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

Procuring, Materials Management

Procuring, Materials Management

Procuring and Supply Chain Management.

Procuring,Supply Chain Management is a total concept involving and organizational structure unifying into a single responsibility the systematic flow and control of material and identification of the need through customer delivery.

The Supply Chain management contributes to increased profitability by coordinated achievement of at least materials cost. This is achieved by optimizing capital investment, capacity of personal, consistent with the appropriate customer service level.

Supply Chain Management is an organizational concept in which a single manager has authority and responsibility for all activity for all activities, principally concern with the flow of material into organization. i.e. purchasing production planning and scheduling incoming traffic inventory control receiving and store normally are included

Supply Chain Management – Scope

The scope of materials management is very vast however, we can broadly identify the following functions of material management

1.Inventory Control

This function covers aspects like setting inventory levels, ABC analysis, fixing economical ordering quantities, verifying safety stock levels, lead time even analysis and reporting.

Some other functions of Supply Chain managements are below

  • -Receiving and inspection of incoming materials.
  • -Inward and outward transportation to various departments.
  • -Materials handling.
  • -Disposal of scrap, obsolete material, old equipment and machinery, surplus material.
  • -Value analysis.

2.Planning and Programming of SCM

This is accomplished with the help of sales forecast and production plans. Supply chain planning and programming involves identifying the individual requirements of parts, preparing materials budget, forecasting the level of inventories, scheduling the order and monitoring the performance in relation to production and sales.

3.Stores | Warehousing

Warehouse is responsible for physical control of materials, preserving materials, minimization of defects and damages through timely disposal and efficient handling. Stores also maintain proper record of materials, ensures proper location and stacking of materials. The physical verification of stocks and the reconciling them with book figures is also responsibility of stores.

4.Procuring

These consists of selection of source of supply, deciding terms of purchase, placement of purchase orders, follow up and maintaining good relationship with supplies, approval of payments to supplier besides evaluating and rating suppliers.

Objectives of Supply Chain Management

Prominent objective of Supply Chain management is as under,

  1. To ensure continuous and uninterrupted production or services operations by maintaining steady flow of SCM.
  2. To reduce the cost of material by purchasing various material of right quality and right quantity from source at right price at appropriate time.
  3. To achieve economies in the cost incurred on material, after their purchase through storage, processing and warehousing till the finished goods ultimately reach customers.
  4. To minimize working capital requirements through proper and scientific inventory control.
  5. To keep watch on new products available in the market.
  6. To increase competitiveness of manufactured goods by reducing their price through cost reduction and value analysis.
  7. To identify import substitute product to reduce overall requirement of foreign exchange and dependence on foreign suppliers.
  8. To ensure co-operation and co-ordination among all departments within the company to meet material management objective and corporate and functional levels.
  9. To supply better quality raw materials or components with ultimate aim to improve quality of end products.
  10. To conserve materials resources within an organization with a view to conserve natural resources.

Procurement, Structure Of Supply Chain Department.

Procurement, Structure Of Supply Chain Department

We are going to discussed Procurement and  how supply chain department has to have close interaction with other departments in company for achieving desire goals of company and cannot afford to work in isolation.

 Procurement, Structure Of Supply Chain Department

Supply chain management being a critical function has to be handled by a competent person who should be part of the top management team. In view of this importance, the head of the material management function generally directly reports to the managing director like other departmental heads, viz, marketing, production, finance, personal, etc.

However, there can be little variations in organization plan depending upon the view and nature of operations of the organization.

The internal structure of the supply chain management department can be,

1.Structure based on commodities.
2. Structure based on location.
3. Structure based on functions.

Detail of each is,

Structure based on commodities.

Various items required by the organization are classified into different groups such as raw materials, spares, components, finished goods, important items, etc. The responsibility of age group is given to different individual.For example, carbide tools manufacturing company may have commodity groups for steel, carbide inserts, imported items and brought out components like shims, screws, levers, etc.

This structure avoids duplication of efforts as each commodity purchase is handled by a separate individual. Besides, the individuals are in charge of group can develop good rapport with the commodity market handled by him.

Secondly, this structure enables standardization and bulk buying in each group.

Structure based on location.

This structure is preferred when organisation has several plants spread across different location in the country.The decentralized supply chain management setup has separate materials manager at each location. This enables reduction in cost and time of procurement besides faster coordination with other departments like production, marketing etc.

An organization can also have an option of centralized supply chain management department instead of decentralized set up at each location. The advantage of this is the reduction in cost due to centralize bulk buying for requirements of all plants at different locations. Secondly it is possible to transfer material from one place to another in case of emergency or excess supplies.

Some organizations may develop system combining the advantages of centralization and decentralization. In this system, central supply chain management staff located at headquarters exercises control at policy level in terms of overall guidelines, procedures and system to be followed by decentralized departments at different plant locations.

The departments and plant are expected to report periodically to the centralised materials department and headquarters. The departments at plant level are given financial limits for the purchases by them, beyond which permission from headquarters is necessary. The items common to all plants is purchased by headquarters, which enables substantial saving due to bulk buying’s.

Structure based on the function.

In this structure the groups are formed on the basis of different functions like purchase, transport, receiving, stores, etc.

Each function is headed by a separate individual who reports directly to materials manager, example purchase activities for different plants will be looked after by one individual.

Similarly transport requirement for all plants will be looked after by another individual.

Composition of purchase department.

The composition of purchase department will depend upon requirements and the kind of activities involved in the organization. Purchase department also need support services like typing, clerical, statistical information, etc.

In large companies purchase department is supported by cost analysts, economists and legal advisers.

Fig2.1

Relationships with other departments.

Purchase department should have continuing relations with only not only other departments in organization but also with its suppliers.

Procurement and engineering

Engineering department is responsible for preparing the technical specifications for company’s products and the materials required to produce product these products for maximizing profits.

The material specified by the engineering department must be both economical to procure and economical to fabricate and similarly these should be available from more than one supplier/ producer.

Generally, there has to be greater understanding between these two departments on their concepts of materials problems. Engineers may look for more safety, quality and performance, while purchaser may look for cost and timing and stick to closer performance requirements than higher safety.

Hence, dilemma of cost vs safety may crop up. In such circumstances, mutual understanding and willingness to give and take is necessary between purchase and engineering department to arrive at mutually satisfactory solution.

 Procurement and operations/ production.

The purchase department procures the goods and materials needed for production, after receiving material requisition from them.

If production department finalizes its production schedule last minute and does not allow purchase department sufficient time then such purchases may be very costly and increase final cost of company’s products.

Such situation leaves inadequate time for selection of good supplier and negotiate, the price. As against this, sometimes production department summit production schedule/ requisition to purchase department and purchase department fails to procure the necessary goods and materials.

This may result in starvation of raw materials required for production department and production of goods, which are not in demand.

Material shortages in process industries are very serious which may result in the complete production stoppage.

A good coordination between production and purchase department may lead to selection of proper materials and reduction in final cost of production.

Purchase department should also ensure timely supply of maintenance spares and materials to maintenance department, which is responsible for ensuring uninterrupted production.

Procurement and marketing .

Marketing department relies on the efficiency of purchase and production department when it commits delivery dates and quality standards to the customer the cost of finished products also depends upon the costs going for purchase of raw materials.

Similarly purchasing production sales cycle depends upon sales forecast given by marketing department.

This forecast decides the production schedule, which is the basis for purchase schedule. Hence it is necessary that marketing department summit accurate forecast.

Any changes in sales forecast should be immediately intimate to production as well as purchase department. Similarly purchase department should immediately inform marketing department about any increases in raw material prices, which can be used by marketing department for seeking price increase from its customer.

Purchase department can also access to its sales department by serving as a practical sales laboratory.

Many manufacturers and suppliers approach purchase department for selling their goods and services.

Therefore, officers in the purchase department can act as source of information to marketing staff to develop and refined their company’s sales policies and procedures.

Procurement and finance

Success of the business depend upon goods good financial planning. Accurate sales forecast and purchasing schedule unable to plan working capital needs and the cash required at given moment. Finance department is responsible for making prompt payment to the suppliers, which creates healthy relationship between purchaser and supplier. However, to affect this purchase department must give sufficient advance notice to finance department to organize the requirement of fund. Finance department also keeps watch on purchase transaction viz.

It sees that company’s policies, rules and regulations are adhered to when purchase transaction take place. Sometimes to take advantage of low prices of materials available in market, the purchase department me make large purchases, however, before this it should consult finance department about availability of finances and excess load on these treasuries.As against this, if finance department does not make available funds for such low-price purchase opportunity, the company may have to pay higher price for same materials at a later date.

Hence, close cooperation between purchase and finance department is necessary to manage working capital and to take benefit at right buying opportunities.

Procurement and planning

Purchase department can assist planning department to draw a realistic short term and long-term plans for the company based on their knowledge of the market.Purchase department can feed planning department accurate forecast about the position of materials supplies, market and new products introduced into the market.

As against this planning department should take purchase department in full confidence about plans chalked out by company.

Procurement and legal 

Purchase department being responsible for materials purchases, enters into a legal contract between them and suppliers, through purchase order.It is necessary that purchase department should understand legal implications of various clauses in purchase order.

Here, legal department can readily assist purchase department to draft and interpret correct clauses in purchase order or contract so as to protect interest of the company as well as purchase department.

Procurement and personnel department 

For efficient functioning purchase department should be equipped with the right kind of staff in terms of their knowledge and skills.Personnel department can correctly assess their needs, recruit and train search stuff for purchase department.