PUNJAB MACHINERY COMPANY (C)

In September 1997, the chief executive, manufacturing division of Punjab Machinery

Company (PM), was worried about the large stocks of raw materials in the manufacturing
unit. He wanted to make sure that inventories were at the optimum level. He, therefore,
asked a recently employed management trainee to look into the matter and suggest suitable
measures for a sound inventory policy.
PM manufactured milling machines, radial drilling machines, and industrial
humidifiers. Since it had originally been a trading organization, the company was well
acquainted with the market for each of its products, including their sales trends and profit
margins. Based on forecasts, the company set the production targets for the milling machines
for the years September 1997 to June 2001 as shown in Exhibit 1. Average monthly milling
machine production during the fiscal year 1997 98 was nine units.
Mr. N.R. Kulkarni, the management trainee, decided to tackle the problem of
materials and parts for the milling machine first. Then he planned to take up the problem of
radial drilling machines and humidifiers. He obtained the stock position of various items of
raw materials, the value of the stock, the quantity required per milling machine, etc., from
records kept in the manufacturing unit. From these he calculated the cost of the different
kinds of materials required for each milling machine. These particulars are given in Exhibit 3.
(Not included are figures for purchase of components and certain other types of raw materials
in all numbering over 400 items). The materials listed in Exhibit 3 were those needed for the
milling machines only, although a few items were also used on the radial drilling machines.
The existing purchasing procedures and inventory system are described below:
Once a year the plant manager of PM, on the advice of his store-keeper, placed an
order with the purchasing officer (stationed at the head office) for purchase of raw materials
and parts. The head office was in a big city located about 300 km from the factory. The order
contained a long list of all items to be procured, and the estimated quantity required for the
following year. Generally, the plant manager did not worry about the stock on hand and
estimated on the high side, to play safe. From this point on, the production manager had
little contact with purchasing. The purchasing agent immediately placed the necessary orders
and sent the material to the factory as it arrived. In the two years since the company had
started manufacturing the milling machines, there had not been a single occasion when
production had to be stopped due to a shortage of materials or parts.
The purchasing officer and his staff bought materials not only for the manufacturing
unit, but also for the sales offices and for sister concerns of PM. A typist clerk in the
purchasing office spent nearly 50 per cent of his time placing orders for materials and parts
required by the manufacturing unit; the rest of his time was spent in connection with
purchasing items for the other units and in clerical activities not connected with purchasing.
The purchasing officer spent about 10 per cent of his time locating suppliers, placing orders,
and following-up. His steno-secretary spent about 20 percent of his time handling
correspondence with suppliers, filing papers, etc., in connection with the purchases for the
factory. The gross monthly salaries drawn by the purchasing officer, his steno-secretary, and
the typist clerk were Rs. 9000, Rs. 4000 and Rs. 3000. The total workload of these three

persons was such that they had little unutilized time at their disposal. Expenses for stationery,
telephone calls, and some visits to suppliers offices averaged roughly Re. 10 per order.
Approximately 200 orders were placed on an average per year for materials and parts
connected with the milling machine alone.
Most of the items, including the EN-24 and EN-1A steel rods, were actually imported
materials, but available ex-stock from different dealers / stockists. When certain sizes of bars
were scarce, the purchasing officer had to pay higher prices. Also, he had often to place
orders with several people for the supply of the same material, since he could not get all he
required from one supplier. After the materials and parts were purchased, they were sent to
the factory by trucks and the transport cost was roughly fifty paise per kg or Rs. 2000 for one
full truckload of five tonnes.
The castings required for the factory were obtained from the foundry of a sister
concern located within a kilometer of PM.
Mr. Kulkarni, in trying to evolve a suitable inventory policy, obtained information
from the purchasing officer about availability of and lead times for the various materials. The
purchasing officer based this information upon his past experience. These data are
reproduced in column 8 in Exhibit 2. Mr. Kulkarni also learned from the financial controller
at the head office that PM borrowed money from its bankers at an interest rate of 10 per cent.
After a preliminary study of date in Exhibit 3, Mr. Kulkarni thought that it would be
useful to know the average hourly cost of running a lathe. These figures supplied to him as
cost per machine hour, were as follows:
1. Direct labour charges
2. Power, oil, coolant, consumable tools, spares, repairs, etc.
3. Depreciation, shop and other fixed overheads
TOTAL

Rs 15.00 / hr.
Rs 7.50 / hr.
Rs 27.50 / hr.
------------------Rs 50.00 / hr.
-------------------

He also obtained the information contained in Exhibit 2.

Questions
1. What is the major problem faced by the company?
2. Analyze the data and identify the items for which inventory is in excess and those which
are in short supply.
3. Classify the items using ABC analysis.
4. Recommend suitable ordering policies for the various items.
5. Suggest remedial measures for short-term and long-term.

Exhibit 1
PUNJAB MACHINERY COMPANY (C)
Production Targets

Production target (No. of machines)

Type of machine tool
1997-1998
Sept.- June
Milling machines

90

July to June
1998-99

1999-2000

135

175

2000-2001
180

2001-2002
180

Exhibit 2
PUNJAB MACHINERY COMPANY (C)

Machining data
Speed*
Feed**
Depth of cut***

Rough cuts on type A steel

80-100 surface feet per minute
0.020 inches per revolution
0.125 inches

* In a lathe, this a measure of the speed at which the workpiece is turning. If the material
diameter is 1 foot, then, with every revolution D =3.14 ft of surface pass the cutting tool.
If the speed is 100, this means 100 / 3.14= 31.8 R.P. M is the machine setting.
** Each time the workpiece revolves; the tool moves a horizontal distance of .020 inches.
Therefore, in the above example, 0.02 x 31.8 = 0.636 inches of the length of the bar
would be traversed by the tool in one minute.
*** The tool cuts to a depth of 0.125 inch, thereby reducing the diameter of the bar by
0.250 inch for every tool setting.

Exhibit 3:

PUNJAB MACHINERY COMPANY (C)

Particulars of EN-24 Steel Required for Milling Machines

S.No

Description
Size in stock

Stock in
hand
(kg.) Metre

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

45 mm dia
50 mm dia
55 mm dia
60 mm dia
65 mm dia
70 mm dia
73 mm dia
75 mm dia
80 mm dia
83 mm dia
85 mm dia
90 mm dia
95 mm dia
100 mm dia
105 mm dia
115 mm dia
120 mm dia
125 mm dia
132 mm dia
140 mm dia
150 mm dia
180 mm dia

186
138
180
81
552
370
31
955
186
1132
1188
2190
Nil
1984
133
1348
216
386
715
784
244
552

14.9
8.7
9.2
3.5
21.0
12.1
1.0
24.8
4.4
26.5
25.9
44.5
30.2
1.8
16.8
2.5
4.2
7.2
6.1
1.7
2.5

Cost per Value

Quantity
Unit*
of stock required
(Rs./kg.) (Rs.)
per
machine
(Kg.)
38.3
7120
3.6
46.4
6400
1.4
40.2
7240
0.5
43.8
3550
12.6
41.4
22850
2.0
43.9
16240
2.6
61.2
1900
8.6
39.8
38010
1.8
46.5
8650
9.0
68.0
76980
2.6
65.0
77220
4.5
42.2
92410
12.4
40.0
2.6
44.0
87300
23.4
66.3
8420
5.8
66.6
89780
19.9
66.6
14390
7.0
66.6
25710
1.8
44.0
31460
0.6
44.4
34810
6.8
66.0
16100
1.4
41.3
22800
2.4

Lead
Cost
of time for
material
material
per
to arrive
machine
at the
factory**
14
7 days
7
2 months
2
6 weeks
55
2 months
8
2 months
11
2 months
53
2 months
7
1 month
42
2 months
18
7 days
29
1 month
52
1 month
10
1 month
103
1 month
38
1 month
133
2 weeks
47
6 weeks
12
2 weeks
3
4 weeks
30
4 weeks
9
4 weeks
10
6 weeks

*Average price paid during 1st year of operation. Prices might vary by as much as 50
percent up or 20 per cent down at any one time, depending on the availability of a
particular size. EN- 24 steel was improved. Generally, scrap could be sold at 30 per cent
of the purchase cost bar stock.
**Average procurement times during 1st year of operation. However, it was believed that
procurement would, normally, not exceed 9 months for any item, nor be less than one
week, with six weeks as the most likely time for any one size at any point in time.
Materials were not available locally but were available outside the city.