The Background MML Limited was incorporated
as a private limited company and later converted into a public limited company
in 1988. Though the company started with the manufacture of soaps and perfumes,
it has added a variety of products to diversify its product line. Today, it is
a conglomerate with businesses in soaps, perfumes, plastics, petrochemicals,
paints, industrial electronics, and agro-business. Their unit at Hosur
manufactures electronic components. The inventory position has been
deteriorating over the last few years. The year-end inventory position, as
revealed by the annual
reports of the conglomerate, showed an
increase from `1,230 million as on 30 June 2004 to `2,490 million as on 31
March 2007. The conglomerate has been operating in a highly centralized
fashion. All major planning activities were done at the corporate office.
However, many inputs for this decision making were made available by all the
operating units. The headquarters sent the tentative monthly production plan
two months prior to the commencement of production. The final production plan
arrived 5 days prior to start of the production. It was not unusual for the
corporate office to change the production plans while production was
progressing. This was communicated through telephone, telex, fax, or mail. Once
the production plan was made, the requirement of each item was also computed
using the bill of materials. Table 17.11 presents the tentative and final
plans, and the actual production of the Hosur unit for 2005–06 and Table 17.12
presents the consumption pattern of the “A-class” item.
The Existing Buying Process The company has
been following a centralized ordering system, which was operated from its
headquarters. The advantages of this system according to the organization were:
1. Better control over inventory-related
2. Since the corporate office compiled the
net requirements of all operating units, the order quantities for the suppliers
were large, sometimes inducing them to offer generous quantity discounts.
3. In case of sudden shortages of an item
at a location, the corporate office could advise another location to transfer
stocks because it knew the safety stocks at each location. The corporate office
advises the purchase departments at the units on the following:
1. What to order?
2. How much to order?
3. When to order?
4. On whom to place the order?
5. What should be the delivery date?
6. What will be the price?
On receipt of this, the purchase department
at the operating units took the responsibility for the procurement of items on
the basis of the advice and subsequently made the payment to suppliers. For the
corporate office to take decisions on these items, it needed the following:
1. Stock levels of each item under
2. The production plan for the following
3. The maximum and the minimum stock levels
to be maintained for each item.
4. The previous month’s consumption. The
operating unit provided the information pertaining to Item 1. Items 3 and 4
were policy decisions made at the corporate office based on historical data and
future plans and Item 2 was market-related information that was forecast.
The Hosur Unit
The unit manufactures electronic components that form part of the control
devices of a variety of equipment. Basically, there are minor variations in the
basic configuration, which result in 13 different products as they roll out of
the assembly. The variations are mainly due to the differences in the rating
and the number of various electronic components used to build the product and
the variations in the electronic circuit design.
The Purchase Department
A senior manager (purchase) assisted by a manager (purchase) headed the
purchase department of the Hosur unit. There were four buyers attached to the
department. The buyers were given responsibility to procure materials of
specific groups of materials. There was one buyer for semiconductor components,
another for raw materials and a third buyer for imported components. Another
buyer was looking after consumables, office equipment, and capital equipment.
Although imported components formed a small
percentage of the total purchase, the procedure and modalities were different,
necessitating an exclusive buyer to handle them. Two clerical staff undertook
the responsibility for all the typing, data preparation and entry into the
computer, preparation of purchase orders, and other such support activities.
The purchase department was provided with a desktop computer, which was
connected to a local area network. The senior manager was interacting with the
corporate office concerning matters such as source development, supplier
rating, and preparation of purchase budgets. In addition, he was liaising with
other departments such as stores, quality control, finance, production
planning, and design. This was an ongoing activity to help take many decisions
on issues such as value engineering, make or buy, new material development,
import substitution, etc. Recently, there was an exercise carried out by the
purchase personnel to collect data useful for making certain policy decisions.
On analysing the past three years’ records it was found that on an average, 450
purchase orders were sent out per year. An ABC analysis was carried out and the
average lead time taken by the vendors for the supply of such items were
computed. Table 17.12 presents the relevant data on the unit price, lead time,
and consumption patterns of “A-class” items. It was also found that the currently
the average investment in inventory is to the tune of `35 million.
Inward Goods Stores and Inspection Section
The Hosur unit had an inward goods stores and inspection section that performed
the task of receiving consignments of supplies, conducting inspections, and
initiating the necessary follow-up action. The section employed two load/
unload workers on a temporary basis each for a monthly wage of `1,200. As soon
as a consignment arrived, a goods received note (GRN) was prepared after inspecting
the materials for any damages. If there were damages, the insurance details
were verified and the consignment sent to the claims section. The claims
section liaised with either the supplier or the insurance company for claims.
Those consignments that were free of damage were set aside for marking codes
and placing at the desired location. Simultaneously, the details were filled in
the GRN. The GRN details were used to update the stock position and copies of
it were sent to other departments such as finance and purchase. The stores
employed a clerk, an inspector and an assistant manager. In addition one
forklift truck operator was employed.
Recent Developments Recently, the company
took a decision to decentralize most of the decision-making processes. Under
this scheme, each unit was focused on certain areas of the business. The
individual unit heads entered into an agreement with the corporate office
regarding the target for sales turnover, profitability, and a few other broad
parameters. The unit took all operational decisions with the required autonomy.
A study group was constituted at the Hosur unit to analyse the various
expenditures incurred at the plant level. The unit head initiated this as soon
as decentralization was put into effect. Until recently, such statistics was
not compiled and analysed at the unit level. The units would merely send a host
of weekly and monthly reports to the corporate office. The corporate staff
performed the task of analysing the data and informing the various unit heads regarding
the vari ances from budgetary provisions. A portion of the cost data gathered
so far by the study group is given in Table 17.13. Certain service items such
as forklift truck maintenance, insurance premiums freight, and demurrage were
allocated to specific departments using the basis developed for costing
purposes. Table 17.13 also shows the apportionment details for the items.
QUESTIONs FOR DISCUSSION
1. What are the reasons for high levels of
inventory at MML Ltd.? Can you offer suggestions for bringing down the level of
2. Based on the data provided, compute the
cost of carrying inventory at the Hosur unit of MML Ltd.
3. Design an appropriate inventory control
system for the A-class items identified by MML Ltd.