Stores and materials control, including procurement by manufacture and by purchase

Front matter

)y

Stores and Materials Control

Including Procurement by Manufacture and by Purchase

Part I — Introductory I The Problem of Materials Control ...... 3

The Three Phases of Management The Importance of Materials Control The Control of the Inventories The Cycle of Manufacturing Operation The Test of Efficiency Materials Control and Discipline

II The Organization of Control ........ 9

Effect of Lack of Organization

The Need for Specialization

The Nucleus of Control

Types of Manufacture

The Storeskeeping Department

Administration of Materials Control Department

Functions of the Control Department

The Decentralization of the Storesrooms

Relation of Purchase and Control Departments to the

Plant Other Service Departments — General and Cost

Accounting Traffic Department The Inspection Department The Engineering Department The Office Manager

Part II — Principles of Control III The Records and Mechanism of Control .... 25

General Purposes of Control

1. The Upkeep of the Inventories

2. The Care of Materials

3. Correlation of Production and Sales Program

4. Materials as an Element of Cost

5. Statistical Feature of Stores Control

6. Classification and Valuation of Inventories Illustration of Procedure

Classification of Orders

Stores Orders

Plant — Increase and Expenses Orders

Charging the Stores Accounts vi CONTENTS

IV The Stores Record Form 39

Purposes of the Stores Record

Information Furnished by Stores Record

General Purposes of Information

Methods of Keeping the Record

Development of Stores Record Form

Control of Ordermg by "Maximum" and "Minimum"

Quantities Keepnig Track of Available Quantity Co-ordinating Requirements and Schedules Appropriating Material

"Ordering Quantity" and "Ordering Point" "Running Totals" versus "Balances"

Heading of a Stock Record Opening a Stores Record

The Handling of Various Classes of Materials Increasing Inventories The Unclassified Stores Record Sheet

V Pricing the Stores Records 58

Necessity of Accurate Prices Advantages of Pricing Stores Record Recording Values Components of Material Costs Predetermining Costs of All Materials Methods of Pricing Requisitions Actual Costs versus Standard Costs Standard Costs

Actual Cost Methods of Pricing Requisitions Average Cost Method for Pricing Requisitions Pricing Requisitions at Current Prices Inventory Adjustments

VI Operating the Stores Records 70

Reporting Delivery of Materials to Stores

The Stores Requisition

Routing the Stores Requisitions

Handling the Requisition in the Storesroom

Posting Requisitions

The Stores Return

Issuing by Specification

The Order Requisition

Mechanical Posting of Records

Accuracy of Stores Records

Errors of the Storesroom

VII Classification and Symbolization 86

Business Classification Advantage of a Uniform System Plannmg a Classification System

CONTENTS vu

The First Steps in Classification Symbol ization

Use of Symbols Facilitates Clerical Work Use of Symbols Maintains Standards Numerical and Alphabetical Systems Requirements of Symbols

VIII Classification and Symbolization of Materials . 94

Problem of Classification

Function of Control Accounts

Classification of Accounts

Classification of General Stores

Symbolization of General Stores

Two Rules for Symbolization

Classification and Symbolization of Service Department

Supplies Symbolization of Unclassified Materials Classification and Symbolization of Products Classification of Special and By-Products Classification and Symbolization of Other Activities Classification and Symbolization of Adjuncts

IX Symbolization of Cost Records 107

Function of Cost Accounting

Monthly Reports

The Balance Sheet

The Profit and Loss Statement

The Burden and Cost Statement

The Budget

The Material Accounts

The Cost Ledgers

Explanation of the Chart

Inventory Account Symbols

Order Symbols

X The Costing of Orders 117

Methods of Costing Orders

Cost Documents

Handling the Cost Reports — The Time Cards

Handling Stores Requisitions

Handling the Stores Returns

Reporting Deliveries to Stores

Journal Entries

Handling Expense Debit Slips

Making Up Expense and Burden Statements

Tabulating Production Order Costs

The Work in Process Control Accounts

XI Control of Inventory 131

Effect of Policy on Inventory Inventory Carrying Charges viii CONTENTS

The Consideration of Quality Control Procedure Determination of Ordering Points Determination of Minimum Ordering Quantity Economic Minimum of Manufacturing Cost Graphing the Consumption Control of Finished Product Inventory by Production

Orders Planning for Materials and Supplies Control of Work in Process Accounts Control of Supplies and Non-Productive Materials

XII Standards and Specifications 142

Definition and Purpose

Advantages of Standardization

Determination of Standards

Organization for Standardization

Example of Standardizing Materials

Example of Standardizing Product

Model Specifications

Specifications in the Purchasing Department

Maintaining Standards

Periodical Revision of Standards and Specifications

XIII Arranging and Equipping the Storesroom . . . 156

Functioning of the Storage Workers

Planning the Storesroom

Written Standard Practice Directions

Location of the Storesroom

Size of the Storesroom

Storing Materials

Allotment of Space in the Storesroom

Aisles

Symbolizing the Storage Spaces

Mechanical Aids

Standard Storage Units

Bin Subdivisions

Skids and Trucks

Counting Machines

Branch Storesrooms

XIV Stowing Material 168

Definition of Stowage

Where Goods Should Be Stowed

The Double-Space Method

Treatment of Special Items

Keeping Items Distinct

Identifying the Materials

The Bin Tag

Surplus Stock

Rules for Good Piling

IX

Page

The Unit of Stowage

Piling

Counting

Removing Goods

Change of Location

Verifying Inventories

The Delivery System

Procedure in Filling Requisitions

XV Taking Inventories 183

Steps in Establishing Materials Control

Necessity for Taking Inventory

Physical Inventory

Advantages of Regular Checking Counts

The Duplicate Tag Method of Taking an Inventory

Preparations for Inventory

Inventory Instructions

Inventory Period

Directing and Taking the Inventory

Classification of Items to be Inventoried

Special Instructions for Departments

Inventory Tags

Filling in the Tags

Supervising and Comparing Inventory

Pricing Inventory Items

Final Steps

XVI Organization of the Materials Control Department

Summary of Responsibility

Relation of Storeskeeping to Other Functions

Relations with a Production Control Department

Co-operaton between the Storeskeeping Groups

Communicating between the Two Groups

Organizing the Materials Control Department

Functional Organization

Function of the Planning Section of the Stores Records

Division Personnel of the Planning Section The Function of the Recording Section Function of the Scheduling Section Function of the Accounting Section Organizing the Small Materials Control Department Organizing the Storage Division The Stowage Section of the Storage Division The Delivery Section

Part III — Procurement by Manufacture XVII Organization of the Production Control Depart- Function of the Department Order Handling Procedure

The Production Control Department The Production Control Manager Materials Control Supervisor Order Control Supervisor The Dispatching Supervisor Tool Control Supervisor

Page

XVIII Graphic Production Control 224

Necessity for Graphic Method Function or Purpose Means or Machinery of Performance Description of Control Boards Control Board Operation Description of Dispatch Boards Dispatch Board Operation

XIX Operation of Production Control Mechanism

Origin of the Production Order

Standard Practice Records

Standard Production Analysis Records

Cost Sheet

Identification, Instruction and Routing Cards

Workers' Time Cards

Standard Operation Symbol Code

Stores Requisitions

Scheduling Jobs on Control Board

Registering Material Available for Production

Forwarding Requisitions to Storage Division

Dispatching Work to Shops

Starting and Quitting Jobs and Registering Accomplishments

Inspection Reports

Computations Made by Dispatchers

Handling Irregular Conditions

Registering on Control Board Progress on Orders

Posting Accomplishments to Progress and Follow-Up Records

Making Up the Pay-Rolls

Departmental Efficiency Reports

Departmental Idle Time Reports

Part IV — Procurement by Purchase XX The Function of the Purchasing Department

Preliminary View of the Purchasing Department

Defects of Departmental Buying

Specialized Purchasing

The Purchasing Agent

Increased Profits through Savings

XI

Page

Good Buying

Records

Contact with the Outside

Personal Relations with Vendors

Justifying Its Existence

The Seven Stages of Purchasing

1. Determining the Article

2. Knowing the Market

3. Selecting the Vendor

4. Determining the Price

5. Making the Contract

6. Effecting Delivery

7. Completing the Contract

The Purchasing Department and the Organization

XXI The Article 273

The Selection of the Right Article

Quality versus Price

Essential Knowledge

The Use of the Article

Questionable Requisitions

Technical Knowledge

Classes of Specifications

Materials from Vendor's Stock

Materials Record

An Illustrative Record

Origin of Purchase Order Requisitions

Checking

Use of Data

Orders Applying on Blanket Contracts

The Quantity

Control of Requisitions

Fixing the Price

XXII The Market 290

The Background

Forcasting the Market — General Information

Statistical Agencies

Graphic Presentation

How to Make a Graph

Speciiic Information

Supply and Demand

The Personal Side

Correlation of Requirements and the Market

Kinds of Prices

Information on Vendors

Delivery Conditions ; the Terms of Sale

XXIII Seller and Buyer

Interrelation of Seller and Buyer Personal Contact with Vendors

Xll

Page

Attitude of the Purchasing Agent

The Legal and the Personal Ties

Sources of Data

Credit Information Forms

Gratitudes and Bribery

Acceptance of Favors and Courtesy

Vendor Expects Correct Purchase Orders

The Purchaser's Requirements

Service Record

Confidence

XXIV The Price

Preparing to Issue a Purchase Order

Quotation File

Request for Bids

Tabulation of Bids

Competitive Prices

Price Maintenance

Kinds of Price

The Definite Price

Price Based on Performance

Current Prices

The Cost— Plus Contract

List and Net Prices

Transportation Charges

Discounts for Prompt Payments

Trade Acceptances

XXV The Written Contract

Kinds of Contracts

Blanket Contracts

The Individual Purchase Order

Fixing the Date of Delivery

Difficulty of Effecting Prompt Delivery

Advance Information of Factory Requirements

Allowance for Time in Transit

Time for Completion

The Copies of the Purchase Order

Inspection of Purchase Order

Vendor's Acceptance of the Order

XXVI Effecting the Delivery 361

Vendor Naturally Remiss

Follow-Up Work

Appeal to Sales Agent

Progress Reports

Rush Orders

"Ship and Trace"

Mechanism of Follow-Up Work

Following up the Transportation Companies

Xlll

Page

Transportation Charges

Freight Rates

Bills of Lading

Demurrage and Damage Claims

Routings

Discontinuing the Fol low-Up

XXVII The Completion of the Purchase Contract . . . 377

The Purchaser's Obligation Payment of the Invoice Registration of the Invoice The Flagging of Invoices Checking the Invoice Checking the Transportation Charges Receiving and Checking the Goods Adjustment of Discrepancies Payment of Invoice

XXVIII Some Legal Aspects of Purchasing 401

Necessity of Familiarity with Law

What Constitutes Our Law

Definition of a Contract

Meaning of Agreement

Acceptance of an Offer

Value of Having Contracts in Writing ,^

The Parties to an Agreement J^

Consideration

Lawful Purpose

Sales Contracts

Caveat Emptor

Express Warranties

Expressions of Opinions

Implied Warranties

Destruction of Subject Matter

Mistakes in Contracts

What Constitutes Fraud

Alteration of Contracts

Interpreting a Contract

Rules of Interpretation

Assignment of Contract

Acting as an Agent

General Agents

Special Agents

Liability of Principal

XXIX Organization and Personnel 419

Two Types of Purchasing Control Organization of Subsidiary Offices The Central Office's Purchases for Distant Plants Control of Subordinate Purchasing Departments Qualifications of a Purchasing Agent xiv CONTENTS

Duties of Purchasing Agent Planning Division Quotation Division Scheduling Division Invoice Division Assistant Purchasing Agent The True Function of the Purchasing Agent His Characteristics His Position in the Organization

Part V — Adopting a System XXX Systems, Records, and Forms 437

Requirements of a System Systems Not Universally Applicable Delegation of Authority Revising a System Records

Reliability and Adequacy Availability and Timeliness Permanency

Development of Records Purchasing Operations and Records Forms — Advantages and Objections Forms Insure a Fixed Policy

Form Page

1. Chart Showing the Paralleling Procedures for Procuring Mate-

rials by Purchase and by Manufacture .• • • ^^

2. Organization Chart of a Large Plant Operated According to

Modern Methods 20

3. Chart Showing Elements of Selling Price 29

4. Simple Perpetual Inventory with Price and Value Spaces ... 43

5. Simple Stores Record Form with "Ordered" Columns .... 45

6. Stores Record . 46

7. Modern Stores Record Carrying Balances 47

8. Modern Stores Record with Appropriated and without Balance

Columns 5^

9. Order to Stock Material 55

10. Unclassified Stores Record 56

11. Report on Cost of Manufactured Material 61

12. Stores Requisition ^2

13. Stores Requisition 73

14. Slip to Accompany Requisition Returned for Correction . . 76

15. Notice that Material Is Not on Hand TJ

16. Stores Return 79

17. Production Order Requisition 81

18. Notice of "Danger Point" 82

19. Daily Record of Balance 83

20. Request for Count of Stock 85

21. Chart Showing Classification and Symbolization of Main Accounts 97

22. Chart Representing the Relationship Subsidiary Ledgers Bear

to General or Main Ledger 112

23. Summary of Materials Used — Credit 122

24. Summary of Materials Used — Debit . 123

25. Journal Voucher 126

26. Expense Ledger Slip 127

27. Cost or Estimate Sheet 129

28. Graphic Record of Consumption 138

29. Bin Tag I73

30. Surplus Stock Tag I75

31. Notice of Change of Location of Material 179

32. Stores Delivery Tag 181

33. Inventory Tag for Raw Material and Supplies 194

34. Inventory Tag for Finished Product or Component Parts . . . 195

35. Inventory Tag for Work in Process 196

36. Inventory Record for All Materials in Stores 199

37. Inventory Record for Work in Process 199

38. Organization Chart of Materials Control Department — Stores

Record Division 205

39. Organization Chart of Materials Control Department — Storage

Division 212

XV xvi FORMS

Form Page

40. Organization Chart of Production Control Department .... 218

41. Control Board (Opposite) 224

42. Dispatch Board (Opposite) 226

43. Standard Machine Practice Card 227

45. Standard Production Analysis Record of Auxiliary Small Tool

Requirements 228

46. Standard Production Analysis Record of Material Requirements . 228

47. Progress and Follow-Up Record 230

48. Identification Instruction, and Routing Card 231

49. Material Requisition Card 232

50. Material Credit Card 232

51. Direct Labor Time Card 233

52. Process and Final Inspection Report 233

53. Idle Equipment Report 234

54. Control Progress Strip 235

55. Signal Tags for Control Board . 236

56. Chart of Sourc s of Stores Receipts and Disbursements (Opposite) 252

57. Purchase Order Requisition 287

58. Extract from Report to Buyers (Babson) 294

59. Summary of Statistical Agency Reports 295

60. Graph Showing Price in Dollars per Gross Ton of Basic Pig,

Valley, and Steel Bars, Pittsburgh 297

61. Graph Showing Fluctuations in Price of Eggs in United States

as Compared with Average of Monthly Figures for Four

Years 299

62. Price and Production Graft (Babson) 300

63. Graph Showing How the Value of Three Relations Diverge from

a Common Point as the Relationships Change 301

64. Weekly Report of Materials Control Department 306

65. Estimate of Consumption and Balances 307

66. Record of Sources of Supply 309

67. Vendor's Record of Buyer's Personality 314

68. Report on Customer 315

69. Purchasing Department Record of Dealers 326

70. Contract Record 329

71. Quotation and Past Purchase Order Record 330

72. Purchasing Agent's Request for Quotation 332, 333

TZ- Trade Acceptance Forms 344

74. Purchase Order 3S4-3S6

75. Supplementary Purchase Order 359

76. Vendor's Acceptance of Order 360

TJ. Post-Card for Routine Follow-Up of Delivery 363, 364

78. Request to Vendor to Trace Shipment 366, 367

79. Record of Purchase Material Received 376

80. Typical Invoice 380

8ia. Invoice Flag for Entry of Checking 381

8ib. Invoice Rubber-Stamp to Replace Flag 381

82. Purchase Materials Received Report 386, 387

83. Back of Defective Material Rejection Report 389

84. Memorandum of Discrepancy in Invoice 391

85. Countercharge Memorandum 393

86. Credit to Vendor Memorandum 393

FORMS xvii

Form Page

87. Requisition for Check 394

88. Vouchers Payable Register 396

89. Remittance Letter 398

90. Cash Disbursements Register 399

91. Chart Showing Purchasing Department Organization 425

Stores and Materials Control

Chapter I The Problem Of Materials Control

The Three Phases of Management

The art of industrial management is to make the best possible use of the raw materials purchased, the men employed, and the capital invested in the business. Broadly considered, therefore, the management of a manufacturing business may be divided into the three phases of control of materials, of men, and of money. These three factors form the legs of the tripod of management; hence none of the three can be considered as more important than the other two. Methods of control aiming to make more effective use of one must exert a more or less beneficial influence upon the others. The instability of one will affect the stability of the others.

Though the three phases of management are thus interdependent, the art of management cannot be profitably studied unless each of the three phases is separately taken up as a problem by itself. Each leg of the tripod should be as carefully fashioned and as strongly constructed as possible, before the three pieces are ready to be welded together.

The Importance of Materials Control

The observation, however, that none of the three phases of management can be considered as more important than the other two and that all three must be given full consideration in any scheme of management is subject to some qualification. The object of business is to sell something at a profit — of a manufacturing business, to sell the thing produced or transformed at a profit. The manufacturing enterprise exists by virtue of the raw materials that enter the factory at one door and leave as finished goods at another door. Capital is invested in buildings, machinery, and other equipment for the purpose of making this transformation. The measure of the effective use of men and capital is determined by the economy, that is, the best possible use of time and materials between the entry of the raw materials into the factory and the egress of the finished goods sold. If we use the term "materials" in its broadest sense and in the sense used throughout this book as including the raw materials, the manufactured parts made therefrom, and the finished goods assembled from the manufactured parts, we may say that the control of materials is the foundation of all other forms of control and therefore of successful management.

The truth of this assertion is made clearer if we consider the relation of materials control to the work of production. The cost of a manufactured product is composed of the three factors of materials, labor, and overhead. To reduce these costs to the lowest possible minimum per unit of production consistent with the quality of the output is the aim of industrial management. Economies in overhead depend upon the most effective use of plant and equipment. Economies in labor depend upon the direction of effort into its most productive channels. Both these aims are thwarted and the effort to economize is largely nullified, if materials are lacking when required and labor and machines stand idle; or if materials of poor quality or the wrong kind have been purchased and work is spoiled and rejected, with the attendant waste of labor and overhead; or if materials are stored in excess of manufacturing requirements and working capital is needlessly tied up in stock and floor space is put to unprofitable use; or if materials are not stored and accounted for properly, and loss from waste, misuse, and careless handling results.

THE PROBLEM OF MATERIALS CONTROL 5

The Control of the Inventories

How closely related is the care and control of the inventories to the fundamental principles of management is not generally realized judging from the inadequacy of most systems of materials control. The profits of a manufacturing concern are largely dependent upon the continuous and unbroken operation of the production departments. The economical operation of these departments requires that they be supplied with materials without cessation. Every hitch in the supply, every breakdown of the flow from raw materials to finished goods, involves the wastes of lost time and idle machines. Therefore, materials must be procured and stored in the requisite quantities to supply every need of production.

Yet the very necessity of maintaining an adequate supply of everything needed for factory operation tends to create the evils of oversupply and waste. Without effective control a large amount of working capital may be invested in materials which will not be used for months and even years to come, or never be used at all because of changes in style or manufacturing policy. Without adequate control also, materials may be transformed into more of one kind of finished parts and less of another kind than is required. Sales may be lost and production orders may be held up in consequence. It will thus be seen that the control of materials is fundamental not only to the orderly progression of a production program but also to the carrying out of a sales program and policy.

Thus materials control in its broadest aspect embraces the control of the inventories of raw materials, parts, and supplies, of work in process, and of finished goods. Materials must flow into the factory in the volume required for production but without bringing into storage more than the minimum quantities required to fill current needs. If the product is an assembled article or machine, parts must be manufactured in the volume required, and yet their stock must be maintained at its lowest possible figure consistent with uninterrupted manufacture. If customers' orders are filled from stock — as is the practice in the majority of businesses — fluctuations in the demand for finished goods or changes in their quality or style should at once react to the storesroom where the potential goods are stored in their raw state, and then from the storesroom to the purchasing department, if they must be purchased, or to the factory, if they must be made.

The Cycle of Manufacturing Operation

Storeskeeping is one phase only of the cycle of materials control. In any discussion of storeskeeping and the routine work involved, it is usual to begin with a description of the purchasing organization and the nature of its work. A little reflection, however, will show that the function of purchasing is dependent upon the sales and production policies and is in no respect an initial function or process that sets in operation other functions and processes. For this reason it has seemed preferable to the writer to arrange the order of presentation in this book with some regard to the sequence of materials control in actual factory operation and to present first a general outline of the problems involved and the mechanism employed in controlling the inventories before discussing more detailed matters. Hence the work and mechanism of the purchasing department is described in the fourth part of this book, because, as explained, purchasing, though preceding the beginning of the cycle of manufacturing operations, is subservient to the control of the inventories.

The Test of Efficiency

The ideal condition of the inventories of a plant would be one in which the turnover of all raw materials synchronized with the time needed to procure them in convenient quantity, in which all finished parts were assembled at periodical inter-

THE PROBLEM OF MATERIALS CONTROL 7

vals into finished stock, and in which few items of stock remained unsold for any length of time. The last of these three circumstances existed in the sellers' market experienced in recent years when buyers were eager to accept anything manu- X.

facturers had to offer. In such a market prices are high enough to pay for inefficiencies in management and wastes in production and still leave a fair margin of profit. When, however, supply equals or exceeds demand and the market belongs to the buyer, the state of the inventories very quickly reflects the relative inefficiency of the management.

Just as the enterprise and business acumen of the merchant are reflected in his turnover, in the freshness and variety of his stock, and in the freedom of his shelves from shop-worn and unsalable goods, so the efficiency with which the average manufacturing plant is managed can be narrowly gauged by a close inspection of its inventories. The statistics of mercantile agencies show that most business failures are due to mismanagement or lack of capital. Both causes mean the same thing — lack of control, and this lack manifests itself most in tying up working capital in useless or unsalable inventories.

Materials Control and Discipline

Just as the individual is largely rated by others at his own valuation, so the inventories — using the term in its widest sense — are valued by employees at the valuation placed upon them by their employer. If materials can be withdrawn from stores without proper authority, if spoiled work and scrap are allowed to accumulate around the plant, if employees are permitted to help themselves to such supplies for their own use, it is human nature for the workers to place a low valuation upon the things for the use or possession of which they are not held strictly accountable. Plant discipline begins with such accountability. Adequate materials control is the first step in the inculcation of such discipline.

Indeed the installation of methods of controlling materials is an essential prerequisite to the installation of methods of controlling the production of workers by measuring the time spent in given operations or in producing certain quantities of goods. Obviously the time spent in processing materials should not be measured and recorded unless the quantity and value of the material used is also measured. Although in every industry some attempt is made to allocate the time of productive workers to the particular processes or operations on which they are engaged, or to the particular goods produced, in few plants is this control carried out in such detail as to bring to light all losses and wastes due to the mishandling of materials or to their lack at the point where required. Only by uncovering such leaks and wastes can the losses due to wasted effort and spoiled or useless material be eliminated. It is by the elimination of such losses that the utmost economy in manufacture is attained.