to the product or service.
Directors / Promoters
Managers (various levels)
Supervisors / Incharges
(various levels)
Operators / Employees
(various levels)
Senior Management Level
Middle Management Level
Junior Management Level
Employee Level

9. Internal and External
Customer
External Customer: A customer who buys the product / services of a
company. All the functions in an organization exist to fulfil the need of these
end customers. This customer is not a part of your organization but pays your
organization for the products / services.
Internal Customer: A member of the organization providing goods / services
for other members inside the organization. For e.g. Stores issues raw materials
to production. So Production function is a customer for Stores. Inside
Production function, each operation sends the product to the next operation thus
becomes a supplier to the next operation. These are called Internal Customers
and Internal Suppliers.
Pic: 1.2 - Internal Suppliers and Customers
Stores Production
Internal CustomerInternal Supplier

10. Goals of each department
Each department works with a set of goals which are aimed at satisfying /
exceeding their Internal / External customer’s needs. These goals are called Key
Result Areas (KRA’s) or Department Objectives / Targets.
Generally there are 6 major categories of objectives / KRAs:
1. Productivity
2. Quality
3. Cost
4. Delivery
5. Safety
6. Morale
These KRA’s needed to be measured through various Indicators. They are
called Key Performance Indicators (KPIs). For e.g. Productivity can be
measured by indicators like “output per person per day”, “Planned production
vs. achieved production”, “Utilisation of the machine”, etc. Similarly, Quality
can be measured by “Reduction in defectives”, “% of yield”, etc.
All the departments will have KRAs and KPIs to measure their performance.
Generally there would be a Monthly Review Meeting (MRM) to discuss the
performance and take corrective and preventive actions.

11. Chapter 2
Purchase

12. Purchase Function
•In many SMEs, we found large opportunities of inventory optimization
(increasing the inventory turnover) and reducing the stock outs.
•The key reason for this situation is the purchase team is not aware of the best
practices in the industry.
•Let’s ask this question to ourselves, “How effective is our purchasing
function?” To determine whether your purchasing function is effective, you
should measure at least the following:
• Inventory Turnover
• No of stock-outs in a month / period
• No of quality issues faced in the incoming materials
• No of pending purchase orders at any point of time
• Only a few employees are trained in managing the Purchase function
properly.
• This section aims at bridging this gap and provides the basic knowledge
of managing the Purchase Function.

13. Purchase Function
This section explains the basics of Purchase Function, its activities, some key
techniques for classification of materials and ordering methods
• Purchasing refers to a business or organization attempting for acquiring
goods or services to accomplish the goals of the enterprise
• Purchasing role in any organization is considered to be important as it
handle raw materials & Sub-assemblies which have significant cost impact on
material manufactured.
• Purchasing is key element of Supply chain management of any
organization more ever in recent times as sourcing is increasingly done from
many countries. Companies with robust purchasing department and experts give
better business results than others.
Pic: 3.1 - Purchase Function works with the Supplier / Vendor
Company
Purchas
e
Supplier / Vendor

14. Purchase Function Structure
• This is a standard organization structure for Purchase Function
• Purchase Manager reports to the CEO of the company
• There would be a few Purchase Executives / Assistants reporting to the
Purchase Manager
• Each Purchase executive would typically focus on a single raw material
category
*We have explained a typical functional hierarchy. It may vary according to
each organization
Pic: 3.2 - Purchase Function’s Structure
CEO
Purchase
Manager
Purchase
ExecuIve /
Assistant
Purchase
ExecuIve /
Assistant
Purchase
ExecuIve /
Assistant

15. Job Responsibilities of
Purchase Manager
• Acquire quality goods and services in a professional, timely and cost
effective manner
• Help develop and maintain a supplier/vendor community capable of
supporting the organization’s needs with emphasis on superior service quality
and cost effectiveness
• Optimal Inventory Holding of Raw Materials using ABC Classification
of materials and purchasing based on the classification
• Creation / Preparation of the Management Information Systems (MIS)
that enable better decision making processes for the present and the future

16. Job Responsibilities of
Purchase Executive
• Classification of all the materials (including packing materials) as A, B
and C Class items (methodology described later in the presentation) – to be
done jointly with Stores function
• Tracking of the lead time of all A & B Class items and make necessary
changes in the purchase process
• Maintaining Nil Stock-Out situation all times
• Scheduled Purchase for all regular/fast moving A Class items
• Re-Order level based ordering for all A&B Class items
• Two Bin System / Min-Max for all C Class items
• All Purchases through formal PO only – no telephone based/other means
of ordering
• Updation of records daily including Pending Order Status

17. Things-to-do in Purchase
Function
• Material Ordering based on the category of items
• Regular follow-ups with the suppliers to ensure that the quality and
quantity specified in the PO are met consistently
• Any item which does not meet the quality requirement specified by the
company should be sent back to the supplier for rework
• This would have an impact on the Vendor Performance Report. Supplier
with frequent quality problems would be taken action based on the company’s
vendor policy
• Coordinate with user departments for strengthening the supply chain – by
providing necessary technical support to the suppliers. (Many companies now
provide financial assistance also for suppliers in case of expansion/purchase of
machinery, etc.…)
• Tracking Monthly Purchase Status and Inventory analyses
• Follow-up on the Pending POs
• All POs would be raised through ERP/mails. No telephonic
ordering/through other means which cannot be recorded, viewed and analyzed

18. Process Flow – Activity 1
• Stores Assistant/Executive sends a Purchase Indent (PI) to the Purchase
Executive depending on the status of the material available in the stores.
• The quantity is based on the Production Planning / requirements
discussed with the other functions. Pending Orders, Items in transit, etc.
• Each PI should have a unique no which would be mentioned in the PO
later
Pic: 3.3 - Purchase Activity 1

19. Process Flow – Activity 2
• Purchase Executive then collects the Purchase Indents and creates a
Purchase Orders (PO) and sends them to Purchase Manager for approval.
• The POs’ can be supplier-wise / item-wise. Each PO should have a
unique PO number which should be mentioned in the PO, tracking
sheet/systems, should be mentioned by the supplier while sending the Invoice
back to the company
Pic: 3.4 - Purchase Activity 2

20. Process Flow – Activity 3
• Purchase Manager approves the POs’ within 1 day (can be fixed by the
senior management) and send back to the Purchase Executive
Pic: 3.5 - Purchase Activity 3

21. Process Flow – Activity 4
• Approved POs’ should be sent to the Suppliers on the same day (hard
copy / email)
• Once the POs’ are sent, the suppliers should be followed-up for the
deliveries. Lead time based tracking should be done and once the lead time is
crossed it should be informed to the Purchase Manager
Pic: 3.6 - Purchase Activity 4

22. Process Flow – Activity 5
• Supplier sends the materials to the company with the Invoice and
Delivery Challan (DC)
• Once the materials are received, the Stores Assistant / Executive checks
for the quality and quantity and prepares a Goods Receipt Note (GRN)
and updates the stock on the same day
Pic: 3.7 - Purchase Activity 5

23. Snapshot of Purchase Function
• Please note these only the basic processes in the Purchase Function.
• Any emergency purchases / part shipments/ Quality issues / changes from
the above mentioned processes are not covered in this presentation.
• Those would be discussed with the Senior Management and necessary
actions would be taken.
Pic: 3.8 - Snapshot of Purchase Function
Stores
Assistant
Purchase
Executive
Purchase
Manager
Suppliers
Shipments
Warehouse
Purchase
Indent
Purchase
Order
For Approval
Approved
Purchase
Order
Purchase
Order
Sent to Suppliers
Invoice,
Delivery Challan
Goods Receipt Note
- Stores Assistant
Purchase Process
1
2 3
4
5

24. Materials Classification
Techniques
Concept / Thumb Rule: Pareto Principle
Pareto Principle – Vital Few and Trivial Many!
• Pareto Principle is also called as 80-20 rule
• 20% of the items would constitute 80% of the value
• Few other examples:
• 20% of the causes results in 80% of the defects
Pic: 3.9 - Pareto Principle
Mismanagement in
these items would have
significant impact on
the business

25. How do you arrive at the
consumption value?
Multiply the unit price of the product and the total consumption for the month to
know the consumption value
•Once you calculated the total consumption value of all items, sort them in
descending order to find out the A, B and C category items. Top 20% of the
items would be contributing to a total of 80% or more of the consumption value.
Next 30% items would contribute to the remaining 15% of value and the last
50% of items contribute to the bottom 5% of the total value.
•This is the methodology of calculating A, B and C Categories.

26. A, B and C Classification of
Materials
Use Pareto Principle to find out the important items in your purchase list
• While analysing the raw materials it would be clear that the top 20% of
the items would constitute about 80% of the purchase value. Next 30~40%
items would constitute about 15% of the purchase value. Remaining 50% of the
items constitute 5% of the purchase value.
Pic: 3.10 - ABC Classification
Focus on A class
items to reduce
your inventory
Few Items = More
Consumption in
Value
More Items = Low
Consumption in Value
A Category
B Category
C Category

27. How to order based on the
Classification of Materials
Each category of items has to be ordered in a different manner!
In A category items, there would be some items whose consumption remains
constant (on an average) throughout the season. These items can be ordered in
schedules. For items whose consumption varies in the season depending on the
orders, a Re-order level should be followed. For C category items, Two bin
system / Minmax model should be followed
Pic: 3.11 - Classification of Materials
Category Characteristics Ordering Techniques Explanation
A
Very High Value. Need to
monitor continuously
Scheduled Shipments /
Standard Order
Quantity (SOQ)
For items whose
consumption is regular
through-out the season
Re-Order Level (ROL) For items whose
consumption do not follow
a pattern
B
Moderate Value -
Moderate impact on the
Inventory Holding
Re-Order Level (ROL) Order based on the Re-
Order level
C
Low Value - No Major
Impact on the Inventory
Holding Cost
MinMax / Two Bin
System
Do not focus more on the
C Category items

28. Scheduled Shipments - for A
Category Items
Few items in the A category whose consumption does not vary across months
can be ordered with a single purchase order asking the supplier to deliver the
items as per the schedule the company gives the supplier.
Please refer the table below: Average consumption of this item is around 1200
kgs per month. This item can be ordered with a single Purchase Order to the
supplier for the entire season. Every week the company requires 300Kgs (4 X
300 = 1200). The supplier can send the items every week (300kgs). Payments
can be made to the supplier month-wise.
Quantity Week 1 Week 2 Week 3 Week 4
January 300 300 300 300
February 300 300 300 300
March 300 300 300 300

29. Re-Order Level - for A & B
Category Items
This method can be followed for most of the A and B category items. Lead time
(Time between placing the order and materials reaching the factory gate) of all
these items should be known with a fair degree of accuracy. Safety stock (SS) to
be determined (25% of the lead time X daily consumption can be taken
initially). Safety Stock is the buffer quantity we keep in case there is a delay in
lead-time, so that stock-out situation can be avoided.

30. Re-Order Level - for A & B
Category Items
Example:
Average Monthly Consumption in Kg -
A
900
Prepay consumption in kg - B = A/25 36
Lead time in days - C 10
Lead time Quantity in Kg - D = C * B 360
Safety Stock in Days - E = C*0.25 2.5
Safety Stock Quantity in Kg - F = E * B 90
Re-Order Level in kg - G = D + F 450
Re-Order Quantity - D 360
When the stock
level reaches
450Kg, order
360Kg
Pic: 3.12 - Re-Order Level

31. • On Day 1, the company has 360+90=450 kgs of stock. Purchase Order
for 360 kgs should be placed now. At the end of 10th day, the stock remaining
will be 90Kgs. On that day, 360kgs arrive from the supplier against the
purchase order. In case of 1~2 day's delay, the safety stock would be consumed.
This would be adjusted in the subsequent purchase orders.
• Every time the stock reaches 450 kgs, Purchase Order to be raised for 360
kgs.
• Sometimes, the Re-order quantity can be set as twice the lead time
consumption (720kgs, based on our example). This reduces the number of
Purchase Orders in a month (Lesser workload for the team)
• Re-Order Level (ROL) = 360+90 = 450 kg
• Re-Order Quantity =720 kgs.
• i.e. Every time the stock reaches 450 kgs, Purchase Order to be raised for
720 kgs.

32. Two Bin System - For C
Category Items
Explanation:
• This system is similar to the Re-Order level system except that it follows
simple calculations. A minimum level is set for each of the items covering the
lead time of the item and the safety stock. A maximum level is set which is 3
times~4 times the lead time consumption
Pic: 3.13 - Two Bin System
FULL
300kgs
FULL
300kgs
EMPTY
0 kg
FULL
300kgs
FULL
300kgs
FULL
300kgs
Both the bins are full
Do not order. Wait till one bin
becomes empty
One Bin is empty. Order 600 kgs.
(By the time the materials arrive
the second bin also nears empty
level)
Both the bins are full
Do not order. Wait till one bin
becomes empty
Stage 1
Stage 2
Stage 3
Focus less on C
Category items

33. Benefits of these Ordering
Techniques
•All the three methods of ordering the materials require close coordination with
the Stores.
•Effective use of these three methods would bring down the inventory by
around 25~30% of the current levels (from our past experience in various firms
across industries)
Pic: 3.14 - Benefits of ABC Classification and Ordering Techniques
Before
Implementation
After
Implementation
25% to 30%
reduction in
inventory

34. Vendor Management
•This book would cover only a few basic points in Vendor Management.
•Purchase Manager should create and manage at least 2 vendors for each item
Pic: 3.15 - Vendor Management
Each Item
Supplier 1 Supplier 2

35. Vendor Evaluation Report
• Any addition/modification of the vendor should be carried out through
proper Vendor Evaluation Report.
• The Following are the parameters that have to be considered in a Vendor
Evaluation Report
• Please note that these weightage are based on general management
principles. They can be modified according to the industry/company’s
preferences.
S.No Parameters Weightage
1 Quality 30
2 Adherence to Delivery 20
3 Price 15
4 Average Lead Time 15
5 Credit Period 10
6 Support During Emergencies 10

36. Vendor Master List
• A Vendor Master Sheet should be maintained in the purchase function.
• Following are the details to be recorded:
S.No Parameters
1 Item Code
2 Item Description
3 Vendor Code
4 Vendor Name
5 Address
6 Contact Person
7 Phone No
8 Email ID
9 Vendor rating (based on the weightages)

37. MIS Reports
The list below explains the various parameters to track, the reports to generate,
the frequency and the person-in-charge in the Purchase function:
Report - 1
Report Name Monthly Purchase Report
Nature of Report Item-wise (Descending in Value Terms)
Frequently Monthly
Who Prepares it Purchase Executive
Analysis Points
Is there a significant increase in the purchase value
compared to the last month
If yes, what are the major items contributing to this
increase

38. MIS Reports
Report – 2
Report - 3
Report
Name
Stock-Out Report
Nature of
Report
Item-wise / Category-wise
Frequently Monthly
Who
Prepares it
Purchase Executive +Production Supervisor
Analysis
Points
What is the trend of number of stock-outs? What are the
items contributing to the stock outs? Are these items
frequently figuring in this list? How to avoid this in the future?
How many times the lead time has exceeded? By how many
days? Is this happening for the same item? Same supplier? Is
this time to update the lead times?
Report Name Pending Order Report
Nature of Report Item-wise / Category-wise
Frequently Updated Daily
Who Prepares it Purchase Executive
Analysis Points
Is there a significant increase in the purchase value
compared to the last month
If yes, what are the major items contributing to this
increase

39. MIS Reports
Report – 4
Report Name Incoming Quality Report
Nature of Report Item-wise / Trend Chart presenting the last 3 months
Frequently Monthly
Who Prepares it Purchase Executive
Analysis Points
What is the Pareto of the quality issues in the incoming
materials? What is the trend? Is it for the same item /
from same supplier? What is the time taken by the
supplier to rectify/send new materials? How to avoid
this in the future?
Report – 5
Report Name Price Change Report
Nature of Report Item-wise with Explanation
Frequently Monthly
Who Prepares it Purchase Manager
Analysis Points
How many of the price revisions happened for A & B
category items? What is the impact of the price
change in our costing? How to minimize the effect?
Are the relevant departments (Accounts/Bill Passing)
aware of the price change?

40. What are the KRAs and KPIs
of your department?
Goals /
KRAs
Performance
Indicators / KPIs
Measure
Current
Level
Target
Productivity
Instances of Stock Out
Situation
in nos 3 0
Productivity Optimum Stock levels
in no of days
of stock
20 10
Quality
Materials received with
quality issues
in % 5% 3%
Cost Reducing Material cost in % 55% 53%
Cost
Reducing Transportation
cost
in % 15% 13%
Prepare your department’s KRA’s in case your organization does not have
them.

41. Learning’s from the Section
Now that you have completed the Purchase Section, Are you clear on the
following?
• Key Processes in the Purchase Function
• Roles and Responsibilities of Purchase Team Members
• ABC Classification
• Ordering Techniques for the various classification of items
• Scheduled Shipments
• Re-Order Level
• Min Max / Two Bin System
• MIS reports to be generated and the analysis to be done

42. Interested in buying the book? Please click on any of the following links to buy.
View Listing
Print Book India
View Listing
View Listing
View Listing
View Listing
View Listing
International Print Books
View Listing
View Listing
eBooks
View Listing
View Listing
View Listing
View Listing

43. Meet the Author
Ananth is the CEO and Founder of Hash Management Services LLP. Ananth
has over 12 years of experience in the areas of Implementation of Lean
Manufacturing concepts, Quality Management, and Supply Chain Management
initiatives. Some of the industries he works/worked with are Textiles, Leather
and Footwear, Castings and Forgings, Electronic Equipment, Pump
Manufacturing, Fabrication, White goods, Heavy Engineering and Light
Engineering sectors. He works with Industry bodies like CII, FICCI and
currently working with International Labour Organization (ILO) for
implementing their SCORE Program in a few auto ancillaries in Chennai. He is
also an empaneled Lean Manufacturing Consultant (LMC) with National
Productivity Council (NPC) and working on Implementing Lean Manufacturing
principles for Small and Medium Enterprises.
Prior to Hash Management Services LLP, he was a consultant with Deloitte`s
consulting practice in India. Earlier, Ananth worked with Titan Industries Ltd,
as a Senior Engineer responsible for productivity improvements and various
quality initiatives. He holds PGDM from the IFMR, Chennai and a Bachelors
degree in Mechanical Engineering from the Government College of
Engineering, Tirunelveli.
Please visit www.hashllp.com to know more about the ways we help
manufacturing companies improve their operations and profitability.

44. Disclaimer
The advice contained in this material is for a specific audience and not for
general public. The author designed the information to present his opinion about
the subject matter. The reader must carefully investigate all aspects of any
business decision before committing him or herself. The author obtained the
information contained herein from sources he believes to be reliable and from
his own personal experience, but he neither implies nor intends any guarantee of
accuracy. The author particularly disclaims any liability, loss or risk taken by
individuals who directly or indirectly act on the information herein. The author
believes the advice presented here is sound, but the readers cannot hold him
responsible for either the take or the result of those actions.

45. Acknowledgements
This book would not have been a reality without the contribution from V N
Shiju who worked with me on creating the contents, L S Kannan contributed
Quality section, Veerabaghu, my mentor and guide, my wife Jeyalakshmi who
helped me in documentation, A S Senthil Kumar, my first boss who helped me
understand the basics of manufacturing industry, my colleagues at Deloitte and
all my friends who stood by me during some of the toughest times in my life.