IV – Unit

IMPORTANCE AND SCOPE OF MATERIALS MANAGEMENT

INTRODUCTION:

Materials management is one of the important activities of business. There is no general agreement
about precisely what activities are embraced by materials management. Some managers would associate
materials management with their material or production control departments, which schedule materials
requirements and may also control inventories of both raw materials and in-process materials. Others would
associate it with the activities of their purchasing departments in dealing with outside suppliers. If we
analyze the total cost of any product nearly 60 to 70% is because of materials. Only the rest is for labour,
overhead and profit. So any reduction in the material cost, even by a very less percentage will give rise to a
greater profit. Moreover the materials management being a staff function, the introduction of new
techniques to reduce the cost of the product is much easier than in any other field.

Hence, the rate of return on capital employed is of prime concern and is given by the

Ratio:
Profit
Rate of Return (ROR) = ---------------------------------
Capital employed
Profit Sales
= -------------- X --------------------------------------------------
Sales Fixed Assets + Current Assets
= Profitability X Capital turnover ratio
So as to increase the rate of return on investment, one way is to increase the capital turnover ratio. For this
if capital employed is reduced, naturally capital turnover ratio will go high. Fixed assets constitute capital
already sunk and only scope for improving the Return on Investment (ROI) lies in the efficient management
materials which constitute the bulk of current assets.

As materials constitute the major cost component, large amount of capital is locked up in materials with the
associated burden interest which further increases the cost of the product. So, because of the greatest
percentage of cost associated with materials and also any possible reduction in material cost will result in
the increase of profit, the industries are now thinking of introducing the concept of scientific materials
management. If we analyze the above graph we find that previously the breakeven point was at A. Because
of reducing the cost the breakeven point shifted to B. For the given output ‘C’ the profit margin has
increased by X2, from X1 to (X1 – X2) amount.

SCOPE OF MATERIALS MANAGEMENT:

Materials Management strives to ensure that the material cost component of the total product cost be
the least. In order to achieve this, the control is exercised in the

Following fields.

1. Materials Planning.
2. Purchasing.
3. Store Keeping.
4. Inventory Control.
5. Receiving, Inspection and Despatching.
6. Value Analysis, Standardization and Variety Reduction.
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7. Materials Handling & Traffic.
8. Disposal of Scrap and Surplus, Material Preservation.

The function of material planning department is to plan for the future procurement of all the
required materials as per the production schedule. At the time of material planning, the budget allocated for
the materials will also be critically reviewed, for better control. After material planning, purchasing is to be
done. Purchasing department buys material based on the purchase requisitions from user departments and
stores departments and annual production plan. There are four basic purchasing activities.

a) Selecting suppliers, negotiating and issuing purchase orders.

b) Expediting delivery from suppliers.

c) Acting as liaison between suppliers and other company departments.

d) Looking for new products, materials, and suppliers that can contribute to

Company objectiveness.

At the time of purchase, right quantity and quality of materials must be purchased at right time, at the
lowest possible cost and select the efficient purchasing system, to derive maximum benefit. Purchasing is
done based on ‘make or buy’ decisions and also using

PERT / CPM effectively.

When the items are purchased, proper storage facilities must be provided so that, the wastage is
reduced to a minimum. Sometimes to protect the quality, greater care must be taken during storage. The
duties of the inventory control department is to decide about the types of ordering system, fixing the safety
stock limits, fixing up the reorder level & maximum / minimum stock level. The responsibility of
Receiving, inspection and dispatching department is to receive the materials when delivered by the
suppliers. After receiving it, the quantity and quality must be checked. Production parts and materials are
checked against blueprints and specifications. Non-production items are also reviewed. When once it is as
per the specifications given, the goods will be accepted. The Value Analysis and Standardization offer
greatest scope, in reducing the materials cost. It also reduce the number of varieties and also helps in
finding the substitute for the materials at lesser cost.

Materials handling section is responsible for the transport of materials to various departments. There are
four basic traffic activities.

a) Selecting common or charter carriers and routings for dispatch / shipments as required.

b) Tracing in-bound shipments of material in short supply as requested by production control or

purchasing. Assisting customers in tracing outbound shipments when asked.

c) Auditing invoices from carriers and filing claims for refunds of excess charges or for damaged shipments
when required.

d) Developing techniques to reduce transportation cost. This may involve negotiation with competing
shippers, special studies n selecting the most advantageous plant location for new products, analysis of
tariffs, and negotiation of any number of special arrangements for handling certain traffic.

e) The activity includes packaging of finished product, labeling and loading of end products in the trades.

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Finally the disposal of scrap and surplus must be done periodically to release the capital locked in those
items.

NON-PRODUCTION STORES:

Techniques and procedures used to control non-production material (office supplies, perishable
tools, and maintenance, repair, and operating supplies) resemble those used for production material,
although they are usually less elaborate. Specifically, the stores department

a) Maintains physical stocks of non-production items to be drawn on as needed for operations or

maintenance.

b) Manages inventories of non-production materials and prepares purchase requisitions for needed material
when stocks drop to the re-order point.

c) Keeps records and maintains controls to prevent duplication of inventories, minimize losses from
pilferage and spoilage and prevent stock-outs.

NEED FOR INTEGRATED CONCEPT :

In an integrated set-up, the materials manager is responsible to exercise control and coordinates
with an overview that ensures proper balance of conflicting objectives of the individual functions.
Integration also helps in the rapid transfer of data, through effective and informal communication channels.
This is crucial as the materials management function usually involves handling a vast amount of data.
Therefore, integrating the various functions ensures that message channels are shortened and the various
functions identify themselves to a common materials management department which, in turn, results in
greater co-ordination and better control.

ADVANTAGES IN INTEGRATED MATERIALS MANAGEMENT

CONCEPT :

Organizations which have gone in a big way for the integrated materials management

usually enjoy the following advantages :

BETTER ACCOUNTABILITY :

Through centralization of authority and responsibility for all aspects of materials function, a clear cut
accountability is established. This helps in evaluating the performance of materials management in an
objective manner.

BETTER CO-ORDINATION :

When a central materials manager is responsible for all functions, the departments under the materials
manager create an identity which is common. This results in better support and co-operation in the
accomplishment of the materials function. The user departments also find that they have to approach one
department for discussing and solving their materials problems. This creates an atmosphere of trust and
generally better relations between the user departments and the materials management department.

BETTER PERFORMANCE :

As all the inter-related functions are integrated organizationally, greater speed and accuracy results in
improved communication. Need for materials is promptly brought tonotice by materials planning. Purchase

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department is fed with stock levels and order status by stores and inventory control departments. All this
calls for judicious decisions leading to lower costs, better inventory in paper work.

ADAPTABILITY TO EDP :

The centralization of the materials function has made it possible to design data processing system. All
information with regard to materials function is centralized under the integrated materials management
function. This has facilitated the collection and analysis of data, leading to better decisions. Advanced and
efficient electronic data processing systems can be economically introduced under in integrated set-up.

MISCELLANEOUS ADVANTAGE :

Under a Centralized Materials Manager, a team spirit is inculcated and this results in better morale and co-
operation. The opportunities and exposure available for the individuals for growth and development are
better in an integrated set-up.

PURCHASING PROCEDURE

Preliminary procedure
If you wish to supply products to Osaka Gas for the first time, please apply to the
Purchasing Department. In doing so, please describe your company's financial
status, the product(s) you wish to provide us and the terms of supply. These details
should be provided by using a brochure or company profile statements explaining
the company's financial position, and brochures on the product(s) and technical data.
It is important that you can explain the advantage of your products to Osaka Gas in
the light of our basic purchase policies, and the benefits that a business relationship
with your company could bring to Osaka Gas. You may be required by Osaka Gas
to submit Japanese translation of the foregoing documents if such documents are not
prepared in Japanese. Information and data on your company and your product(s)
will be stored and managed in our files as "Products and Suppliers". The
information will be used for selecting the companies to which we ask to submit
estimates.

Should it be the first time you wish to supply materials or equipment for which
Osaka Gas has clearly defined purchase conditions, such as delivery time and
product specifications, we conduct a preliminary examination of your company and
the product(s) you wish to supply, and make a comprehensive evaluation based on
the following criteria:
･Necessity of the product(s).
･Whether the product(s) can satisfy the standards set by Osaka Gas regarding
quality, performance, reliability, safety, price, delivery reliability, and
compatibility with existing facilities, as well as the company's financial
condition, supply capacity, facility capacity, technological capacity, maintenance
and service systems.The merit of establishing a business relationship with the
new supplier will also be considered.
Information for the preliminary examination can be in any format as long as it
provides sufficient data for evaluating the above criteria. However, if deemed
necessary, Osaka Gas may request additional information, product samples and/or
explanation. After passing the preliminary examination, the information and data on
your company and products will be stored and managed in our files as "Companies
from Which Estimates Can Be Requested", to be used in selecting those companies
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 to which we ask to submit estimates. The results of the preliminary examination are
available up on request, although any information considered confidential by Osaka
Gas will be excluded.
Details of purchasing procedure
The specifications and number/quantity and delivery of equipment, devices and
materials are determined by the department(s) that will be using the product(s) or
materials. The Purchasing Department conducts purchase activities based on
purchase requests submitted by the/these department(s).

The Purchasing Department, at its sole discretion, selects companies from which
estimates will be sought. Suppliers are selected from the files of "Companies with
Previously Established Business Relationships", "Companies from Which
Estimates Can Be Requested" and "Products and Suppliers". Selection is made by
comprehensivly evaluating such factors as the quality and performance of the
equipment, device(s) or materials to be purchased, compatibility with existing
facilities, degree of reliability, product requirements including safety, delivery
time, the scale of the order, after-sale service and the company's previous business
record. As a rule, Osaka Gas asks several companies to submit estimates.
However, only one company may be specified for estimate submission in such
special cases as those concerned with industrial property rights, those requiring
maximum levels of safety that only one specific supplier can ensure, cases where
only one specific supplier can assure compatibility with existing facilities, or in
case of urgency.

As a rule, when requesting an estimate from a company that it has selected, Osaka
Gas will set out a specification from listing Osaka Gas's requirements in respects
of quality, performance standard, size, inspection and method of inspection. The
selected companies will be asked to submit cost estimates and specifications to
Osaka Gas prior to a specified date.

Specification sheets submitted by potential suppliers at their own expense are

checked by the Purchasing Department and the department(s) that will be using
the product(s), in order to determine whether the required standards are met by the
product(s). All products must pass this examination. During this process, Osaka
Gas may request additions or changes to the specifications.

After valid cost estimates and specifications have been comprehensively evaluated
in respect of price, technical requirements, etc. Osaka Gas will commence
negotiation with the company with the most attractive proposal to discuss the
amount of the contract and other terms and conditions. The selection of such a
company shall be made by Osaka Gas at its sole discretion. Contract terms and
conditions will be decided upon mutual agreement.

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 The business will be established upon conclusion of a contract, in the form of a
written document if necessary. The obligations and liabilities of Osaka Gas arise
only when such contract is concluded.

Delivery dates specified in the contract must be strictly observed. Precise details
of the delivery schedule will be agreed between the supplier and the relevant
department(s) of Osaka Gas. Delivered equipment, device(s) or materials must
pass inspections conducted by the relevant department(s) of Osaka Gas. When
deemed significant, an interim inspection may be conducted during the
manufacturing process.

Payment will be made according to the payment terms specified in the contract.

INVENTORY CONTROL
TYPES OF INVENTORIES

Inventories may be classified as under:-

(1) Raw materials and production inventories:

These are raw - materials, parts and components which enter into the product Direct during the
production process and generally form part of the product.

(2) In-process inventories:

Semi-finished parts, work-in-process and partly finished products formed at various stages of
production.

(3) M.R.O. Inventories:

Maintenance, repairs and operating supplies which are consumed during the production process and
generally do not form part of the prod.uct itself (e.g. POL, Petroleum products like petrol, kerosene, diesels,
various oils and lubricants, machinery and plant spares, tools, jibs and fixtures, etc.)

(4) Finished goods inventories:

Complete finished products ready for sale.
Inventories may also be classified according to the function they serve, such as,

(a) Movement and transit inventories:

This arises because of the time necessary to move stocks from one place to another. The average
amount can be determined mathematically thus- I=S x T Where, S represents the average rate of sales (say,
weekly or monthly average) and T the transit time required to move from one place to another, and I the
movement inventory needed.

As for example, if it takes three weeks to move materials to aware house from the plant and if the
warehouse sells 110 per week, then the average inventory needed will be 110 units x 3 weeks = 330 units. In
fact, when a unit of finished product is manufactured and ready for sale, it must remain idle for three weeks
for movement to warehouse. Therefore, the plant stock on an average must be equal to three weeks' sale in
transit.
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(b) Lot-size inventories:
In order to keep costs of buying, receipt, inspection and transport and handing charge slow, larger
quantities are bought than are necessary for immediate use. It is common practice to buy some raw materials
in large quantities in order to avail of quantity discounts.

(c) Fluctuation inventories:

In order to cushion against unpredictable demands these are maintained, but they are not absolutely
essential in the sense that such stocks are always uneconomical. Rather than taking what they can get,
general practice of serving the customer better is the reason for holding such type of inventories.

(d) Anticipation inventories:

Such inventories are carried out to meet predictable changes in, demand. In case of seasonal
variations in the availability of some raw materials, it is of inventory and also to some extent economical to
build up stocks where consumption pattern may be reasonably uniform and predictable. of the types of
inventories discussed above, the Lot-size, Fluctuation and Anticipation Inventories may be said to he
'Organization Inventories'. As more of these, basic types of inventories are carried into stock, less
coordination and planning are required. Also less clerical and administrative efforts are needed and greater
economies can be obtained in handling, manufacturing and dispatching.
But the difficulty is that gains are not directly proportional to the size of inventories maintained.

As the size increases, even if they are efficiently maintained, handled and properly located, gains
from additional stock become less and less prominent The cost of warehousing, obsolescence and capital
costs associated with maintenance of large quantities grow at a faster rate than the inventories themselves.
As such, the basic problem is to strike a balance between the increase in costs and the decline in return from
holding additional inventories. Striking a balance in a complex business situation through intuition alone is
not easy. Costs, and to be sure, the balancing of opposite costs, lie at the heart of all inventory control
problems, for which cost analyses are necessary to which we shall turn in this chapter now.

Meaning of Inventory Control

Inventory control is a planned approach of determining what to order, when to order and how much
to order and how much to stock so that costs associated with buying and storing are optimal without
interrupting production and sales. Inventory control basically deals with two problems: (i) When should an
order be placed? (Order level), and (ii) How much should be ordered? (Order quantity). These questions are
answered by the use of inventory models. The scientific inventory control system strikes the balance
between the loss due to non-availability of an item and cost of carrying the stock of an item. Scientific
inventory control aims at maintaining optimum level of stock of goods required by the company at minimum
cost to the company.

Objectives of Inventory Control

1. To ensure adequate supply of products to customer and avoid shortages as far as possible.

2. To make sure that the financial investment in inventories is minimum (i.e., to see that the working capital
is blocked to the minimum possible extent).

3. Efficient purchasing, storing, consumption and accounting for materials is an important objective.

4. To maintain timely record of inventories of all the items and to maintain the stock within the desired
limits.

5. To ensure timely action for replenishment.

6. To provide a reserve stock for variations in lead times of delivery of materials.

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7. To provide a scientific base for both short-term and long-term planning of materials.

Benefits of Inventory Control

It is an established fact that through the practice of scientific inventory control, following are the benefits of
inventory control:

1. Improvement in customer’s relationship because of the timely delivery of goods and service.

2. Smooth and uninterrupted production and, hence, no stock out.

3. Efficient utilisation of working capital. Helps in minimising loss due to deterioration, obsolescence
damage and pilferage.

4. Economy in purchasing.

5. Eliminates the possibility of duplicate ordering.

INVENTORY CONTROL SYSTEMS

Inventory control (also known as inventory management) refers to the systems and strategies businesses use
to ensure that they have adequate supplies of raw materials for production and finished goods for shipment
to customers, while also minimizing their inventory carrying costs. Storing excess inventory is costly,
because the space and financial resources invested in the goods can often be put to better use elsewhere. At
the same time, however, inadequate inventory stores can result in costly production shutdowns or delays in
filling customer orders. Inventory control systems help companies to find the delicate balance between too
little and too much inventory.

"It is nearly impossible to overemphasize the importance of keeping inventory levels under control," Ronald
Pachura wrote in an article for IIE Solutions. "Whether the problems incurred are caused by carrying too
little or too much inventory, manufacturers need to become aware that inventory control is not just a
materials management or warehouse department issue. The purchasing, receiving, engineering,
manufacturing, and accounting departments all contribute to the accuracy of the inventory methods and
records."

Pachura created a checklist to aid companies in assessing their inventory controls. He recommended that
business managers examine the accuracy and effectiveness of their: bills of materials (BOM); receiving
policies; engineering changes; scrap reporting; vendor lead times; reorder triggers; and warehouse locator
systems. The inventory turnover ratio is a tool that can help companies to determine whether they are
producing and carrying too much inventory. The basic measure of inventory turnover is defined as cost of
goods sold divided by average inventory on hand. But Pachura noted that managers may gain more
information by segmenting average inventory into raw materials, work in process inventory, and finished
goods, and then computing a separate turnover figure for each. Comparing these figures often reveals
opportunities for improving inventory controls.
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COMPUTERS AND INVENTORY

In today's business environment, even many smaller businesses have come to rely on computerized
inventory management systems. Certainly, there are plenty of small retail outlets, manufacturers, and other
businesses that still rely on manual means of inventory tracking. Indeed, for some businesses—such as
convenience stores, shoe stores, or nurseries—the purchase of an electronic inventory tracking system might
constitute a wasteful use of financial resources. But for firms operating in industries that feature high volume
turnover of raw materials and/or finished pro-ducts, computerized tracking systems have emerged as a key
component of business strategies aimed at increasing productivity and maintaining competitiveness.
Moreover, the recent development of powerful computer programs capable of addressing a wide variety of
record-keeping needs—including inventory management—in one integrated system have also contributed to
the growing popularity of electronic inventory control options.

Given such developments, it is little wonder that business experts commonly cite inventory management as a
vital element that can spell the difference between success and failure in today's keenly competitive business
world. Writing in Production and Inventory Management Journal, Godwin Udo described
telecommunications technology as a critical organizational asset that can help a company realize important
competitive gains in the area of inventory management. According to Udo, companies that make good use of
this technology are far better equipped to succeed than those who rely on outdated or unwieldy methods of
inventory control.

Automation can draidatically affect all phases of inventory management, including counting and monitoring
of inventory items; recording and retrieval of item storage locations; recording changes to inventory; and
anticipating inventory needs, including inventory handling requirements. This is true even of stand-alone
systems that are not integrated with other areas of the business. But many analysts indicate that productivity
—and hence profitability—gains that are garnered through use of automated systems can be increased when
a business integrates its inventory control systems with other systems, such as accounting and sales, to
better manage inventory levels.

According to Dennis Eskow in PC Week, business executives are "increasingly integrating financial data,
such as accounts receivable, with sales information that includes customer histories. The goal: to control
inventory quarter to quarter, so it doesn't come back to bite the bottom line. Key components of an
integrated system … are general ledger, electronic data interchange, database connectivity, and
connections to a range of vertical business applications." David Cahn, a director of product strategy for
business applications at a firm in New York, confirmed this view in an interview with Eskow: "What drives
business is optimization of working capital. The amount of control you have on inventory equals the
optimization of the capital. That's why it's so important to integrate the inventory data with everything else."

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THE FUTURE OF INVENTORY CONTROL SYSTEMS

In the late 1990s many businesses were investing heavily in integrated order and inventory systems designed
to keep inventories at a minimum and replenish stock quickly. But as Eskow noted, business owners have a
variety of system integration options from which to choose, based on their needs and financial liquidity.
"Integrated inventory systems may range in platform and complexity," he noted.

At the same time that these integrated systems have increased in popularity, business observers have
suggested that "stand-alone" systems are falling into disfavor. Tom Andel and Daniel A. Kind, for instance,
cited a study by the International Mass Retail Association in Transportation and Distribution: "The study
concludes that stand alone Warehouse Management System (WMS) packages acquired today to perform
individual functions will probably be abandoned in just a few years because they do not integrate well with
other systems. Systems investments must be considered in context of future systems objectives."

Another development of which business vendors should be aware is a recent trend wherein powerful
retailers ask their suppliers to implement vendor-managed inventory systems. These arrangements place the
responsibility for inventory management squarely on the shoulders of the vendors. Under such an
agreement, the vendors obtain warehouse or point-of-sale information from the retailer and use that
information to make inventory restocking decisions.

Warehouse Layout and Operation

The move toward automation in inventory management naturally has moved into the warehouse as well.
Citing various warehousing experts, Sarah Bergin contended in Transportation and Distribution magazine
that "the key to getting productivity gains from inventory management … is placing real-time intelligent
information processing in the warehouse. This empowers employees to take actions that achieve immediate
results. Real-time processing in the warehouse uses combinations of hardware, including material handling
and data collection technologies. But according to these executives, the intelligent part of the system is
sophisticated software which automates and controls all aspects of warehouse operations."

Another important component of good inventory management is creation and maintenance of a sensible,
effective warehousing design. A well-organized, user-friendly warehouse layout can be of enormous benefit
to business owners, especially if they are involved in processing large volumes of goods and materials.
Conversely, an inefficient warehouse system can cost businesses dearly in terms of efficiency, customer
service, and, ultimately, profitability.

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Transportation and Distribution magazine cited several steps that businesses using warehouse storage
systems can take to help ensure that they get the most out of their facilities. It recommended that companies
utilize the following tools:

 Stock locator database: "The stock locator database required for proactive decision making will be
an adjunct of the inventory file in a state-of-the-art space management system. A running record will
be maintained of the stock number, lot number, and number of pallet loads in each storage location.
Grid coordinates of the reserve area, including individual rack tier positions, must therefore be
established, and the pallet load capacity of all storage locations must be incorporated into the
database."
 Grid coordinate numbering system: The warehouse numbering system should be developed in
conjunction with the storage layout, and should be user-friendly so that workers can quickly locate
currently stocked items and open storage spaces alike.
 Communication systems: Again, this can be a valuable investment if the business's warehouse
requirements are significant. Such facilities often utilize forklift machinery that can be used more
effectively if their operators are not required to periodically return to a central assignment area.
Current technology, however, makes it possible for the warehouse computer system to interact with
terminal displays on the forklifts themselves. "Task assignment can then be made by visual display
or printout, and task completion can be confirmed by scanning, keyboard entry, or voice
recognition," observed Transportation and Distribution.
 Maximization of storage capacity: Warehouses that adhere to rigid "storage by incoming lot size"
storage arrangements do not always make the best use of their space. Instead, businesses should
settle on a strategy that eases traffic congestion and reduces problems associated with ongoing
turnover in inventory.

Outsourcing Warehouse Responsibilities

Some companies choose to outsource their warehouse functions. "This allows a company that isn't
as confident in running their own warehousing operations to concentrate on their core business and let the
experts worry about keeping track of their inventory," wrote Bergin. "There are third party services available
for managing warehouse operations. SonicAir, for one, provides companies with an analysis of products and
spare parts, evaluations of their time sensitivity, and current installations and locations of vendor's
distribution centers." Inventory control systems such as the one utilized by SonicAir, said Bergin, provide
businesses with the ability to do real-time updating of inventory, cross-docking and dispatch, verification,
and up-to-the-minute tracking of inventory item location. Such systems are also capable of providing "a
strategic stocking analysis which looks at the customer's equipment locations to determine which strategic
stocking locations should be used, the expected transit time, and projected fill rate," added Bergin. Of

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course, businesses weighing whether to outsource such a key component of their operation need to consider
the expense of such a course of action, as well as their feelings about relinquishing that level of control.

The techniques we used in store inventory control.

Store / Inventory control technique is the important tool in the hands of the modern management. It is
indispensable for each and every manufacturing concern. The following are the important techniques of
store control.

Fixation of various stock level: Under this method various stock levels are fixed scientifically to avoid over
stocking and under stocking of materials. Over stocking of materials leads to unnecessary blockage of
materials and investment and under stocking of material leads to disputation in production. These are the
following stock levels which help for planning of materials.

Economic ordering quantity(EOQ): Economic ordering quantity is that quantity of material which are to
be ordered in one time in order to minimize ordering cost, carrying cost as well as cost of holding stock.

Perpetual inventory system: Perpetual inventory system is defined as "a system of records maintained by
the controlling department which reflects the physical movement of stocks and their current balances."

Bin card and store ledger constitute the bedrock of perpetual inventory system. It is a method of recording
store after every receipt & every issue and their current balances to avoid closing down the firm for stock
taking. To ensure accuracy the physical verification may be made which must have to agree with the balance
of Bin Card & store ledger. If there is any discrepancy between the two, it may be adjusted by preparing
debit note and credit note.

Re-order level (ROL):

Receiving and issuing of inventories are the common and recurring phenomena in a manufacturing
organization. When the inventories fall below a particular level, they are replenished by the fresh purchases.
The prescription of re-order level (ROL) is an important technique of inventory control. It fundamentally
deals with ‘when to order’ to replenish the inventories. Re-order level is predetermined point, and when the
existing stock of inventories reaches this point of falls below it, the purchase action is initiated to replenish
them. The ROL is mentioned in the bin-card of each inventory item. What should be the quantity of
replenishment order is also a matter of policy. Generally, size of the order is determined on the basis of the
economic ordering quantity (EOQ) which is also an important technique of inventory control. Detailed
treatment is given to this technique separately.

The re-order level is decided for each important item of inventory on the basis of following considerations:

1) Lead time
2) Average periodic consumption (daily consumption)
3) Safety stock

Re-order level is decided as under:

ROL= (Lead time x average daily consumption) + safety stock

Re-order level is the point of remaining stock when the new order is to be send. In order to calculate the
reorder pint, following term should be known:

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  Lead Time: Lead time is the time normally takes by the supplier in sending goods after placing the
order.

 Average Usage: Average usage means average consumption in a particular time period.

 EOQ (Economic Order Quantity): EOQ is the level of inventory order that minimizes the total
cost associated with inventory management.

 Safety Stock: Safety stock is the minimum level of stock that is to be maintained to avoid delay.

Economic order quantity (EOQ):

Learning Objective:

1. Definite and explain economic order quantity (EOQ).

2. How is economic order quantity (EOQ) calculated?

1. Definition of EOQ

2. Formula

3. Example:

Definition and Explanation:

Economic order quantity (EOQ) is that size of the order which gives maximum economy in
purchasing any material and ultimately contributes towards maintaining the materials at the
optimum level and at the minimum cost.

In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at
one time for purposes of minimizing annual inventory cost.

The quantity to order at a given time must be determined by balancing two factors: (1) the cost of
possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing
larger quantities may decrease the unit cost of acquisition, but this saving may not be more than
offset by the cost of carrying materials in stock for a longer period of time.

The carrying cost of inventory may include:

 Interest on investment of working capital

 Property tax and insurance
 Storage cost, handling cost
 Deterioration and shrinkage of stocks
 Obsolescence of stocks.
Formula of Economic Order Quantity (EOQ):

The different formulas have been developed for the calculation of economic order quantity (EOQ).
The following formula is usually used for the calculation of EOQ.

 A = Demand for the year

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  Cp = Cost to place a single order

 Ch = Cost to hold one unit inventory for a year

 *=×

Example:

Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000.
The annual holding cost per unit is $2.50 and the cost to place an order is $50.

Calculate economic order quantity (EOQ)

Calculation:

Materials Requirements Planning (MRP)

MRP is a planning tool geared specifically to assembly operations. The aim is to allow each manufacturing
unit to tell its supplier what parts it requires and when it requires them. The supplier may be the upstream
process within the plant or an outside supplier. Together with MRP II it is probably the most widely used
planning and scheduling tool in the world. MRP was created to tackle the problem of 'dependent demand';
determining how many of a particular component is required knowing the number of finished products.
Advances in computer hardware made the calculation possible.

Master Production Schedule

The process starts at the top level with a Master Production Schedule (MPS). This is an amalgam of known
demand, forecasts and product to be made for finished stock. The phasing of the demand may reflect the
availability of the plant to respond. The remainder of the schedule is derived from the MPS. Two key
considerations in setting up the MPS are the size of `time buckets' and the `planning horizons'. A `time
bucket' is the unit of time on which the schedule is constructed and is typically daily or weekly. The
`planning horizon' is how far to plan forward, and is determined by how far ahead demand is known and by
the lead times through the operation. There are three distinct steps in preparing an MRP schedule:

1. exploding
2. netting
3. offsetting.
Exploding
Explosion uses the Bill of Materials (BOM). This lists how many, of what components, are needed for each
item (part, sub assembly, final assembly, finished product) of manufacture. Thus a car requires five wheels
including the spare. BOM's are characterised by the number of levels involved, following the structure of
assemblies and sub assemblies. The first level is represented by the MPS and is 'exploded' down to final
assembly. Thus a given number of finished products is exploded to see how many items are required at the
final assembly stage.

Netting

The next step is 'netting', in which any stock on hand is subtracted from the gross requirement determined
through explosion, giving the quantity of each item needed to manufacture the required finished products.

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Offsetting

The final step is 'offsetting'. This determines when manufacturing should start so that the finished items are
available when required. To do so a 'lead time' has to be assumed for the operation. This is the anticipated
time for manufacturing.

The whole process is repeated for the next level in the BOM and so on until the bottom is reached. These
will give the requirements and timings to outside suppliers.

There are three major assumptions made when constructing an MRP schedule:

 The first, and possibly the most important, is that there is sufficient capacity available. For this
reason MRP is sometimes called infinite capacity scheduling.

 The second is that the lead times are known, or can be estimated, in advance.

 The third is that the date the order is required can be used as the starting date from which to develop
the schedule.

Material Requirements Planning:

MRP calculates and maintains an optimum manufacturing plan based on master production schedules, sales
forecasts, inventory status, open orders and bills of material. If properly implemented, it will reduce cash
flow and increase profitability. MRP will provide you with the ability to be pro-active rather than re-active
in the management of your inventory levels and material flow.

Implementing or improving Material Requirements Planning can provide the following benefits for your
company:

1 Reduced Inventory Levels

2 Reduced Component Shortages
3 Improved Shipping Performance
4 Improved Customer Service
5 Improved Productivity
6 Simplified and Accurate Scheduling
7 Reduced Purchasing Cost
8 Improve Production Schedules
9 Reduced Manufacturing Cost
10 Reduced Lead Times
11 Less Scrap and Rework
12 Higher Production Quality
13 Improved Communication
14 Improved Plant Efficiency
15 Reduced Freight Cost
16 Reduction in Excess Inventory
17 Reduced Overtime
18 Improved Supply Schedules
19 Improved Calculation of Material Requirements
20 Improved Competitive Position
The consultants at Inventory Solutions can provide an un-biased review of your operations and make
suggestions on how you can improve your process. If you want the productivity improvements that MRP
can deliver,

MRP uses the following elements to plan optimal inventory levels, purchases, production schedules and
more:

Master Production Schedule (MPS)

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 Bill of Materials (BOM)
Quantity on Hand (QOH)
Part Lead Times
Sales Order Quantities / Due Dates
Scrap Rate
Purchase Order Quantities / Due Dates
Lot Sizing policies for All Parts
Safety Stock Requirements
MRP will plan production so that the right materials are at the right place at the right time. MRP
determines the latest possible time to product goods, buy materials and add manufacturing value. Proper
Material Requirements Planning can keep cash in the firm and still fulfill all production demands. It is the
single most powerful tool in guiding inventory planning, purchase management and production control.
MRP is easy to operate and adds dramatically to profits.

A.B.C. Analysis: A. B. C. analysis is always a better control system. Under this method inventory items are
classified in to three categories such as A. B. C. basing upon its value and cost significance. The number of
items and the value of each class is expressed as percentage of the total and categorize as under.

Items of high value and small in numbers termed as 'A'

Items of moderate value and moderate in number is termed as 'B'

Items of small in value and large in number is termed as 'C'

V.E.D. Analysis: This method is used for control of spare parts. VED is the symbol of

1. Vital spare parts: Are those spares whose cost of stock out is very high.
2. Essential spare parts: Are those spares which are essential for the production to continue.
3. Desirable spare parts: Are those spares which are needed but their absence even a week or more will
not lead to stoppage of production.
Inventory turn over ratio: Inventory turn over ratio is one of the method of store control. it indicates how
quickly the stocks are converted in to sale. Low inventory turn over ratio indicates the inefficient
management in inventory & high inventory turn over ratio is always implies favorable situation.

ValueAnalysis:

Value analysis is a systematic effort to improve upon cost and/or performance of products
(services), either purchased or produced. It examines the materials, processes, information systems, and the
flow of materials involved. Value Analysis efforts began in earnest during WW II. GE, concerned with the
difficulties in obtaining critical listed materails to produce war material, assigned an engineer, Lawrence D
Miles to the Purchasing department. His mission was to find adequate material and component substitutes
for critical listed material to manufacture needed war equipment. In his search, Miles found that each
material has unique properties that could enhance the product if the design was modified to take advantage
of those properties.

Miles discovered that he could meet or improve product performance and reduce its production cost
by understanding and addressing the intended function of the product. His method was - Blast (dissecting
products to discern key competitive advantages), Create (detailed analysis of the disassembled products,
identifying those functions of concern and soliciting ideas for improving), Refine (selecting the most value
adding, cost-effective ideas and preparing a business case for the implementation of the proposals) - the VA

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Tear Down Analysis. The key element in Miles' work is that he separated Function (what it must do) from
the characteristics of the design (how it does it). Value = Function/Cost (esteem value - want, exchange
value - worth, utility value - need).

US Navy adopted this in 1945 as Value Engineering. The Defense Department described Value
Engineering as a "before the fact" activity applying the value methodology during the product design phase
and Value Analysis as "after the fact" activity, practicing the value process following design release, during
the production of the product.

Importance

Implemented diligently, value analysis can result in -

reduced material use and cost
reduced distribution costs
reduced waste
improved profit margins
increased customer satisfaction
increased employee morale

FSN ANALYSIS:

All items are not required with the same frequency – some are required regularly, some occasionally
and some once in a while. FSN Analysis places the items in three categories: Fast Moving (F), Slow Moving
(S) and Non-Moving (N). Inventory policies and models for these three groups are different.

Theoretical models have validity for F items with regular consumption. Spare are slow moving (S), and
require special management. Disposal policies are designed to control dead stock.

MARKETING MANAGEMENT

Definition: Marketing management is a business discipline which is focused on the practical application
ofmarketing techniques and the management of a firm's marketing resources and activities.

Marketing definition : Marketing is the social process by which individuals and groups obtain what they
need and want through creating and exchanging products and value with others.

-Kotler.

Marketing is the management process that identifies, anticipates and satisfies customer requirements
profitably.

-The Chartered Institute of Marketing (CIM).

MARKETING ENVIRONMENT

The marketing environment surrounds and impacts upon the organization. There are three key
perspectives on the marketing environment

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MACRO ENVIRONMENT

This includes all factors that can influence an organization, but that are out of their direct control.

A company does not generally influence any laws .It is continuously changing, and the company needs to
be flexible to adapt.

There may be aggressive competition and rivalry in a market.

Globalization means that there is always the threat of substitute products and new entrants.

The wider environment is also ever changing, and the marketer needs to compensate for changes in culture,
politics, economics and technology.

Competitive Environment

Adopting the marketing concept means that an organization must provide greater customer value
than its competitors. Being good is not good enough if a competitor is better. It is impossible for an
organization to develop strong competitive positioning strategies without a good understanding of its
competitors and the strengths and weaknesses of the competitors.

Three levels of competition exist.

1. Direct competitors are firms competing for the same customers with the similar products (ex. grocery
stores).
2. Competition exists between products that can be substituted for one another (ex. margarine for butter).
3. Competition exists among all organizations that compete for the consumer's purchasing power (ex.
entertainment).

Economic Environment

The economic environment consists of factors that affect consumer purchasing power and spending
patterns. Economic factors include business cycles, inflation, unemployment, interest rates, and income.
Changes in major economic variables have a significant impact on the marketplace. For example, income
affects consumer spending which affects sales for organizations. According to Engel's Laws, as income
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rises, the percentage of income spent on food decreases, while the percentage spent on housing remains
constant.

People spend, save, invest and try to create personal wealth with differing amounts of money. How
people deal with their money is important to marketers. Trends in the economic environment show an
emphasis on global income distribution issues, low savings and high debt, and changing consumer-
expenditure patterns. If you consider access to telephones, clothes washers, dryers, microwaves, etc., there is
little visible difference between the poor and nonpoor. Indeed, recent figures indicate that the affluent are
shopping at discount stores, having adopted some of the shopping habits of those with less income.

Technological Environment

The technological environment refers to new technologies, which create new product and market
opportunities. Technological developments are the most manageable uncontrollable force faced by
marketers. Organizations need to be aware of new technologies in order to turn these advances into
opportunities and a competitive edge. Technology has a tremendous effect on life-styles, consumption
patterns, and the economy. Advances in technology can start new industries, radically alter or destroy
existing industries, and stimulate entirely separate markets. The rapid rate at which technology changes has
forced organizations to quickly adapt in terms of how they develop, price, distribute, and promote their
products.

Political and Legal Environment

Organizations must operate within a framework of governmental regulation and legislation.

Government relationships with organizations encompass subsidies, tariffs, import quotas, and deregulation
of industries.

The political environment includes governmental and special interest groups that influence and limit
various organizations and individuals in a given society. Organizations hire lobbyists to influence legislation
and run advocacy ads that state their point of view on public issues. Special interest groups have grown in
number and power over the last three decades, putting more constraints on marketers. The public expects
organizations to be ethical and responsible. An example of response by marketers to special interests
is green marketing, the use of recyclable or biodegradable packing materials as part of marketing strategy.

Demographic Environment

Demographics tell marketers who current and potential customers are; where they are; and how
many are likely to buy what the marketer is selling. Demography is the study of human populations in terms
of size, density, location, age, sex, race, occupation, and other statistics. Changes in the demographic
environment can result in significant opportunities and threats presenting themselves to the organization.
Major trends for marketers in the demographic environment include worldwide explosive population
growth; a changing age, ethnic and educational mix; new types of households; and geographical shifts in
population.

Cultural Environment

Social/cultural forces are the most difficult uncontrollable variables to predict. It is important for
marketers to understand and appreciate the cultural values of the environment in which they operate. The
cultural environment is made up of forces that affect society's basic values, perceptions, preferences, and
behaviors. U.S. values and beliefs include equality, achievement, youthfulness, efficiency, practicality, self-
actualization, freedom, humanitarianism, mastery over the environment, patriotism, individualism, religious
19
and moral orientation, progress, materialism, social interaction, conformity, courage, and acceptance of
responsibility. Changes in social/cultural environment affect customer behavior, which affects sales of
products. Trends in the cultural environment include individuals changing their views of themselves, others,
and the world around them and movement toward self-fulfillment, immediate gratification, and secularism.

Ecosystem Environment

The ecosystem refers to natural systems and its resources that are needed as inputs by marketers or
that are affected by marketing activities. Green marketing (the greening of America) or environmental
concern about the physical environment has intensified in recent years. Environmental consciousness has a
strong presence in Western Europe and Japan, as well as in the United States. To avoid shortages in raw
materials, organizations can use renewable resources (such as forests) and alternatives (such as solar and
wind energy) for nonrenewable resources (such as oil and coal). Organizations can limit their energy usage
by increasing efficiency. Goodwill can be built by voluntarily engaging in pollution prevention activities and
natural resource

MICRO ENVIRONMENT

The Market

Organizations closely monitor their customer markets in order to adjust to changing tastes and
preferences. Amarket is people or organizations with wants to satisfy, money to spend, and the willingness
to spend it. Each target market has distinct needs, which need to be monitored. It is imperative for an
organization to know their customers, how to reach them and when customers' needs change in order to
adjust its marketing efforts accordingly. The market is the focal point for all marketing decisions in an
organization.

Consumer markets are individuals and households that buy goods and services for personal
consumption.Business markets buy goods and services for further processing or for use in their production
process.Reseller markets buy goods and services in order to resell them at a profit. Government markets are
agencies that buy goods and services in order to produce public services or transfer them to those that need
them. The federal government is the largest buyer in the United States. International markets consist of
buyers in other countries.

Suppliers

Suppliers are organizations and individuals that provide the resources needed to produce goods and
services. They are critical to an organization's marketing success and an important link in its value delivery
system. Marketers must watch supply availability and monitor price trends of key inputs. If there is a
breakdown in the link between the organization and its suppliers, the result will be delays and shortages that
can negatively impact the organization's marketing plans. On the other hand, positive and cooperative
relationships between the organization and its suppliers can lead to enhanced service and customer
satisfaction.

Marketing Intermediaries

Like suppliers, marketing intermediaries are an important part of the system used to deliver value to
customers. Marketing intermediaries are independent organizations that aid in the flow of products from the
marketing organization to its markets. The intermediaries between an organization and its markets constitute
a channel of distribution. These include middlemen (wholesalers and retailers who buy and resell
merchandise). Physical distribution firms help the organization to stock and move products from their points
of origin to their destinations. Warehouses store and protect the goods before they move to the next

20
destination. Marketing service agencies help the organization target and promote its products and include
marketing research firms, advertising agencies, and media firms. Financial intermediaries help finance
transactions and insure against risks and include banks, credit unions, and insurance companies.

THE INTERNAL ENVIRONMENT.

All factors that are internal to the organization are known as the ‘internal environment’. They are
generally audited by applying the ‘Five Ms’ which are Men, Money, Machinery, Materials and Markets. The
internal environment is as important for managing change as the external. As marketers we call the process
of managing internal change ‘internal marketing.’

Essentially we use marketing approaches to aid communication and change management.

ADVERTISING

Advertising is a form of communication used to persuade an audience (viewers, readers or listeners)

to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive
consumer behavior with respect to a commercial offering, although political and ideological advertising is
also common. Advertising messages are usually paid for by sponsors and viewed via various traditional
media; including mass media such as newspaper, magazines, television commercial, radio
advertisement, outdoor advertising or direct mail; or new media such as websites and text messages.

Definition:
1. The non-personal communication of information usually paid for & usually persuasive in nature,
about products (goods & services) or ideas by identified sponsor through various media. (Arenes
1996)
2. Any paid form of non-personal communication about an organization, product,service, or idea from
an identified sponsor. (Blech & Blech 1998)
3. Paid non-personal communication from an identified sponsor using mass media to persuade
influence an audience. (Wells, Burnett, & Moriaty 1998)
4. The element of the marketing communication mix that is non personal paid for an identified
sponsor, & disseminated through channels of mass communication to promote the adoption of
goods, services, person or ideas. (Bearden, Ingram, & Laforge 1998)
5. An informative or persuasive message carried by a non personal medium & paid for by an identified
sponsor whose organization or product is identified in some way. (Zikmund & D'amico 1999)
6. Impersonal; one way communication about a product or organization that is paid by a marketer.
(Lamb, Hair & Mc.Daniel 2000)
7. Any paid form of non-personal presentation and promotion of ideas,goods or services by an
identified sponsor. (Kotler et al., 2006)

Importance of Advertising

Advertising has become an indispensable function in modern business due to cut-throat competition
and mass production. It pervades our economic and social life. It helps to disseminate information which is
useful to businessmen, consumers and the society in general. Through it one can create an indirect and
impersonal link with his prospects easily, quickly and economically. The importance of advertising can be
classified into three different heads:

• Importance of Advertising to producers and Traders,

• Importance of Advertising to customers,
• Importance of Advertising to society,
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We will precisely deal with Importance of Advertising to producers and traders in this topic. Let us now

discuss the Importance of Advertising to Producers and Traders.

Advertising provides various benefits to the producers and traders and it can be summed up under the

following head;

Meeting competition: Advertising is an important means for facing competition. By creating brand loyalty,
it helps to maintain sales and market share. It supplements personal selling and sales promotion. The
importance of Advertising lies in the fact that it creates preference for a particular product opens doors for
salesmen and reinforces point of purchase display, thereby reducing the costs of creating and maintaining
demand. Dealers prefer to handle well advertised products.

Steady demand: Advertising creates regular demand by smoothening out seasonal and other fluctuations.
For instance, advertising is used to emphasize hot and cold uses of coffee to maintain regular sales both
during summer and winter. By suggesting new and more frequent uses of product, advertising helps to
maintain demand, throughout the year. Steady demand enables regular production.

Higher sales volume: Advertising helps to increase demand, expand markets and enhance sales of existing
products. Through repeated advertising, a producer can create new customers and enter new markets. It
creates new wants and increases sales. Advertising is an essential technique of mass selling.

Introduction of new product: Advertising is helpful in introducing new products by creating awareness
and gaining their acceptance. By informing consumers about the new product, advertising stimulates their
interest and persuades them to buy it. Effective advertising helps in overcoming consumers’ resistance to
new products.

Economies of scale: Advertising facilitates mass distribution of goods. It reduces dependence on middlemen
as dealers are more willing to stock and sell well advertised goods. Direct distribution and rapid sales
turnover help to reduce costs of distribution. Mass distribution and steady demand lead to large scale and
regular production. As a result, several economies of scale become available and cost of production per unit
is reduced. Investment in inventories can be reduced.

Goodwill : Advertising helps in creating a good image of the firm and reputation for its products. A
favorable image increases the capacity of the firm to survive competition and depression. It is through
effective advertising that Tatas, Birlas, etc., have become household names. It has rightly been observed that
"doing business without advertising is like winking at a girl in the dark. You know what you are doing but
the targets do not know." By building goodwill advertising enables business firms to obtain repeat orders.

Employee morale: By building reputation of the firm, advertising provides a sense of security to employees
and improves their morale. Salesmen feel happy as their task becomes easier when the product and its
producer are known to customers. In a well reputed firm, executive have a feeling of pride and job
satisfaction which is necessary for better performance.

DIFFERENT TYPES OF ADVERTISING

Advertising is the promotion of a company's products and services carried out primarily to drive
sales of the products and services but also to build a brand identity and communicate changes or new
product /services to the customers. Advertising has become an essential element of the corporate world and
22
hence the companies allot a considerable amount of revenues as their advertising budget. There are several
reasons for advertising some of which are as follows:

 Increasing the sales of the product/service

 Creating and maintaining a brand identity or brand image.
 Communicating a change in the existing product line.
 Introduction of a new product or service.
 Increasing the buzz-value of the brand or the company.

Thus, several reasons for advertising and similarly there exist various media which can be effectively used
for advertising. Based on these criteria there can be several branches of advertising. Mentioned below are
the various categories or types of advertising:

Print Advertising Newspapers, Magazines, Brochures, Fliers

The print media have always been a popular advertising medium. Advertising products via
newspapers or magazines is a common practice. In addition to this, the print media also offers options like
promotional brochures and fliers for advertising purposes. Often the newspapers and the magazines sell the
advertising space according to the area occupied by the advertisement, the position of the advertisement
(front page/middle page), as well as the readership of the publications. For instance an advertisement in a
relatively new and less popular newspaper would cost far less than placing an advertisement in a popular
newspaper with a high readership. The price of print ads also depend on the supplement in which they
appear, for example an advertisement in the glossy supplement costs way higher than that in the newspaper
supplement which uses a mediocre quality paper.

Outdoor Advertising - Billboards, Kiosks, Tradeshows and Events

Outdoor advertising is also a very popular form of advertising, which makes use of several tools and
techniques to attract the customers outdoors. The most common examples of outdoor advertising are
billboards, kiosks, and also several events and tradeshows organized by the company. The billboard
advertising is very popular however has to be really terse and catchy in order to grab the attention of the
passers by. The kiosks not only provide an easy outlet for the company products but also make for an
effective advertising tool to promote the company's products. Organizing several events or sponsoring them
makes for an excellent advertising opportunity. The company can organize trade fairs, or even exhibitions
for advertising their products. If not this, the company can organize several events that are closely associated
with their field. For instance a company that manufactures sports utilities can sponsor a sports tournament to
advertise its products.

Broadcast advertising - Television, Radio and the Internet

Broadcast advertising is a very popular advertising medium that constitutes several branches like
television, radio or the Internet. Television advertisements have been very popular ever since they have been
introduced. The cost of television advertising often depends on the duration of the advertisement, the time of
broadcast (prime time/peak time), and of course the popularity of the television channel on which the
advertisement is going to be broadcasted. The radio might have lost its charm owing to the new age media
however the radio remains to be the choice of small-scale advertisers. The radio jingles have been very
popular advertising media and have a large impact on the audience, which is evident in the fact that many
people still remember and enjoy the popular radio jingles.

Covert Advertising - Advertising in Movies

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 Covert advertising is a unique kind of advertising in which a product or a particular brand is
incorporated in some entertainment and media channels like movies, television shows or even sports. There
is no commercial in the entertainment but the brand or the product is subtly( or sometimes evidently)
showcased in the entertainment show. Some of the famous examples for this sort of advertising have to be
the appearance of brand Nokia which is displayed on Tom Cruise's phone in the movie Minority Report, or
the use of Cadillac cars in the movie Matrix Reloaded.

Surrogate Advertising - Advertising Indirectly

Surrogate advertising is prominently seen in cases where advertising a particular product is banned
by law. Advertisement for products like cigarettes or alcohol which are injurious to health are prohibited by
law in several countries and hence these companies have to come up with several other products that might
have the same brand name and indirectly remind people of the cigarettes or beer bottles of the same brand.
Common examples include Fosters and Kingfisher beer brands, which are often seen to promote their brand
with the help of surrogate advertising.

Public Service Advertising - Advertising for Social Causes

Public service advertising is a technique that makes use of advertising as an effective

communication medium to convey socially relevant messaged about important matters and social welfare
causes like AIDS, energy conservation, political integrity, deforestation, illiteracy, poverty and so on. David
Oglivy who is considered to be one of the pioneers of advertising and marketing concepts had reportedly
encouraged the use of advertising field for a social cause. Oglivy once said, "Advertising justifies its
existence when used in the public interest - it is much too powerful a tool to use solely for commercial
purposes.". Today public service advertising has been increasingly used in a non-commercial fashion in
several countries across the world in order to promote various social causes. In USA, the radio and television
stations are granted on the basis of a fixed amount of Public service advertisements aired by the channel.

Celebrity Advertising

Although the audience is getting smarter and smarter and the modern-day consumer getting immune
to the exaggerated claims made in a majority of advertisements, there exist a section of advertisers that still
bank upon celebrities and their popularity for advertising their products. Using celebrities for advertising
involves signing up celebrities for advertising campaigns, which consist of all sorts of advertising including,
television ads or even print advertisements.

SALES PROMOTION

Sales promotion is the process of persuading a potential customer to buy the product. Sales
promotion is designed to be used as a short-term tactic to boost sales – it is not really designed to build long-
term customer loyalty.

Some sales promotions are aimed at consumers. Others are targeted at intermediaries (such as agents and
wholesalers) or at the firm’s sales force.

When undertaking a sales promotion, there are several factors that a business must take into account:

 What does the promotion cost – will the resulting sales boost justify the investment?

24
  Is the sales promotion consistent with the brand image? A promotion that heavily discounts a
product with a premium price might do some long-term damage to a brand

 Will the sales promotion attract customers who will continue to buy the product once the promotion
ends, or will it simply attract those customers who are always on the look-out for a bargain?

There are many methods of sales promotion, including:

 Money off coupons – customers receive coupons, or cut coupons out of newspapers or a products
packaging that enables them to buy the product next time at a reduced price
 Competitions – buying the product will allow the customer to take part in a chance to win a prize
 Discount vouchers – a voucher (like a money off coupon)
 Free gifts – a free product when buy another product
 Point of sale materials – e.g. posters, display stands – ways of presenting the product in its best
way or show the customer that the product is there.
 Loyalty cards – e.g. Nectar and Air Miles; where customers earn points for buying certain goods or
shopping at certain retailers – that can later be exchanged for money, goods or other offers
Loyalty cards have recently become an important form of sales promotion. They encourage the customer to
return to the retailer by giving them discounts based on the spending from a previous visit. Loyalty cards can
offset the discounts they offer by making more sales and persuading the customer to come back. They also
provide information about the shopping habits of customers – where do they shop, when and what do they
buy? This is very valuable marketing research and can be used in the planning process for new and existing
products.

The main advantages and disadvantages of sales promotion are:

Advantages of Sales Promotion

Sales promotions have a significant effect on the behaviour of consumers and trades people. Such
promotions can bring in more profits for the manufacturers because they permit price discrimination.

1. Price discrimination:

Producers can introduce price discrimination through the use of sales promotions. They can charge different
prices to different consumers and trade segments depending on how sensitive each segment is
to particular prices.Coupons, special sales events, clearance sales anddiscounts are examples to explain the
phenomenon.

Often such price discrimination are offered in specific cities in the country,Bajaj Auto Ltd. started
the scheme on 20th august 2001, where by if you buy a Bajaj Spirit two-wheeler you get Rs.3000/- off, valid
only in Ahmedabad.

2. Effect on consumer behaviour:

As sales promotions are mostly announced for a short period, customers may feel a sense of urgency and
stop comparing the alternatives. They are persuaded to act now rather than later.With every 500g pack of
Tang, you get a free Tang glass. Offer valid only till stocks last.

3. Effect on trade behaviour:

Short-term promotions present an opportunity and encourage dealers to forward buy. This forward buying
ensures that retailers won’t to go out of stocks. As dealers have more than the normal stocks, they think it
advisable to advertise in local media, arranged displays and offer attractive promotion deals to consumers.
These actions help in increasing the store traffic. Buy 2 dozen shampoo sachets & get 2 sachets free.

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4. Regional Differences:

The South is generally characterised by greater degree of going out and people tend to drink outside the
house. The Tamilian, consumer in particular, is value oriented, rational and looks up to film stars, while the
Keralite is more international in his outlook. The Bangalorean is as Cosmopolitan as his Mumbai or Delhi
counterpart. Such factors have to be taken into consideration while providing incentives to the customers.

In mid 80s, Philips decided to launch a special project in Tamil Nadu and Andhra Pradesh for their rural
buyers. So, for the Tamil Nadu market, they created a special campaign “The Super Star of the House” and
made the cine idol Rajnikant their brand ambassador as in that state he is popularly known as “Superstar”.
Whereas, in Andhra Pradesh, they launched their brand as “Mega Star of the House” as Chiranjeevi was
taken as their brand representative. Sales promotion was done by organizing various ‘super shows’ and
‘mega-shows’ for the masses in states of Tamil Nadu and Andhra Pradesh respectively. Both these
campaigns became a major success.

Disadvantages of Sales Promotion

While sales promotion is a powerful and effective method to produce immediate short termpositive results, it
is not a cure for a bad product or bad advertising. In fact, a promotion is speed up the killing of a bad
product.

1. Increased price sensitivity

Consumers wait for the promotion deals to be announced and then purchase the product. This is true even
for brands where brand loyalty exists. Customers wait and time their purchases to coincide with
promotional offers on their preferred brands. Thus, the routine sales at the market price are lost and the
profit margin is reduced because of the discounts to be offered during sale-season. ‘The Diwali Bonanza
Offers’ on electronic goods.

2. Quality image may become tarnished:

If the promotions in a product category have been rare, the promotions could have a negative effect about
its quality image. Consumers may start suspecting that perhaps the product has not been selling well, the
quality of the product is true compared to the price or the product is likely to be discontinued because it has
become outdated.

The Smyle Powder offer of “Buy 1 and get 2 free” went on and on. Ultimately people stopped asking for the
product as the on-going sales promotion strategy made the customers perceive it to be a cheap and an
inferior product.

3. Merchandising support from dealers is doubtful:

In many cases, the dealers do not cooperate in providing the merchandising support nor do they pass on any
benefit to consumers. The retailer might not be willing to give support because he does not have the place, or
the product does not sell much in his shop, or may be he thinks the effort required is more than the
commission/benefit derived.

4. Short-term orientation:

Sales promotions are generally for a short duration. This gives a boost to sales for a short period. This
short-term orientation may sometimes have negative effects on long-term future of the organization.

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Promotions mostly build short-term sales volume, which is difficult to maintain. Heavy use of sales
promotion, in certain product categories, may be responsible for causing brand quality image dilution.

Difference Between Advertising and Sales Promotion

Advertising and Sales Promotion are different. They have differences in there use and utility. WIll try to
explain it with example of HUTCH (Orange) to facilitate our understanding.

ADVERTISING SALES PROMOTION

By using a variety of persuasive appeals, it offers reasons Besides giving reasons in the form of different appeals,
to buy a product or service. they offer incentive to the consumers to buy the product
or service now.
Eg: Good Network, Promises and Delivers.
For new users, 1HUTCH no is given free for 1 month &
sms is free for 3 months.

Appeals are emotional or functional in nature. Appeals are rational

Eg: the current ad of “Wherever you go, our network It justifies whatever it says.
follows”

Time-frame is long term. Time frame is short term.

The primary objective is to create an enduring brand To get sales quickly or to induce trial.
image.

Indirect and subtle approach towards persuading Direct in approach to induce consumers to buy a product
customers to buy a product or service. or service immediately by temporarily changing the
existing price-value relationship of the product or
service.

What is Consumer Behavior?

Definition of Buying Behavior:

Buying Behavior is the decision processes and acts of people involved in buying and using products.

Need to understand:

 why consumers make the purchases that they make?

 what factors influence consumer purchases?
 the changing factors in our society.

Consumer Buying Behavior refers to the buying behavior of the ultimate consumer. A firm needs to analyze
buying behavior for:

 Buyers reactions to a firms marketing strategy has a great impact on the firms success.
 The marketing concept stresses that a firm should create a Marketing Mix (MM) that satisfies (gives
utility to) customers, therefore need to analyze the what, where, when and how consumers buy.
 Marketers can better predict how consumers will respond to marketing strategies.

Stages of the Consumer Process

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Six Stages to the Consumer Buying Decision Process (For complex decisions). Actual purchasing is only
one stage of the process. Not all decision processes lead to a purchase. All consumer decisions do not always
include all 6 stages, determined by the degree of complexity...discussed next.

The 6 stages are:

1. Problem Recognition(awareness of need)--difference between the desired state and the actual
condition. Deficit in assortment of products. Hunger--Food. Hunger stimulates your need to eat.
Can be stimulated by the marketer through product information--did not know you were deficient?
I.E., see a commercial for a new pair of shoes, stimulates your recognition that you need a new pair
of shoes.
2. Information search--
o Internal search, memory.
o External search if you need more information. Friends and relatives (word of mouth).
Marketer dominated sources; comparison shopping; public sources etc.

A successful information search leaves a buyer with possible alternatives, the evoked set.

Hungry, want to go out and eat, evoked set is

o chinese food
o indian food
o burger king
o klondike kates etc
3. Evaluation of Alternatives--need to establish criteria for evaluation, features the buyer wants or does
not want. Rank/weight alternatives or resume search. May decide that you want to eat something
spicy, indian gets highest rank etc.
If not satisfied with your choice then return to the search phase. Can you think of another restaurant?
Look in the yellow pages etc. Information from different sources may be treated differently.
Marketers try to influence by "framing" alternatives.
4. Purchase decision--Choose buying alternative, includes product, package, store, method of purchase
etc.
5. Purchase--May differ from decision, time lapse between 4 & 5, product availability.
6. Post-Purchase Evaluation--outcome: Satisfaction or Dissatisfaction. Cognitive Dissonance, have
you made the right decision. This can be reduced by warranties, after sales communication etc.
After eating an indian meal, may think that really you wanted a chinese meal instead.

Types of Consumer Behavior

Types of consumer buying behavior are determined by:

 Level of Involvement in purchase decision. Importance and intensity of interest in a product in a

particular situation.
 Buyers level of involvement determines why he/she is motivated to seek information about a certain
products and brands but virtually ignores others.

High involvement purchases--Honda Motorbike, high priced goods, products visible to others, and the
higher the risk the higher the involvement. Types of risk:

 Personal risk
 Social risk
 Economic risk

The four type of consumer buying behavior are:

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  Routine Response/Programmed Behavior--buying low involvement frequently purchased low cost
items; need very little search and decision effort; purchased almost automatically. Examples include
soft drinks, snack foods, milk etc.
 Limited Decision Making--buying product occasionally. When you need to obtain information about
unfamiliar brand in a familiar product category, perhaps. Requires a moderate amount of time for
information gathering. Examples include Clothes--know product class but not the brand.
 Extensive Decision Making/Complex high involvement, unfamiliar, expensive and/or infrequently
bought products. High degree of economic/performance/psychological risk. Examples include cars,
homes, computers, education. Spend alot of time seeking information and deciding.
Information from the companies MM; friends and relatives, store personnel etc. Go through all six
stages of the buying process.
 Impulse buying, no conscious planning.

The purchase of the same product does not always elicit the same Buying Behavior. Product can shift from
one category to the next.
For example:
Going out for dinner for one person may be extensive decision making (for someone that does not go out
often at all), but limited decision making for someone else. The reason for the dinner, whether it is an
anniversary celebration, or a meal with a couple of friends will also determine the extent of the decision
making.

Categories that Effect the Consumer Decision Process

A consumer, making a purchase decision will be affected by the following three factors:

1. Personal
2. Psychological
3. Social

The marketer must be aware of these factors in order to develop an appropriate MM for its target market.
PERSONAL

Unique to a particular person. Demographic Factors. Sex, Race, Age etc.

Who in the family is responsible for the decision making?
Young people purchase things for different reasons than older people.

PSYCHOLOGICAL FACTORS
Psychological factors include:

 Motives--

A motive is an internal energizing force that orients a person's activities toward satisfying a need or
achieving a goal.
Actions are effected by a set of motives, not just one. If marketers can identify motives then they can
better develop a marketing mix.
MASLOW hierarchy of needs!!

 Physiological
 Safety
 Love and Belonging
 Esteem
 Self Actualization

Need to determine what level of the hierarchy the consumers are at to determine what motivates their
purchases.

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  Perception

What do you see?? Perception is the process of selecting, organizing and interpreting information
inputs to produce meaning. IE we chose what info we pay attention to, organize it and interpret it.
Information inputs are the sensations received through sight, taste, hearing, smell and touch.

Selective Exposure-select inputs to be exposed to our awareness. More likely if it is linked to an event,
satisfies current needs, intensity of input changes (sharp price drop).

Selective Distortion-Changing/twisting current received information, inconsistent with beliefs.

Advertisers that use comparative advertisements (pitching one product against another), have to be very
careful that consumers do not distort the facts and perceive that the advertisement was for the competitor. A
current example...MCI and AT&T...do you ever get confused?

 Ability and Knowledge

Need to understand individuals capacity to learn. Learning, changes in a person's behavior caused by
information and experience. Therefore to change consumers' behavior about your product, need to give them
new information re: product...free sample etc.

When making buying decisions, buyers must process information.

Knowledge is the familiarity with the product and expertise. Inexperience buyers often use prices as
an indicator of quality more than those who have knowledge of a product. Non-alcoholic Beer example:
consumers chose the most expensive six-pack, because they assume that the greater price indicates greater
quality. Learning is the process through which a relatively permanent change in behavior results from the
consequences of past behavior.

 Attitudes
Knowledge and positive and negative feelings about an object or activity-maybe tangible or
intangible, living or non- living.....Drive perceptions

Individual learns attitudes through experience and interaction with other people.
Consumer attitudes toward a firm and its products greatly influence the success or failure of the firm's
marketing strategy.

 Personality

All the internal traits and behaviors that make a person unique, uniqueness arrives from a person's
heredity and personal experience. Examples include:

 Workaholism
 Compulsiveness
 Self confidence
 Friendliness
 Adaptability
 Ambitiousness
 Dogmatism
 Authoritarianism
 Introversion
 Extroversion
 Aggressiveness
 Competitiveness.

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 Traits effect the way people behave. Marketers try to match the store image to the perceived image of
their customers. There is a weak association between personality and Buying Behavior, this may be due to
unreliable measures. Nike ads. Consumers buy products that are consistent with their self concept.

 Lifestyles

Recent US trends in lifestyles are a shift towards personal independence and individualism and a
preference for a healthy, natural lifestyle. Lifestyles are the consistent patterns people follow in their lives.
EXAMPLE healthy foods for a healthy lifestyle. Sun tan not considered fashionable in US until 1920's. Now
an assault by the American Academy of Dermatology.

SOCIAL FACTORS

Consumer wants, learning, motives etc. are influenced by opinion leaders, person's family, reference groups,
social class and culture.

 Opinion leaders

Spokespeople etc. Marketers try to attract opinion leaders...they actually use (pay) spokespeople to
market their products. Michael Jordon (Nike, McDonalds, Gatorade etc.)

 Roles and Family Influences—

Role...things you should do based on the expectations of you from your position within a group.
People have many roles. Husband, father, employer/ee. Individuals role are continuing to change therefore
marketers must continue to update information.

Family is the most basic group a person belongs to. Marketers must understand:

o that many family decisions are made by the family unit

o consumer behavior starts in the family unit
o family roles and preferences are the model for children's future family (can reject/alter/etc)
o family buying decisions are a mixture of family interactions and individual decision making
o family acts an interpreter of social and cultural values for the individual.

The Family life cycle: families go through stages, each stage creates different consumer demands:

o bachelor stage...most of BUAD301

o newly married, young, no children...me
o full nest I, youngest child under 6
o full nest II, youngest child 6 or over
o full nest III, older married couples with dependant children
o empty nest I, older married couples with no children living with them, head in labor force
o empty nest II, older married couples, no children living at home, head retired
o solitary survivor, in labor force
o solitary survivor, retired
o Modernized life cycle includes divorced and no children.
 Reference Groups

Individual identifies with the group to the extent that he takes on many of the values, attitudes or behaviors
of the group members.

Families, friends, sororities, civic and professional organizations. Any group that has a positive or
negative influence on a persons attitude and behavior. Membership groups (belong to) Affinity marketing is

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focused on the desires of consumers that belong to reference groups. Marketers get the groups to approve the
product and communicate that approval to its members. Credit Cards etc.!!

Aspiration groups (want to belong to)

Disassociate groups (do not want to belong to).

The degree to which a reference group will affect a purchase decision depends on an individuals
susceptibility to reference group influence and the strength of his/her involvement with the group.

 Social Class

An open group of individuals who have similar social rank. US is not a classless society. US criteria;
occupation, education, income, wealth, race, ethnic groups and possessions.

Social class influences many aspects of our lives. IE upper middle class Americans prefer luxury
cars Mercedes.

o Upper Americans-upper-upper class, .3%, inherited wealth, aristocratic names.

o Lower-upper class, 1.2%, newer social elite, from current professionals and corporate elite
o Upper-middle class, 12.5%, college graduates, managers and professionals
o Middle Americans-middle class, 32%, average pay white collar workers and blue collar friends
o Working class, 38%, average pay blue collar workers
o Lower Americans-lower class, 9%, working, not on welfare
o Lower-lower class, 7%, on welfare

Social class determines to some extent, the types, quality, quantity of products that a person buys or uses.

Lower class people tend to stay close to home when shopping, do not engage in much prepurchase
information gathering. Stores project definite class images. Family, reference groups and social classes are
all social influences on consumer behavior. All operate within a larger culture.

 Culture and Sub-culture--

Culture refers to the set of values, ideas, and attitudes that are accepted by a homogenous group of
people and transmitted to the next generation.

Culture also determines what is acceptable with product advertising. Culture determines what people
wear, eat, reside and travel. Cultural values in the US are good health, education, individualism and
freedom. In american culture time scarcity is a growing problem. IE change in meals. Big impact on
international marketing.

Culture can be divided into subcultures:

o geographic regions
o human characteristics such as age and ethnic background.

Culture effects what people buy, how they buy and when they buy.Understanding Consumer Buying
Behavior offers consumers greater satisfaction (Utility). We must assume that the company has adopted the
Marketing Concept and are consumer oriented.

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