Leasing, Make or Buy Decision,

Make or buy decision, leasing

Purchasing Decisions Make or Buy, Buy or Leasing and Sub-Contracting

Make or buy decision, leasing

Make or buy decision, leasing; Manufacturing company cannot produce by itself all the components required by it sometimes it may have capacity to produce still a decision has to be made weather it is economical to produce in house or buy it from outside

Factors in favour of making components in house

  1. It is cheaper in cost as compared to buying from outside
  2. Excess plant capacity available which can absorb overheads
  3. Extensive investments beyond capacity of supplier required to create facilities to produce CC specialised items
  4. The item has relatively large and consistent demand
  5. Supplier not interested due to small quantity required
  6. Company has necessary equipments expertise which can be utilised for family to produce an item similarly closely allied to its main products components
  7. very big items which are difficult to transport
  8. Company intends to maintain secrecy of product design and manufacturing prices
  9. Existence of only 1 non dependable supplier in terms of quality delivery schedule financial stability etc
  10. Company may be interested in forward or backward integration
  11. To utilise the existing manpower effectively in recession Times
  12. To reduce ultimate cost of product by reducing expensive in exercise duty is sales tax octroi etc

Factors in favour of buying a component from outside sources

  1. Cheaper in cost as compared to a in house production
  2. Necessary space equipments time and manpower skills not available in house
  3. Company does not want to make new investments which can be am used beneficially elsewhere
  4. Existing facilities can be used more profitable by produce other components
  5. Legal barriers prevent company to produce in house for example environment problems patents etc
  6. Inconsistent demand
  7. Supplier specialises in that component and can give better quality
  8. Availability of good number of suppliers offering better selection choice
  9. Status of Industrial Relations in company

Make or buy decision should be evaluated continuously as Technology as well as internal and external environment of company is changing continuously for this purpose and analysis of the present and future market and economic Trends supplier evaluation new development in the raw materials and processes etc is necessary

Engineering units generally preferred to buy them to make due to following factors

  1. Components manufacturing specialist for that product can produce at much lower price than producing in house
  2. Such specialist manufacturer keep track of new technologies and can make necessary investments to ensure good Returns
  3. Parent company sets up ancillary units which are joint venture of partnership companies e.g. Telco have set up ancillary units like Tata toyo Limited JBM tools PVT Ltd etc which produce specialised components for a Telco
  4. Due to less inventory new concepts like just in time total quality management tqm etc  can be taken up

Buy or lease decision

 Leasing

Leasing the international accounting standard 17 define sleeves as an agreement whereby the lesser conveyor to the lessee for rent the right to use an asset for an agreed period of time this includes a contract for the hire of an asset which provides for giving the higher an option to acquire title to the Asset upon the fulfillment of certain agreed conditions

The point to be noted here is that the easy pace lease rental 2 laser over a period of time and prefix rate at fixed interval ownership of acid remains with laser or Lisa gets only right to use that asset

Types of leases

  1. Financial lease

 This transfers majority of the risks and rewards pertaining to the ownership of an asset though its title may or may not be subsequently transferred. in this these the rental Evil during the period recover the capital cost of the acid and contributes to the prophets of laser this enables laser light of the acid and dispose it off the way he likes

In this leaves the lesser retains the ownership of the assets during the lease period through a purchase option or reduced rentals may be provided after the lease period during the leaves period primary period laser receives the cost of the Asset and his profit next paragraph

During secondary period the lease may be continued on payment of substantially lowered rental through the list is the legal owner the risk and reward incidental to ownership pass on to the lessee hence lassey is supposed to pay for the insurance maintenance of the Asset etc

This release this Lizy is non cancellable were both sides except in the event of default according to provisions of the law during the primary period of leaves the least she has the exclusive right to retain position and to use the assets object to complying with the terms of the lease agreement

  1. Operating leases

In this type of lease the owner lesser of an asset agreement to leave the acid for specified period for an agreement some to be paid as rentals and who Returns all this and rewards incidental to ownership

In this lease the lesser maintenance that’s at least in good condition and retains ownership of an acid during and after the lease period the Lizzie has the exclusive right to passes and use the assets the lazy period is generally shorter up to 1 year the lease rentals over one single leaves period generally do not cover the cost of the Asset

Advantages of leasing

  1. Burden and cost of likely obsolescence shifted to the laser
  2. Leasing is better option on short term basis then out right purchase of an acid in rapidly changing technological environment
  3. Enables organisations with uncertain incomes the use of an asset
  4. It is more flexibale than ownership
  5. Allows companies to expand gradually as they cannot invest in assets
  6. Leasing offer sometimes cost savings over direct borrowings allow
  7. Allows companies to expand gradually as they cannot invest in assets
  8. Lease financing is better option when an equivalent amount of Dept finance is not available
  9. enable to avail certain tax benefit as lease payment is tax deductible
  10. Leasing reduces the risk of obsolescence of assets
  11. More preferred by institutional in inventor who want to earn higher rate of return on their assets
  12. Preferred by companies who operate within Limited working capital
  13. Leasing companies provide asset along with labour so lazy need not face Union and Labour problems

Disadvantages of leasing

  1. Cost of living high on long term basis
  2. In case of Wrong Turn and non cancellable lease Alizee is required to face the danger of Excellence obsolescence
  3. Lease rentals being fixed lazy cannot enjoy the benefit of decreasing interest rates
  4. when the lessee Enter into leasing agreement it is difficult to understand the implications of financial resources
  5. lessee cannot take advantage of and potential capital gain in case real estate value increases during lease period
  6. The interest cost of lease financing is generally higher than that of debt financing
  7. Ownership of asset remains with laser hence we cannot benefit from increase in value of property due to inflation and demand

Contents of the lease agreement 

The lease agreement generally contains information of following

  1. The least transaction
  2. Title identification and ownership of an asset
  3. Cost of maintenance and use
  4. Liabilities of the lazy
  5. Liabilities of the laser
  6. Default of the leases
  7. Remedies in event of default
  8. Arbitration

Subcontracting

Subcontracting in walls procuring parts and components required to produce main product from outside sources

For example Bajaj Auto Limited manufacturers scooter and motorcycles Bajaj Auto Limited broke your large number of components and parts required to manufacture scooter on motorcycle from outside resources the main reason for subcontracting is to reduce costs the small manufacturers overhead Bangalore he can supply the same components that much lower cost than producing in house

This is a common practice in large automobile and Engineering companies Tu subcontract large number of components to small scale manufacturers who specialise in particular line activity se casting forging auto Electricals rubber parts transmission products like there’s police etc

Subcontracting in was following activities

  1. Vendor development – Various actions related to this activity can be given below
  • Identification of vendors
  • Guidance two vendors to procure the required components of desired quality and price
  • Optimisation of number of vendors
  • Evaluating of  vendors
  • addition and deletion of vendors

Before selecting the vendor companies first evaluate their strength capabilities by Reference visit to their factory they inspect the facilities available for production quality control etc now add a large companies are trying to reduce the number of vendors and new suppliers are not encouraged unless they have something special than others new suppliers are asked to root their products through selected few when does the intention behind this is to reduced administrative time and cost spent on dealing with large number of surplus secondly companies want to develop strong business relationship with selected few vendors

  1. Purchase formalities-This includes routine formalities like sending enquiries obtaining quotations placing orders follow-up and receiving and inspection
  2. Systems-Standardizing the designs of the components needed frequently enables to develop specialised skill of vendors it is also expected that purchasing procedure should also be standardizedVarious areas in which purchaser in large company should provide attention in subcontracting are as follows
  3. Establishing delivery schedule-This is necessary to receive uninterrupted flow of components from window to the company or desired time company is expected you sufficient Lead time as well as necessary drawings and designs to winter to ensure getting deliveries as perfect delivery schedule
  4. Prompt payment to vendor on delivery
  5. Ensuring quality standards-For obtaining desired quality from supplier it is necessary that company provides guidance Technology know how and test facilities to vendor when not available with him sometimes companies may provide raw material and to the necessary to produce the desired component in such case company pays the full cost of the tools required by vendor for producing the components required by the company the vendor is responsible for maintaining the tools in good condition it is expected that the vendors should send back the tools along with the components produce to the company on completion of orderSometimes the cost of tools is bore by Inder and the company on mutually agreed terms
  6. Record Keeping –Company is expected to keep records of all new raw materials paint Saint to vendor and received back from him similarly annual or 6 months is stock level maintaining Binder for all goods supplied by company should be recorded this is necessary from audit point of you

Production Planning Control (PPC)

Production Planning Control

Production Planning Control (PPC) : Production Planning Control purchasing and inventory management operations depend upon timing and volume requirements for various materials used during manufacturing process. Hence, proper coordination between purchase department and production planning staff is essential.

Production Planning Control; Activities

Following activities are generally covered under production planning and control operation.

1.Operation Preliminary Planning

During this step identification of materials, labor, machine and tooling required to produce the desired product is done.

2.Aggregate Scheduling

aggregate scheduling determined that the necessary equipment, labor and materials can be made available at desired time to produce desired product. In short, it is overall capability assessment.

3.Production Scheduling

aggregate scheduling is further find tuned to define detailed manufacturing steps with schedule for specific machines. Production properties are set by assigning start and completion dates for each operation. This phase also identified specific materials and tooling required along with specific shop routing for the product designs to be produced.

4.Release And Dispatch Of Orders

operation plan prepared during production scheduling is released and dispatched various operating units. Orders are released along with necessary drawings, list of materials and tooling required, routing sheet and necessary instruction for the production staff.

5.Monitoring Of Progress

During this step progress at each stage of operation is monitored and sent to the production scheduler. If actual performance is not as per plan then rescheduling, rerouting and provision of overtime is necessary.

Severe competition in market place and availability of modern computing tools has changed the face of production planning system.

Development Of Aggregate Plan

the basis of aggregate plan is estimate of orders likely to be received for a given basket of products during the planning period. This is based on present number of orders in hand and the reading of the business environment for the planning period in future. These demand estimates are based on the future forecast made by the planning stuff in company.

Aggregate planning plan is generally developed in company by the top management comprising representative from administration, marketing and production department. The plan may be for 6-12 months.

Forecasting

forecasting is essential to identify the requirements of various materials in future as well as their prices. These forecasts can be used for formulating materials budget, cash flows, inventory levels, etc. Collection, evaluation and reliability of basic data would decide quality and correctness of forecast made.

Though many techniques are available for forecasting, every company will have to select the method best suitable to them depending upon its data processing facilities, skill of manpower available with them and operating environment. Some of the factors like number of items involved, the nature of their markets and data handling system etc. Decide the forecasting of inventory systems.

Various forecasting techniques used by the planner as under,

1.Bottom Up Analysis

hear the feedback given by field sales personnel based on their market surveys, opinions and hunch is utilized today’s forecast to base forecast.

2.Time Series Analysis

this technique can be applied by using two methods

  • Moving average method
  • Exponential smoothing method

Moving average method: here the weightage is given is 1/n where ‘n’ is the number of months over which the average is taken. The average maybe for say last six months i.e. January-June sale figure of price of raw materials etc. The sale figure for 7th month is obtained by adding sales figures for 6 months divided by 6.

Forecasted July sales= (January + February+ march + April + may+ June sales) / 6

Hence, in above example weightage given to each of the last 6-month sales figure was 1 / 6

the drawback of this method is that it required lot of data storage. Secondly, the method is cumbersome as the number of months over which average is taken become becomes large.

Exponential smoothing method: in this method, the forecast for the next month is based on the forecast for the previous month and the actual sales value of the previous months. For example, refer example is moving average method.

Forecasted July sales = 1 / 6 (actual sales in June) + (1 – 1 /6) (forecast for the month of June)

3.Regression And Correlation Analysis

in this method forecast of one commodity is linked to the forecast of another commodity with whom there exist direct relationship.

For example: price forecast of mango juice is based on the price forecast of mango. There is linear relationship between mango price and mango juice price.

Forecast is a specified job, which required different skills. Hence, this responsibility entrusted to a separate group other than computerized planning system group.

Master Production Schedule (MPS)

MPS is developed directly from aggregate plan. The aggregate plan outlines the overall level of production taking into consideration the demand for the product and capacity of plant. MPS translates the aggregate plan into specified number of specific type of products to be produced in the given time period.

After the MPS is evaluated for its feasibility by simulation, against available and required resources in terms of materials, machine and labor. The time interval used in MPS can be weekly, fortnightly or monthly depending upon type of products, volume of production, and lead time and materials used. MPS can be updated weekly taking into consideration feedback received from sales personnel about demand and other changes in organization.

Material Requirement Planning (MRP)

material requirements planning is used to determine the quantity and time at which various materials are required in manufacturing operations.

These materials can be procured from outside are produced in house in the organization. MRP activity involve uses of MPS to study the output of given product. Based on MPS requirements of specific components and parts to produced given output in specific time frame are calculated.

MRP is based on three concepts as follows.

  • Demand linked to anticipated production.
  • Efficient use of inventory.
  • Time phasing.

1.Demand Linked To Anticipated Production

the decisions with regard to purchase materials are linked to anticipated production plan. The decisions are in context of quantities to be purchased and the timing for such purchases. Here projected requirements for each item is based on the production of all products where these items are used.

2.Efficient Use Of Inventory

this means that a new inventory would be acquired only when current stock is almost over. In other words, this indicates planning of order and time for arrival of materials

3.Time Phasing

this is based on lead time information and the dates on which item is needed. Each order is expected to arrive exactly at the time it is needed according to production stage pre-determined.

Thus, MRP system helps to create a set of planned orders for all manufactured parts and purchased materials based on necessary information of inputs.

Bill Of Material Explosion Exercise

We have seen earlier that material requirement planning enable to determine the requirements of raw materials, components, spares etc. Which are needed for planned production in given time frame. Future demand is arrived at by using forecasting techniques. By using these demand forecast requirements of various materials is arrived at through explosion charts. Computers are used to “explode”, bill of materials with demand forecast. Bill of materials show for a given product, the list of material, components, spares required along with their quantities and location code. It also indicates whether it is made in house or brought from outside. An explosion chart is a series of bill of materials group together in a matrix form so that combining the requirements for different products can be made. Generally, the material, planning is done on quarterly basis to rectify errors in forecasting. This also has to make realistic ordering to the supplies.

Capacity Requirement Planning (CRP)

This is another important step in the production planning process of the organization. CRP aims to convert the shop orders produced by the MRP systems into scheduled workloads for the various factory work centers. CRP utilizes output of MRP systems along with shop routing data and work center status data. The shop routing data file contains physical routing plans along with standard processing time requirements. WorkCentre data files indicates machine and manpower capacity available and already booked in each of the factory’s work centers.

MRP gives position of current and planned shop orders release for given time frame. CRP utilizes routing and timing data for each schedule order and checks the work centers files to determine whether the required capacity is available or not. Thus, CRP activities work hand in hand with MRP to plan the appropriate production.

Just In Time Planning (JIT)

The core aim of JIT is reducing inventories. However, it also aims at reducing waste and increasing productivity. This concept was pioneered by henry ford but was put to use extensively and developed by Japanese industries.

JIT enables to minimize production inventories and work in process industries. This is accomplished by providing each work center with just the quantity of materials and components needed to do a given job at the exact time when they are needed.

Production Planning Control (PPC)