- v./ /Jilfe'v %,<.* .•^'. •%./ ,-^\ %,*' .l^^^o, «^'"-< ,/y^;^-.V ./..^.*°o /,'j^-:x , . :- '^'^^n'^ •««' .V^ v^^ )y Stores and Materials Control Including Procurement by Manufacture and by Purchase By MADISON CARTMELL, A. B. Consulting Industrial Engineer, Associate Member of American Society of Mechanical Engineers, Member of National Association of Cost Accoimtants NEW YORK THE RONALD PRESS COMPANY 1922 ,,to° Copyright, 1922, by The Ronald Press Company All Rights Reserved NOV -4 '22 ^ 5*^:^^' PRICFACR This book presents the ^^cncral siibjocl of tlic procurement and handliiij^ of materials, from the initiation of the order for their purchase or manufacture to the shipment of the fuiished pr()(hict. It thus covers storeskeepiii};, niamifacturin}^ and ])»ir- chasiiij^, trealinj^ all from the point of view of the prodiiction executive. While there are several useful hooks dealing; with l)articular portions of the subject — with the work of the pur- chasiu}^ department, or the production department — there ap- pears a need for a work coverinj^ in a comi)rehensive way all the imjiortant phases of materials control. 'J'he effort has been made to explain in detail the procedure to be followed in an effective system of materials control in both large and small organizations. The basic principles ap|)ly to both classes alike, .and in most cases the jjractice is the same. Special attention has been given to the prcxedure of the large plant, inasmuch as there the volume of work, necessitating close study of every detail, exhibits the problems involved on a scale which reveals clearly their essential elements. Details of practice should receive no less serious attention in the small concern than in the large one, though necessarily attended to by a smaller force and recpiiring a less detailed system. The only safe policy for the small plant that is to hold its own today, lies in simplifying and adapting the methods tested out in the big plant and found essential to sound operation, without slurring over or emasculating them. To show more plainly the stei)s in the necessary procedure and their interrelations a series of forms has been given, il- lustrating both simple and complicated systems of materials control and those ojjcrating imder special conditions. It is iii iv PREFACE believed that these are shown In sufficient detail and sufficient quantity to enable ready adaptation to meet individual requirements. - The author is indebted to many individuals and firms for material, suggestions, and criticism. Particular mention should be made of the assistance received from Mr. W. A. Langford, past president of the New York Association of Purchasing Agents, and Mr. L. F. Boffey, editor of The Purchasing Agent, in connection with a course of lectures on "Materials Control" given by the author at the New York University School of Commerce. In the same connection the author is indebted also to Messrs. Henry Hardenberg, general purchasing agent of The New Jersey Zinc Company; F. H. Hoyt, purchasing agent of The Standard Oil Company of New York; Fred Macklin, purchasing agent of The Consolidated Gas Company of New York; C. H. Weakland, purchasing agent of The National Cloak and Suit Company; and C. Frank Schwep, purchasing .agent of The Ingersoll-Rand Company. Appreciation must also be expressed for assistance received from Mr. Thomas Conyng- ton, who is largely responsible for the chapter on "Some Legal Aspects of Purchasing." Special mention is due likewise to Mr. R. E. Anderson, treasurer, and Mr. W. T. Birney, purchasing agent of the Winchester Repeating Arms Company, former employers; to C. E. Knoeppel and Company, Inc., industrial engineers, with whom the author has been associated, for permission to use material and data from their files ; and to Mr. J. P. Jordan and Mr. A. F. Stock, former members of the latter organiza- tion, for valuable criticisms and suggestions. Madison Cartmell New York City, October i, 1922. CONTENTS Part I — Introductory Chapter Page I The Problem of Materials Control ...... 3 The Three Phases of Management The Importance of Materials Control The Control of the Inventories The Cycle of Manufacturing Operation The Test of Efficiency Materials Control and Discipline II The Organization of Control ........ 9 Effect of Lack of Organization The Need for Specialization The Nucleus of Control Types of Manufacture The Storeskeeping Department Administration of Materials Control Department Functions of the Control Department The Decentralization of the Storesrooms Relation of Purchase and Control Departments to the Plant Other Service Departments — General and Cost Accounting Traffic Department The Inspection Department The Engineering Department The Office Manager Part II — Principles of Control III The Records and Mechanism of Control .... 25 General Purposes of Control 1. The Upkeep of the Inventories 2. The Care of Materials 3. Correlation of Production and Sales Program 4. Materials as an Element of Cost 5. Statistical Feature of Stores Control 6. Classification and Valuation of Inventories Illustration of Procedure Classification of Orders Stores Orders Plant — Increase and Expenses Orders Charging the Stores Accounts vi CONTENTS Chapter Page IV The Stores Record Form 39 Purposes of the Stores Record Information Furnished by Stores Record General Purposes of Information Methods of Keeping the Record Development of Stores Record Form Control of Ordermg by "Maximum" and "Minimum" Quantities Keepnig Track of Available Quantity Co-ordinating Requirements and Schedules Appropriating Material "Ordering Quantity" and "Ordering Point" "Running Totals" versus "Balances" Heading of a Stock Record Opening a Stores Record The Handling of Various Classes of Materials Increasing Inventories The Unclassified Stores Record Sheet V Pricing the Stores Records 58 Necessity of Accurate Prices Advantages of Pricing Stores Record Recording Values Components of Material Costs Predetermining Costs of All Materials Methods of Pricing Requisitions Actual Costs versus Standard Costs Standard Costs Actual Cost Methods of Pricing Requisitions Average Cost Method for Pricing Requisitions Pricing Requisitions at Current Prices Inventory Adjustments VI Operating the Stores Records 70 Reporting Delivery of Materials to Stores The Stores Requisition Routing the Stores Requisitions Handling the Requisition in the Storesroom Posting Requisitions The Stores Return Issuing by Specification Standard Parts List Record The Order Requisition Mechanical Posting of Records Accuracy of Stores Records Errors of the Storesroom VII Classification and Symbolization 86 Business Classification Advantage of a Uniform System Plannmg a Classification System CONTENTS vu Chapter Page The First Steps in Classification Symbol ization Use of Symbols Facilitates Clerical Work Use of Symbols Maintains Standards Numerical and Alphabetical Systems Requirements of Symbols VIII Classification and Symbolization of Materials . 94 Problem of Classification Function of Control Accounts Classification of Accounts Classification of General Stores Symbolization of General Stores Two Rules for Symbolization Classification and Symbolization of Service Department Supplies Symbolization of Unclassified Materials Classification and Symbolization of Products Classification of Special and By-Products Classification and Symbolization of Other Activities Classification and Symbolization of Adjuncts IX Symbolization of Cost Records 107 Function of Cost Accounting Monthly Reports The Balance Sheet The Profit and Loss Statement The Burden and Cost Statement The Budget The Material Accounts The Cost Ledgers Explanation of the Chart Inventory Account Symbols Order Symbols X The Costing of Orders 117 Methods of Costing Orders Cost Documents Handling the Cost Reports — The Time Cards Handling Stores Requisitions Handling the Stores Returns Reporting Deliveries to Stores Journal Entries Handling Expense Debit Slips Making Up Expense and Burden Statements Tabulating Production Order Costs The Work in Process Control Accounts XI Control of Inventory 131 Effect of Policy on Inventory Inventory Carrying Charges viii CONTENTS Chapter Page The Consideration of Quality Control Procedure Determination of Ordering Points Determination of Minimum Ordering Quantity Economic Minimum of Manufacturing Cost Graphing the Consumption Control of Finished Product Inventory by Production Orders Planning for Materials and Supplies Control of Work in Process Accounts Control of Supplies and Non-Productive Materials XII Standards and Specifications 142 Definition and Purpose Advantages of Standardization Determination of Standards Organization for Standardization Example of Standardizing Materials Example of Standardizing Product Specifications Model Specifications Specifications in the Purchasing Department Maintaining Standards Periodical Revision of Standards and Specifications XIII Arranging and Equipping the Storesroom . . . 156 Functioning of the Storage Workers Planning the Storesroom Written Standard Practice Directions Location of the Storesroom Size of the Storesroom Storing Materials Allotment of Space in the Storesroom Aisles Symbolizing the Storage Spaces Mechanical Aids Standard Storage Units Bin Subdivisions Skids and Trucks Counting Machines Branch Storesrooms XIV Stowing Material 168 Definition of Stowage Where Goods Should Be Stowed The Double-Space Method Treatment of Special Items Keeping Items Distinct Identifying the Materials The Bin Tag Surplus Stock Rules for Good Piling CONTENTS IX Chapter Page The Unit of Stowage Piling Counting Removing Goods Change of Location Verifying Inventories The Delivery System Procedure in Filling Requisitions XV Taking Inventories 183 Steps in Establishing Materials Control Necessity for Taking Inventory Physical Inventory Advantages of Regular Checking Counts The Duplicate Tag Method of Taking an Inventory Preparations for Inventory Inventory Instructions Inventory Period Directing and Taking the Inventory Classification of Items to be Inventoried Special Instructions for Departments Inventory Tags Filling in the Tags Supervising and Comparing Inventory Pricing Inventory Items Final Steps XVI Organization of the Materials Control Depart- ment Summary of Responsibility Relation of Storeskeeping to Other Functions Relations with a Production Control Department Co-operaton between the Storeskeeping Groups Communicating between the Two Groups Organizing the Materials Control Department Functional Organization Function of the Planning Section of the Stores Records Division Personnel of the Planning Section The Function of the Recording Section Function of the Scheduling Section Function of the Accounting Section Organizing the Small Materials Control Department Organizing the Storage Division The Stowage Section of the Storage Division The Delivery Section Part III — Procurement by Manufacture XVII Organization of the Production Control Depart- Function of the Department Order Handling Procedure 201 217 CONTENTS Chapter The Production Control Department The Production Control Manager Materials Control Supervisor Order Control Supervisor The Dispatching Supervisor Tool Control Supervisor Page XVIII Graphic Production Control 224 Necessity for Graphic Method Function or Purpose Means or Machinery of Performance Description of Control Boards Control Board Operation Description of Dispatch Boards Dispatch Board Operation XIX Operation of Production Control Mechanism Origin of the Production Order Standard Practice Records Standard Parts List Record Standard Production Analysis Records Cost Sheet Identification, Instruction and Routing Cards Workers' Time Cards Standard Operation Symbol Code Stores Requisitions Scheduling Jobs on Control Board Registering Material Available for Production Forwarding Requisitions to Storage Division Dispatching Work to Shops Starting and Quitting Jobs and Registering Accomplish- ments Inspection Reports Computations Made by Dispatchers Handling Irregular Conditions Registering on Control Board Progress on Orders Posting Accomplishments to Progress and Follow-Up Records Making Up the Pay-Rolls Departmental Efficiency Reports Departmental Idle Time Reports 239 Part IV — Procurement by Purchase XX The Function of the Purchasing Department Preliminary View of the Purchasing Department Defects of Departmental Buying Specialized Purchasing The Purchasing Agent Increased Profits through Savings 257 Chapter XI Page CONTENTS Good Buying Records Contact with the Outside Personal Relations with Vendors Justifying Its Existence The Seven Stages of Purchasing 1. Determining the Article 2. Knowing the Market 3. Selecting the Vendor 4. Determining the Price 5. Making the Contract 6. Effecting Delivery 7. Completing the Contract The Purchasing Department and the Organization XXI The Article 273 The Selection of the Right Article Quality versus Price Essential Knowledge The Use of the Article Questionable Requisitions Technical Knowledge Specifications Classes of Specifications Materials from Vendor's Stock Materials Record An Illustrative Record Origin of Purchase Order Requisitions Checking Use of Data Orders Applying on Blanket Contracts The Quantity Control of Requisitions Fixing the Price XXII The Market 290 The Background Forcasting the Market — General Information Statistical Agencies Graphic Presentation How to Make a Graph Speciiic Information Supply and Demand The Personal Side Correlation of Requirements and the Market Kinds of Prices Information on Vendors Delivery Conditions ; the Terms of Sale XXIII Seller and Buyer 311 Interrelation of Seller and Buyer Personal Contact with Vendors Xll CONTENTS Chapter Page Attitude of the Purchasing Agent The Legal and the Personal Ties Sources of Data Credit Information Forms Gratitudes and Bribery Acceptance of Favors and Courtesy Vendor Expects Correct Purchase Orders The Purchaser's Requirements Service Record Confidence XXIV The Price 328 Preparing to Issue a Purchase Order Quotation File Request for Bids Tabulation of Bids The Price Competitive Prices Price Maintenance Kinds of Price The Definite Price Price Based on Performance Current Prices The Cost— Plus Contract List and Net Prices Transportation Charges f.o.b. Destination Discounts for Prompt Payments Trade Acceptances XXV The Written Contract 347 Kinds of Contracts Blanket Contracts The Individual Purchase Order Fixing the Date of Delivery Difficulty of Effecting Prompt Delivery Advance Information of Factory Requirements Allowance for Time in Transit Time for Completion The Copies of the Purchase Order Inspection of Purchase Order Vendor's Acceptance of the Order XXVI Effecting the Delivery 361 Vendor Naturally Remiss Follow-Up Work Appeal to Sales Agent Progress Reports Rush Orders "Ship and Trace" Mechanism of Follow-Up Work Following up the Transportation Companies CONTENTS Xlll Chapter Page Transportation Charges Freight Rates Bills of Lading Demurrage and Damage Claims Routings Discontinuing the Fol low-Up XXVII The Completion of the Purchase Contract . . . 377 The Purchaser's Obligation Payment of the Invoice Registration of the Invoice The Flagging of Invoices Checking the Invoice Checking the Transportation Charges Receiving and Checking the Goods Adjustment of Discrepancies Payment of Invoice XXVIII Some Legal Aspects of Purchasing 401 Necessity of Familiarity with Law What Constitutes Our Law Definition of a Contract Meaning of Agreement Acceptance of an Offer Value of Having Contracts in Writing ,^ The Parties to an Agreement J^ Consideration Lawful Purpose Sales Contracts Caveat Emptor Express Warranties Expressions of Opinions Implied Warranties Destruction of Subject Matter Mistakes in Contracts What Constitutes Fraud Alteration of Contracts Interpreting a Contract Rules of Interpretation Assignment of Contract Acting as an Agent General Agents Special Agents Liability of Principal XXIX Organization and Personnel 419 Two Types of Purchasing Control Organization of Subsidiary Offices The Central Office's Purchases for Distant Plants Control of Subordinate Purchasing Departments Qualifications of a Purchasing Agent xiv CONTENTS Chapter Page Duties of Purchasing Agent Planning Division Quotation Division Scheduling Division Invoice Division Assistant Purchasing Agent The True Function of the Purchasing Agent His Characteristics His Position in the Organization Part V — Adopting a System XXX Systems, Records, and Forms 437 Requirements of a System Systems Not Universally Applicable Delegation of Authority Revising a System Records Reliability and Adequacy Availability and Timeliness Permanency Development of Records Purchasing Operations and Records Forms — Advantages and Objections Forms Insure a Fixed Policy FORMS Form Page 1. Chart Showing the Paralleling Procedures for Procuring Mate- rials by Purchase and by Manufacture .• • • ^^ 2. Organization Chart of a Large Plant Operated According to Modern Methods 20 3. Chart Showing Elements of Selling Price 29 4. Simple Perpetual Inventory with Price and Value Spaces ... 43 5. Simple Stores Record Form with "Ordered" Columns .... 45 6. Stores Record . 46 7. Modern Stores Record Carrying Balances 47 8. Modern Stores Record with Appropriated and without Balance Columns 5^ 9. Order to Stock Material 55 10. Unclassified Stores Record 56 11. Report on Cost of Manufactured Material 61 12. Stores Requisition ^2 13. Stores Requisition 73 14. Slip to Accompany Requisition Returned for Correction . . 76 15. Notice that Material Is Not on Hand TJ 16. Stores Return 79 17. Production Order Requisition 81 18. Notice of "Danger Point" 82 19. Daily Record of Balance 83 20. Request for Count of Stock 85 21. Chart Showing Classification and Symbolization of Main Accounts 97 22. Chart Representing the Relationship Subsidiary Ledgers Bear to General or Main Ledger 112 23. Summary of Materials Used — Credit 122 24. Summary of Materials Used — Debit . 123 25. Journal Voucher 126 26. Expense Ledger Slip 127 27. Cost or Estimate Sheet 129 28. Graphic Record of Consumption 138 29. Bin Tag I73 30. Surplus Stock Tag I75 31. Notice of Change of Location of Material 179 32. Stores Delivery Tag 181 33. Inventory Tag for Raw Material and Supplies 194 34. Inventory Tag for Finished Product or Component Parts . . . 195 35. Inventory Tag for Work in Process 196 36. Inventory Record for All Materials in Stores 199 37. Inventory Record for Work in Process 199 38. Organization Chart of Materials Control Department — Stores Record Division 205 39. Organization Chart of Materials Control Department — Storage Division 212 XV xvi FORMS Form Page 40. Organization Chart of Production Control Department .... 218 41. Control Board (Opposite) 224 42. Dispatch Board (Opposite) 226 43. Standard Machine Practice Card 227 44. Standard Parts List Record 228 45. Standard Production Analysis Record of Auxiliary Small Tool Requirements 228 46. Standard Production Analysis Record of Material Requirements . 228 47. Progress and Follow-Up Record 230 48. Identification Instruction, and Routing Card 231 49. Material Requisition Card 232 50. Material Credit Card 232 51. Direct Labor Time Card 233 52. Process and Final Inspection Report 233 53. Idle Equipment Report 234 54. Control Progress Strip 235 55. Signal Tags for Control Board . 236 56. Chart of Sourc s of Stores Receipts and Disbursements (Opposite) 252 57. Purchase Order Requisition 287 58. Extract from Report to Buyers (Babson) 294 59. Summary of Statistical Agency Reports 295 60. Graph Showing Price in Dollars per Gross Ton of Basic Pig, Valley, and Steel Bars, Pittsburgh 297 61. Graph Showing Fluctuations in Price of Eggs in United States as Compared with Average of Monthly Figures for Four Years 299 62. Price and Production Graft (Babson) 300 63. Graph Showing How the Value of Three Relations Diverge from a Common Point as the Relationships Change 301 64. Weekly Report of Materials Control Department 306 65. Estimate of Consumption and Balances 307 66. Record of Sources of Supply 309 67. Vendor's Record of Buyer's Personality 314 68. Report on Customer 315 69. Purchasing Department Record of Dealers 326 70. Contract Record 329 71. Quotation and Past Purchase Order Record 330 72. Purchasing Agent's Request for Quotation 332, 333 TZ- Trade Acceptance Forms 344 74. Purchase Order 3S4-3S6 75. Supplementary Purchase Order 359 76. Vendor's Acceptance of Order 360 TJ. Post-Card for Routine Follow-Up of Delivery 363, 364 78. Request to Vendor to Trace Shipment 366, 367 79. Record of Purchase Material Received 376 80. Typical Invoice 380 8ia. Invoice Flag for Entry of Checking 381 8ib. Invoice Rubber-Stamp to Replace Flag 381 82. Purchase Materials Received Report 386, 387 83. Back of Defective Material Rejection Report 389 84. Memorandum of Discrepancy in Invoice 391 85. Countercharge Memorandum 393 86. Credit to Vendor Memorandum 393 FORMS xvii Form Page 87. Requisition for Check 394 88. Vouchers Payable Register 396 89. Remittance Letter 398 90. Cash Disbursements Register 399 91. Chart Showing Purchasing Department Organization 425 Stores and Materials Control PART I INTRODUCTORY CHAPTER I THE PROBLEM OF MATERIALS CONTROL The Three Phases of Management The art of industrial management is to make the best possible use of the raw materials purchased, the men employed, and the capital invested in the business. Broadly considered, therefore, the management of a manufacturing business may be divided into the three phases of control of materials, of men, and of money. These three factors form the legs of the tripod of management; hence none of the three can be considered as more important than the other two. Methods of control aim- ing to make more effective use of one must exert a more or less beneficial influence upon the others. The instability of one will affect the stability of the others. Though the three phases of management are thus inter- dependent, the art of management cannot be profitably studied unless each of the three phases is separately taken up as a prob- lem by itself. Each leg of the tripod should be as carefully fashioned and as strongly constructed as possible, before the three pieces are ready to be welded together. The Importance of Materials Control The observation, however, that none of the three phases of management can be considered as more important than the other two and that all three must be given full consideration in any scheme of management is subject to some qualification. The object of business is to sell something at a profit — of a manufacturing business, to sell the thing produced or trans- formed at a profit. The manufacturing enterprise exists by 3 4 INTRODUCTORY virtue of the raw materials that enter the factory at one door and leave as finished goods at another door. Capital is invested in buildings, machinery, and other equipment for the purpose of making this transformation. The measure of the effective use of men and capital is determined by the economy, that is, the best possible use of time and materials between the entry of the raw materials into the factory and the egress of the finished goods sold. If we use the term "materials" in its broadest sense and in the sense used throughout this book as including the raw materials, the manufactured parts made there- from, and the finished goods assembled from the manu- factured parts, we may say that the control of materials is the foundation of all other forms of control and therefore of successful management. The truth of this assertion is made clearer if we consider the relation of materials control to the work of production. The cost of a manufactured product is composed of the three factors of materials, labor, and overhead. To reduce these costs to the lowest possible minimum per unit of produc- tion consistent with the quality of the output is the aim of industrial management. Economies in overhead depend upon the most effective use of plant and equipment. Economies in labor depend upon the direction of effort into its most pro- ductive channels. Both these aims are thwarted and the effort to economize is largely nullified, if materials are lacking when required and labor and machines stand idle; or if materials of poor quality or the wrong kind have been pur- chased and work is spoiled and rejected, with the attendant waste of labor and overhead; or if materials are stored in excess of manufacturing requirements and working capital is needlessly tied up in stock and floor space is put to unprofit- able use; or if materials are not stored and accounted for properly, and loss from waste, misuse, and careless handling results. THE PROBLEM OF MATERIALS CONTROL 5 The Control of the Inventories How closely related is the care and control of the inven- tories to the fundamental principles of management is not generally realized judging from the inadequacy of most sys- tems of materials control. The profits of a manufacturing concern are largely dependent upon the continuous and un- broken operation of the production departments. The eco- nomical operation of these departments requires that they be supplied with materials without cessation. Every hitch in the supply, every breakdown of the flow from raw materials to finished goods, involves the wastes of lost time and idle machines. Therefore, materials must be procured and stored in the requisite quantities to supply every need of production. Yet the very necessity of maintaining an adequate supply of everything needed for factory operation tends to create the evils of oversupply and waste. Without effective control a large amount of working capital may be invested in materials which will not be used for months and even years to come, or never be used at all because of changes in style or manufactur- ing policy. Without adequate control also, materials may be transformed into more of one kind of finished parts and less of another kind than is required. Sales may be lost and pro- duction orders may be held up in consequence. It will thus be seen that the control of materials is fundamental not only to the orderly progression of a production program but also to the carrying out of a sales program and policy. Thus materials control in its broadest aspect embraces the control of the inventories of raw materials, parts, and supplies, of work in process, and of finished goods. Materials must flow into the factory in the volume required for production but without bringing into storage more than the minimum quanti- ties required to fill current needs. If the product is an assembled article or machine, parts must be manufactured in the volume required, and yet their stock must be maintained at 6 INTRODUCTORY its lowest possible figure consistent with uninterrupted manu- facture. If customers' orders are filled from stock — as is the practice in the majority of businesses — fluctuations in the de- mand for finished goods or changes in their quality or style should at once react to the storesroom where the potential goods are stored in their raw state, and then from the stores- room to the purchasing department, if they must be purchased, or to the factory, if they must be made. The Cycle of Manufacturing Operation Storeskeeping is one phase only of the cycle of materials control. In any discussion of storeskeeping and the routine work involved, it is usual to begin with a description of the purchasing organization and the nature of its work. A little reflection, however, will show that the function of purchasing is dependent upon the sales and production policies and is in no respect an initial function or process that sets in operation other functions and processes. For this reason it has seemed preferable to the writer to arrange the order of presentation in this book with some regard to the sequence of materials con- trol in actual factory operation and to present first a general outline of the problems involved and the mechanism employed in controlling the inventories before discussing more detailed matters. Hence the work and mechanism of the purchasing department is described in the fourth part of this book, be- cause, as explained, purchasing, though preceding the be- ginning of the cycle of manufacturing operations, is subser- vient to the control of the inventories. The Test of Efficiency The ideal condition of the inventories of a plant would be one in which the turnover of all raw materials synchronized with the time needed to procure them in convenient quantity, in which all finished parts were assembled at periodical inter- THE PROBLEM OF MATERIALS CONTROL 7 vals into finished stock, and in which few items of stock re- mained unsold for any length of time. The last of these three circumstances existed in the sellers' market experienced in recent years when buyers were eager to accept anything manu- X. facturers had to offer. In such a market prices are high enough to pay for inefficiencies in management and wastes in production and still leave a fair margin of profit. When, how- ever, supply equals or exceeds demand and the market belongs to the buyer, the state of the inventories very quickly reflects the relative inefficiency of the management. Just as the enterprise and business acumen of the merchant are reflected in his turnover, in the freshness and variety of his stock, and in the freedom of his shelves from shop-worn and unsalable goods, so the efficiency with which the average manufacturing plant is managed can be narrowly gauged by a close inspection of its inventories. The statistics of mercantile agencies show that most business failures are due to mis- management or lack of capital. Both causes mean the same thing — lack of control, and this lack manifests itself most in tying up working capital in useless or unsalable inventories. Materials Control and Discipline Just as the individual is largely rated by others at his own valuation, so the inventories — using the term in its widest sense — are valued by employees at the valuation placed upon them by their employer. If materials can be withdrawn from stores without proper authority, if spoiled work and scrap are allowed to accumulate around the plant, if employees are permitted to help themselves to such supplies for their own use, it is human nature for the workers to place a low valuation upon the things for the use or possession of which they are not held strictly accountable. Plant discipline begins with such accountability. Adequate materials control is the first step in the inculcation of such discipline. 8 INTRODUCTORY Indeed the installation of methods of controlling materials is an essential prerequisite to the installation of methods of controlling the production of workers by measuring the time spent in given operations or in producing certain quantities of goods. Obviously the time spent in processing materials should not be measured and recorded unless the quantity and value of the material used is also measured. Although in every industry some attempt is made to allocate the time of productive workers to the particular processes or operations on which they are engaged, or to the particular goods pro- duced, in few plants is this control carried out in such detail as to bring to light all losses and wastes due to the mishandling of materials or to their lack at the point where required. Only by uncovering such leaks and wastes can the losses due to wasted effort and spoiled or useless material be eliminated. It is by the elimination of such losses that the utmost economy in manufacture is attained. CHAPTER II THE ORGANIZATION OF CONTROL Effect of Lack of Organization Some years ago the writer was employed in a plant where agricultural implements of different types were assembled from the parts kept in stock to fill customers' orders. When an order had to be filled for a number of machines, it frequently happened that the supply of a particular part was insufficient. The assembly would be started and then be put aside in its incomplete stage, and the customer's order would either be filled in part or deferred until the purchasing agent could pro- cure or the foundry and machine shops could manufacture the required quantity of the needed part. On the finished part stock shelves there may have been certain parts sufficient for the assembly of a hundred or more machines of one type and yet the foundry continued to produce those parts because production schedules were based upon bills of material. It is true that the office professed to keep records of the number of parts on hand; but so many parts proved defective or could not be found when wanted, and so many parts had been manufactured either in excess of or below the quantities called for in the production orders, that the office records were only approximately correct. They were useless in determining the exact number of machines of one type that could be assembled from the parts carried in stock. The Need for Specialization The condition of things described above illustrates the "guess-work" that passes for materials and stores control in 9 lO INTRODUCTORY many factories and plants. The management thinks that the manufacture of so many parts or so many units of production will be about correct; it believes that such and such quantities of materials will be required to fill the needs of production; and it guesses that there is enough stock on hand of this, that, or the other product to fill the sales demands for quite a while. It is true that many organizations big enough to require a storesroom with a clerk in charge do put their houses in order to the extent of determining the minimum quantities of indis- pensable materials and supplies to be kept on hand — and in the majority of cases this is about as far as the control goes. Most factory executives are proverbially reluctant to allow specialization in any work unconnected with actual production. They look upon the large amount of detailed clerical work necessary to the control of materials as "unproductive" labor and therefore an expense, which ought to be reduced to the bare essentials required for the purchase and storage of materials. In plants where this policy prevails it is not unusual for the department head who fails to maintain the schedule of pro- duction set for him to pass on the responsibility for the delay with the excuse that some essential material, or part, or supply, was not furnished in time. The department head probably blames the foreman, the foreman passes the blame to the shop clerk, the shop clerk places responsibility upon the purchasing department, the purchasing agent may blame the supplier, and the supplier, being outside the control of the factory, is per- haps after all the best person on whom to shoulder responsi- bility for production delays. The point is that the game of "passing the buck" is inherent in any system of management where responsibility for the performance of specific duties is not clearly and definitely fixed. To fix such responsibility it is obviously necessary to split up the work of materials control into as many functions as there are to be performed, and to ORGANIZATION OP CONTROL II make some clerk, or division, or section, or department, re- sponsible for the performances of each function. The Nucleus of Control The nucleus of the organization needed for materials con- trol are departments responsible for ( i ) the purchase of mate- rials, (2) their receiving, storage, and issuance, and (3) their movement within the plant. As will be explained in a later chapter, each of these departments may be expanded into a number of divisions and sections responsible for the perform- ance of particular duties, the number being determined by the size of the organization and the variety and complexity of its products. Under simple conditions of manufacture the organi- zation and mechanism will be correspondingly simple ; whereas the manufacture of a varied line of articles made up from many parts will require an organization of many "unproductive" workers if the productive work is to progress with automatic regularity from the receipt of raw materials into stores to the dispatch of the finished products from the shipping room. As the organization and functions of the purchasing de- partment are, for reasons previously explained, left for later consideration, in the discussion of the organization needed for control we have only to consider the expansion or evolution of the storeskeeping department under varying conditions of man- ufacture. A bird's-eye view of the organization and duties of the personnel in charge of the work of control is necessary if the details to be described in Parts II, III, and IV are to be fitted into the general scheme. Types of Manufacture The varying needs of organization will be seen if we con- sider the control problems involved in different types of manu- facture. Broadly speaking, all manufacture belongs to one of two types — "continuous" or "interrupted" — though both 12 INTRODUCTORY types may be carried on side by side in the same plant. In the continuous type of manufacture production flows through the factory or the department, or a series of machines in a con- tinuous stream. The problem of control is so to synchronize the materials, machines, and men that there will be no interrup- tion to steady production. The finished goods are usually of one kind only. If the article manufactured is of a simple type, made in one piece, as in a glass works making plain standard- size bottles, or tumblers, or window glass, the organization for control purposes is relatively simple. If the article manufac- tured is complicated and made up of many parts and sub- assemblies, as in a bicycle factory or in a plant turning out but one or two types of automobiles, the control must be more elaborate and detailed. But in either case certain quantities of certain kinds of materials are required to produce a given quantity of goods; and as the goods are of one kind when once the routine between the purchase of the materials and the manufacture of the finished articles is standardized in all its details, the problem of control reduces itself to the maintenance of this standardized routine. In a plant manufacturing a variety of articles, it is appar- ent that production cannot be as continuous as when the same machinery and workmen are constantly occupied with the manufacture of the same article, and that the interruptions of production caused by changes from the manufacture of one article to that of another increase the difficulty of control. Yet in principle the problems to be solved are the same under both types of manufacture. The difference is merely one of degree or number rather than of kind. If the principles and methods of controlling the production of one article throughout its manufacture are clearly understood, the control of a varied line of manufactures merely involves the finding of the proper detailed methods to fit the case and then subdividing the duties and responsibilities among a staff of clerical workers and ORGANIZATION OF CONTROL 13 storeskeepers large enough to attend effectively and rapidly to the volume of detail created by the manufacture of such a complicated line. As a rule it is not the highly organized industry manufac- turing an intricate line — as for instance a concern making many types of electrical instruments — that objects to the "red tape" of control. In such a plant it would be impossible without such control to manufacture at a commercial price. Smoothness of operation and economy in the use of time depend upon materials and parts always being available when and where they are required, and the tendency to extravagance and waste is reduced to a minimum when an effective control is installed. It is the management of the small concern with a relatively simple production problem which thinks it a waste of time to draw up the records needed for effective control, and which tries to economize in the clerical work involved in maintaining a smoothly operating and efficient production pro- gram. The Storeskeeping Department Every manufacturing concern, big or little, which maintains a storeskeeping department, does so for three purposes : ( i ) to order, receive and care for the articles kept in stores; (2) to deliver them on suitable request or "requisition"; and (3) to keep a record of the values of the articles received and de- livered and thus of the value of the inventories on hand. Where the volume of work in the stores department is sufficient to keep one or more men fully occupied with the physical labor of handling materials and supplies, and of caring for the stock, the two distinct phases to the task of storeskeeping — the clerical and the physical — are for obvious reasons best kept distinct but under the same supervision. The qualifications demanded of the employees in the two groups differ accordingly. The group handling the clerical 14 INTRODUCTORY work is the guiding force of the "materials control department" and one of its duties is to maintain the record of what the other group has done and should do. The other group — the storage group — whose work is largely physical keeps only such records as it needs to carry out its duties and keep a check on the records of the other group. Administration of Materials Control Department The materials control department occupies a position in the handling of materials similar to that of the personnel depart- ment in the management of men, or of the inspection depart- ment in the work of passing on the quality and perfection of the finished product. Like the heads of the last two de- partments, the head of the stores organization should be responsible to the chief of the production organization, because the success of this organization depends to a large extent upon their furnishing, when and as wanted, the materials required in production. By placing the two groups in the stores department under one head, their work is correlated and each is made responsible for its part in the success of the whole. Co-operation can be obtained through friendly rivalry and mutual assistance in the difficulties which arise in ordinary routine work — and diffi- culties occur frequently enough. In a small concern the one supervisor will have ample time and skill for administering both phases of his department. In the very large organization efficient administration requires that most of his time be given to the clerical group where the more frequent and more important problems arise. For directly supervising the storage group, he will have a special- ist in storage problems as one of his chief assistants. When the work justifies it, the securing of another specialist as an assistant to supervise the clerical work is not a useless ex- penditure. ORGANIZATION OF CONTROL 15 Functions of the Control Department Though few concerns have hitherto recognized the impor- tance of a proper stores or materials control organization, their number is steadily increasing as the fundamental importance of more systematic and controlled production is realized. In addition to keeping the stores records relating to the receipt and issue of materials, parts, and supplies, the control department lays out and schedules production orders for the producing shops, and purchase orders for the purchasing de- partment. As orders are based on sales probabilities and requirements, the preparation of the orders begins with the receipt and classification of sales orders. The control depart- ment translates these sales order requirements into shop terms and quantities, and is responsible for such planning and sched- uling of production and purchase as will insure shipments to customers on the dates requested or specified. In the manufacture of a wide range of assembled products, many production orders for the manufacture of parts and for their assembly into the completed product will be going through the shops at the same time. It is the primary function of the control department to keep track of these production orders, so as to insure the delivery of materials at the place and time they are required, and the return to the stores or finished stock room of the manufactured parts and completed articles. A secondary function of the department is to make the necessary entries on the stores records of the values of manufactured parts and finished goods as they are turned into stores after manufacture. Most of the clerical work involved in calculat- ing these costs of manufacture is done in the cost department (see Chapter X). To the control department falls the task of keeping track of the movement of materials and parts, and of entering on the stores records the figures supplied by the cost department as to the value of the production, i.e., the finished parts and finished goods. l6 INTRODUCTORY The Decentralization of the Storesrooms The size of a plant will largely govern the methods of storing and issuing materials, parts, and supplies. Though all the inventories are under the control of the control depart- ment and this department is responsible for their movement to and fro within the plant, it does not follow that the inven- tories are stored in one general storesroom. Where the manu- facturing departments are compact and the work is carried on in a small building, one storesroom centrally located may serve all storage purposes. Where manufacture is carried on on several floors, or where departments are located in different buildings, some decentralization of the storage department will be necessary though the control under all conditions remains centralized. The modern practice is to utilize as many sub- storesrooms as are necessary for convenience in manufacture, and to separate the stock rooms in which manufactured parts and finished goods are stored from the general storesroom in which raw materials and supplies are located. Nevertheless, however numerous the various storesrooms and whatever the classifications of materials, parts, finished stock, and supplies, one set of records controls the inventories as a whole. It is apparent that material of a heavy or bulky nature, difficult to handle and not likely to be stolen or misused, need pass through the operation of being "taken into stores" only in a technical sense. Lumber may be conveniently stored under a shed outside the building, heavy castings may be taken direct from the foundry to the shop where they are to be machined, or finished parts may be taken direct to the assembly floor if they are immediately required for the work of assembling the finished product. But wherever stores are located, their where- abouts as well as their value should be entered on the stores records. Such records are assured when no work is under- taken in a plant without a numbered order of some kind initiat- ing and directing this work, and when no materials, supplies, ORGANIZATION OF CONTROL 17 and parts are used for any purpose whatsoever without a document (known as a requisition) specifying the number of the order, by which the nature of the work or the production to which the stores are to be appHed can be ascertained. Relation of Purchase and Control Departments to the Plant The relation of the purchasing and control departments to the other departments of the plant may be illustrated by con- sidering the procedure involved in filling their requirements. The process of ordering begins with the determination of the need for materials or supplies. This need is made known by means of a requisition (to be illustrated later) upon stores for the article, materials, or supplies required. Materials and supplies are secured by purchase from outside ; parts are usually manufactured within the plant, though under certain conditions or in some lines of manufacture, it may be better policy to purchase some of them ready made. The requisition or inquiry for the thing wanted first comes to the clerk in charge of the controlling stores records. He ascertains from the records whether the article called for is in stock and if not whether it is to be purchased or manu- factured. If the article has to be purchased the purchasing department is called upon to procure it; if it is to be manu- factured the control department sets in motion the requisite order and accompanying papers to initiate its manufacture. Through either route the required article reaches the stores department and is entered on its records, thus completing a cycle that may be illustrated by the following diagram ( Form i ) . Thus the control department is the agency through which pass all details of orders for articles to be made by the various departments of the plant. It receives the production order requirements from the clerk or the head of the division in charge of the stores records, plans the work, and schedules and routes it through the shops. I8 INTRODUCTORY The purchasing department occupies a corresponding place in its relations to outside suppliers. It receives purchase requi- 5T0RE5 RECORDS VENDOR * TJX PURCHASING DEPT CONTROL DEPT. MANUFG DEPT 5T0RE5 REC0RD5 C0N5UMING DEPT. Form I. Chart showing the Paralleling Procedures for Procuring Materials by Purchase and by Manufacture. sitions from the clerk in charge of the stores records, places the order, sees that delivery is made on time, makes certain that the material received corresponds with the specifications in the order, and looks after the clerical work involved in checking the supplier's invoice and passing it for payment. Other Service Departments — General and Cost Accounting Having discussed the relation of the stores and control department to the work of production, brief consideration needs to be given to the points of contact between the control department and the other service departments which carry on the work initiated by the control department. In the following discussion it should be understood that reference is made to departments some of which may be operated only in large organizations where the need for specialization in duties and ORGANIZATION OF CONTROL 1 9 for placing responsibility leads to their creation. Whether or not such departments actually exist, their functions are per- formed by somebody in every plant. The size of the business and the varieties of its activities will naturally determine the departmental division of its operations into specialized func- tions. Form 2 charts organization that has the usual control department. The line of demarcation between the work of the general accounting department and that of the control department can always be clearly drawn; that between the control and cost departments cannot be definitely determined. The conditions of manufacture govern in each case. So far as concerns the purchasing and accounting for materials, the general accounting department should be re- sponsible for recording liabilities and assets of the concern, and the amounts due to or from outsiders, and for accounting for all distributions to be made to the general accounts from pur- chase invoices. The work in connection with purchases begins when the purchasing department has approved a seller's in- voice for material, and ends with the writing of the check for the amount due. In the sale of products the work of the general accounting department begins with the billing of the customer and ends with the crediting of the customer's account when the cashier receives a remittance. To the auditing division of the accounting department, if such a division exists, falls the task of making certain that no mistakes have been made in the bookkeeping work. In a large organization the control and cost departments have distinct duties and spheres of operation. In a small organization the functions of the two departments are occa- sionally merged under a control supervisor who is thus respon- sible for the correctness of the entries made on the stores records. The cost accounting department, so far as the control of 20 INTRODUCTORY ORGANIZATION OF CONTROL 21 materials is concerned, allocates the responsibility for all ex- penditures, receives stores requisitions after they have been priced and items have been issued, posts the values of these requisitions to the proper orders and accounts, distributes overhead expense to departments and burden to products, and prepares the statistical statements of costs and operations for the guidance of the management. Its work is described in detail in Chapter X. Traffic Department The traffic department's work involves the routing of in- coming and outgoing shipments, and all other routine matters connected with the transportation of materials, especially pur- chased materials. The department is usually responsible to the office manager, whose duties will be explained later. The Inspection Department Where the nature of the production is such as to demand continuous inspection through the various stages of its manu- facture, the creation of an inspection department is essential to centralize all responsibility for quality, size, etc., of items of stores received and issued. Thus the work of this depart- ment is complementary to that of the control department, and as such is concerned with ascertaining that the manufacturing departments or vendors supply exactly what they have been requested to furnish. The standards to be used as the limits in the inspection of materials, parts, and finished goods are determined in advance as nearly as possible. The engineering department, the laboratory, and any other department of the organization should be at the call of the inspection department when it is necessary to determine the suitability of questionable contract materials. All manufactured materials are inspected in the shop either after the article has been completed, or operation by operation as the engineering department con- 22 INTRODUCTORY siders best. Purchased materials should be inspected imme- diately after their unpacking. This inspection is made pre- ferably by the receiving department as agents of the inspection department. When passed by the inspectors, all materials are turned over to the stores department for delivery to the consuming departments as wanted. The place occupied in the organiza- tion by each of these departments is shown on the organization chart (Form 2). The Engineering Department The primary function of an engineering department is to develop definite standards for quality and composition of the product of the concern and its methods and materials of manufacture. Such a department may require a laboratory with one or more chemists under its control, not only for pur- poses of experimenting with new materials and products, but also for testing both purchased materials and those manufac- tured in the plant when requested to do so by the inspection department. In this way the engineering department helps to determine how and wherein the manufacture of articles can be improved and whether the vendor has shipped what he contracted to supply. The Office Manager The office manager of the organization is the authority for the purchase of office supplies. He should have a techni- cal knowledge of the materials used in office work and should standardize office supplies in the same way as the engineering department standardizes raw and manufactured materials. A description of the functions of other departments besides those mentioned does not come within the scope of this book, which is concerned only with departments responsible for securing and handling materials. PART II PRINCIPLES OF CONTROL CHAPTER III THE RECORDS AND MECHANISM OF CONTROL General Purposes of Control A brief description of the essential records and the mechan- ism used in a system of materials control may best be begun by enumerating the main purposes of control and describing the means and procedure required to carry them out. The purposes of control are : 1. To keep the right quantity and qualities of materials on hand at all times. 2. To care for materials awaiting use. 3. To determine material requirements by correlating the pro- duction with the sales program. 4. To furnish cost figures of materials and supplies used in factory operations. 5. To furnish at any time statistics as to quantities on hand, on order, consumed, required, and so on. 6. To determine the value of the inventories for the purpose of preparing financial statements. The survey to follow is merely explanatory of the mechan- ism used to carry out the above aims, a more detailed descrip- tion of records and procedure being left for later consideration. I. The Upkeep of the Inventories The first of the functions of materials control enumerated above relates to the upkeep of the inventories. To carry out this function, three things must be determined and made a matter of record, viz. : ( i ) the quality or grade to be ordered, (2) the quantity to be kept on hand, and (3) the time needed for procurement. 25 26 PRINCIPLES OF CONTROL The quality and grades of material to be used in manu- facture are matters that every concern settles for itself. In very few lines of manufacture can materials be ordered on the basis of price alone without a careful comparison between the price asked and the quality supplied. In some lines the necessity of maintaining a standard of quality may require that the raw materials and the product be put to laboratory tests and that a research department be organized to investigate the causes of defects in quality and to suggest remedial meas- ures. In the majority of cases, however, requirements as to quality are met by making a careful analysis of the kind of raw materials best adapted for a specific purpose and then reducing these requirements to exact specifications. These specifications are kept on file and used in the purchase of all materials that must fulfil certain requirements as to quality or size or both. The method of standardizing the items of stores and then drawing up specifications for use in their procure- ment are matters for later discussion. The quantity of an item of stores to be kept on hand is determined first by manufacturing requirements in the present and near future, and secondly by past experience in the time needed to procure the materials by purchase or to manufacture the parts or articles required in the shops. In the most simple system of storeskeeping, records are kept, usually in the form of a card file, to show the quantity of each item of material and supplies in the storesroom and the minimum quantity to be kept on hand. Originated to serve the purpose of a per- petual inventory so that the quantities on hand and their values may be ascertained at any time without taking a physical in- ventory, the stores ledger record has been developed until it has become the most important single record concerned with production and purchasing. A description of the several forms this record may take and the many purposes it serves is the subject of Chapters IV to VI. THE RECORDS AND MECHANISM OP CONTROL 2^ 2. The Care of Materials While the necessity of having a place for everything and keeping everything in its place would seem to be essential for the successful operation of any storeskeeping system, many attempts to control the inventories break down at the start because of inadequate facilities for storing and caring for materials. A manufacturer who never for a moment questions the wisdom of buying all the materials and supplies needed for purposes of manufacture, often fails to realize the necessity of a considerable investment in fixtures and equipment and the need for considerable floor space, if a heavy investment in stores is to be cared for and items are to be handled and counted with the minimum of lost motion and liability to error and with the maximum dispatch. For every cent saved in interest on the capital cost of the storesroom equipment, dollars may be lost through waste, oversight, and needless handling where the necessary fixtures, fittings, and weighing and counting machines are lacking. The arrangement and equipment of the storesroom and the method of stowing ma- terials are thus details in the general plan of control sufficiently important to merit careful consideration and study. To the discussion of this matter two chapters are devoted in Part 11. 3. Correlation of Production and Sales Program To insure a regular turnover of the inventories and thus the minimum loss from dead stock and capital necessarily tied up in stores, it is essential for the production program to be based on a careful estimate of what the sales may be expected to be during the coming quarter, half-year, or year. The longer the period covered by the estimated sales budget, the better the provision that can be made to meet the production requirements. If, as is the practice in the management of many businesses, the estimate of future sales is based on hopes and expectations rather than upon careful calculation. 28 PRINCIPLES OP CONTROL the production program will be liable to frequent change and it will be difficult to estimate material requirements for any length of time ahead. Under these conditions, either materials must be carried in stock in sufficient quantity to provide for all possible contingencies, with swollen and wasteful inventories as the consequence; or the attempt to keep the inventories as low as is compatible with the needs of production is likely to result in the disorganization of production routine because of lack of materials and supplies. Proper materials control, therefore, begins not in the pur- chasing, but in the sales end of the business. It falls upon the sales department to furnish the production and control depart- ments with estimates, on which these last departments can base their purchasing and production programs. It is not intended to imply, by the emphasis placed on the importance of the sales estimate, that the sales department wholly determines the production program and therefore the quantity and kinds of materials to be purchased and carried in stores. A sales program must be trimmed to and attuned to the productive capacity of machines and departments and some- times to the supplies of materials available or procurable. The point is that the sales manager, factory superintendent, and the head of the control organization must get together and map out the production program in its every detail, which detail goes back to the materials in the storesroom and the quantities that will have to be purchased to cover future requirements. 4. Materials as an Element of Cost The profit of a manufacturing enterprise is the margin between what is received for the product and the cost of its production. Production costs are made up of materials, labor, and burden; that is, of the purchase price of the materials used and the wages paid in producing a certain article, or a number of parts, or a given lot of goods, and a proportion of THE RECORDS AND MECHANISM OF CONTROL 29 the general expenses incurred in operating the factory. The wages and materials costs are termed "direct costs" because they can be charged direct to the job or process; the overhead charges are known as "indirect costs" because they are charged to the job or process upon some indirect factor, such as the time spent in producing the article, lot, or parts. A major item of cost in every plant is that of the materials consumed; in certain industries, especially those engaged in producing articles of every-day consumption, materials often PROFIT 10% ' J5EL_LiNG*_ ^AOMINliTRATlVE' /.EXPENSE'/ '//)ry//. BURDEN 13 7o LABOR y////y , MATERIAL/ Form 3. Chart Showing Elements of Selling Price Shaded portions represent influence of materials. cost more than either labor or overhead. The above chart (Form 3) illustrates the elements of the cost of a product in which the material cost is assumed to be half the selling price. 30 PRINCIPLES OF CONTROL It falls Upon the stores and control departments to keep track of the materials issued for manufacture so that their consumption may be traced and allocated to the job or process on which they are used, and so that supplies may be charged to the department where they are consumed. The means of withdrawing items from stores and thus tracing and allocating their cost, is by surrendering a stores requisition specifying the kind and quantity of the particular item requisitioned and the purpose to which it is to be put. A stores requisition is thus a written order on stores to deliver certain material for use the value of which is to be charged to a suitable account. The requisitions, after being priced, form the basis of credit to the stores inventory account and particular accounts controlled thereby, the offsetting charge being to Work in Process, Burden, or Expense. The account- ing procedure, so far as it concerns the control of materials, will be fully discussed in later chapters. For the present it need merely be understood that material for one order or account only can appear on one requisition. The principle and practice are the same with all kinds of materials. 5. Statistical Feature of Stores Control In modern factory management the tendency is more and more to control production by means of budgets and estimates of requirements, based on the future sales program and the ability of a concern to finance the estimated volume of pro- duction and sales. The economy of first preparing such esti- mates and then carrying out the buying, production, and sales programs according to plan should be apparent. In the chain of factory operations between the purchase of raw materials and the shipment of finished goods, expenditures are constantly being incurred and financial provision must be made for them before they arise. If the minimum amount of capital is to be tied up in the materials requisite for carrying on these opera- THE RECORDS AND MECHANISM OP CONTROL 31 tions, it is necessary for the management to receive frequent and regular statistical reports of the capital tied up in the inventories, of the values consumed in production, and of the financial obligations incurred in materials ordered but not yet delivered and taken up on the books. The form and content of these statistical reports vary with the nature of the prod- uct. In general, however, records are kept by the control department to show the movement of materials in and out of the stores department day by day, so that at the end of a given period the daily totals may be summarized to furnish the required statistical information. 6. Classification and Valuation of Inventories We have seen that all materials, wherever located, are under the control of the stores organization, and that every- thing manufactured or purchased, after counting and valuation, is recorded on the stores ledger records until such time as it is drawn out for use on an order or for disposal in some other way. Thus, whatever material is represented in the stores accounts should also be in the custody of the stores depart- ment. For purposes of control it is convenient to classify the material handled by the stores department into four groups, according to its intended use, as follows: (a) Raw materials and supplies stores, usually known as general stores. This classification includes all materials purchased from outside which have not been processed in the plant, and sometimes certain supplies made within the plant. (b) Component parts stores, sometimes known as "worked materials" stores. This includes all materials that have been partly or completely processed as a step in the com- pletion of a finished or assembled product. (c) Finished product stores. This includes all completed prod- ucts ready for shipment on sales orders. 32 PRINCIPLES OF CONTROL (d) By-product stores, sometimes known as "salvage" or "scrap" stores. This includes all obsolete or scrap mate- rials or supplies no longer needed or unusable in pro- duction without reclamation. The total value of whatever is in each class of stores is the inventory value of the financial controlling account for that class of stores. The account is charged with whatever is received, and is credited with whatever is delivered. When material is delivered for production, its value plus the value of the labor expended on it and a portion of the overhead expense, is charged to an order of some kind, the forms and content of which will be discussed later. The order while in process belongs financially to the inventory account known as "Work in Process," and this account is credited with the value of the finished parts of goods turned into stores. There is usually one work in process account for each stores inventory account. The usual manufacturing cycle in a factory making a product in pieces or assembled from parts (and this means the majority of factories) is for raw material to be received into general stores, requisitioned out for work in process, turned into component parts stores, requisitioned out again for work in process, and finally turned into finished product stores where the completed article is ready for sale to customers. Part of the raw material may find its way into by-product stores as scrap. The above classification of the stores and work in process accounts is sometimes modified by subdividing the accounts into two or more subsidiary accounts. This is done whenever the value of a particular material is large or when a closer control over the material is desired. For instance, a motor manufacturer divides his raw materials and supplies into four classifications : pig iron stores, steel stores, coal stores, and miscellaneous or general stores. A stove maker classifies his finished products and work in process as ranges or as stoves. i THE RECORDS AND MECHANISM OP CONTROL 33 (a) General Stores. Every manufacturing concern transforms some kind of raw materials into parts or finished product, or both, and uses many kinds of suppHes in process- ing the raw materials, such as belting or oil, and in addition various office supplies. These materials may be secured from outside concerns by means of purchase orders, or for reasons of economy or speed of delivery some supplies may be manu- factured within the plant. However procured, these materials are passed into and held in general stores until such time as they are requisitioned out for use in connection with a production order, or in the current routine work of some department. Their value becomes a direct charge to either the department or to the order on which they are used. (b) Component Parts Stores. Materials are re- ceived into component parts stores under the conditions already outlined. They may be in any stage of completion, either in the usual form of fully processed parts and sub-assemblies, or of partly processed parts. Though they may be sold as parts for repairs or used in other ways by the sales department, the purpose of the processing is to make completed parts; and when complete as parts, to assemble them into completed units of finished product. Component parts may be purchased from outside or may be manufactured and assembled inside the plant. A material may become a part of component parts stores any number of times, but each time it will have advanced further toward the finished product stage. (c) Finished Product Stores. Everything which has reached its final stage of manufacture and is ready for ship- ment to a customer is held in finished products stores which, as explained before, may be subdivided according to classes of products. It is the final place of account for products be- fore delivery. The term "model" is usually applied to the article which has reached its final stage in production. (d) By-Product Stores. Scrap and obsolete materials 34 PRINCIPLES OF CONTROL have a value that needs to be considered in the inventory ac- counts. Such material may be put into shape for sale, or it may be reconditioned for use. Accordingly, it is accounted for in the same way as any other material under a suitable heading such as "by-product stores." Illustration of Procedure The procedure and routine involved in stores control may be illustrated by a description of the manufacture of a simple article such as that of cartridges. Cartridges are made in many varieties, of which the one known as ''22 short" is probably the most widely sold. They are usually manufactured in a large quantity, and the production problem resolves it- self into balancing the number of machines so that the total production on all operations of all parts and assemblies is equal. Side by side with this continuous manufacture, another type of cartridge may be turned out under interrupted manu- facture wherein the process is broken into many stages. A brief survey of the processes of manufacture is necessary to indicate the stores problems involved. The first step in the production process is to punch a cir- cular disk of metal from a brass sheet; then to draw the disk into a cup-shaped piece which is alternately annealed and fash- ioned in several operations into the form known as the "shell." After the shell is shaped and trimmed, a primer is inserted in the head of the shell. This primer is an assembly of a smaller shell, which has been similarly processed and then filled with a high explosive. The shell assembly is then almost filled with powder. After this operation an assembled bullet is wedged into it, and the cartridge is finished. Machine breakdowns, absent operators, and bad materials are causes of trouble to the control organization. The use of various raw materials, the change in unit in the punching of cups from sheets, the need for the proper quantity of parts to THE RECORDS AND MECHANISM OF CONTROL 35 make up the assemblies, the management's desire for knowl- edge of costs — all these matters form stores and materials problems the solution of which falls upon the control organi- zation. In the example given above of cartridge manufacture, the sheet of brass from which disks are punched is the first step in the manufacture of the cartridge shell. The sheet has lost its identity and has been transformed into a number of small disks which can no longer be handled on the basis of weight, but have become individual units. It is necessary for the control department to know the quantity and the total and unit value of the cups processed, as a means .of checking the effi- ciency of the machine, or of the brass-rolling mill, or for plan- ning future production. This information is also wanted by the cost department, in order to check actual costs against estimated costs, and to record the value of the inventory in the accounts. If this information is to be available, the value of the material at whatever stage it has reached must be known. If one size of brass cup can be used for various sizes of cartridge shell, it may be economical to make the cups in very large quantities, although the succeeding processes may be best handled in smaller lots. In such cases production is not con- tinuous, but proceeds step by step until the finished product is turned out. Under any of these conditions the number and value of the cups made must be known, in order to control labor and production. In the case of the manufacture of brass sheets for car- tridges, copper, zinc, and other materials have been requisi- tioned from general stores, melted, cast, and rolled — and then turned into component parts stores in the form of sheets. When the sheets are later requisitioned from stores for use on a production order for processing cartridge shells, their value is charged to the Work in Process account. At whatever 36 PRINCIPLES OF CONTROL stage the processing of the shells may stop, the material is turned into component parts stores as component parts and the Work in Process account is credited, while Component Parts Stores is charged with the value. When a production order is issued for assembling the cartridge, the final product, shells are withdrawn on a requisi- tion, with powder, bullets, and primers, for the manufacturing department. All items are charged to the proper production order, which is included in the Work in Process account. When the cartridge is completed it is turned into finished product stores, the Work in Process account being credited, and the Finished Product account debited. Thus from one stage to another a complete transfer on the control and finan- cial records has been made, although the material may or may not have been moved through the storesroom each time. Classification of Orders Stores orders are of two kinds : purchase and manufactur- ing. Both originate from the stores records. Purchase orders are written by the purchasing department when ordering material from outside concerns. Manufacturing orders are written by the control department upon manufacturing depart- ments. The effect of both kinds is to increase the value of the stores inventory accounts. The control department also handles and schedules two other kinds of orders — expense orders and plant increase orders, which originate not from the stores records but upon the request of such executives as have the authority. The nature of these orders is explained below. As all orders afifect one, two, or all of the inventory accounts, their origin and use must be carefully noted. Stores Orders The two kinds of stores orders, purchase orders and manu- facturing orders, are much alike, both being issued to secure THE RECORDS AND MECHANISM OF CONTROL 37 items of stores. A manufacturing order Is placed for the manufacture, within the organization, of parts and products, while purchase orders calling for an exact quantity of a specified material to be delivered on a definite date are filled from an outside source. Plant-Increase and Expense Orders The other two classes of orders — expense and plant-increase — cause the withdrawal of material from stores, but do not permanently increase the net inventory total of any of these stores accounts through the turning of material into stores. Plant-increase orders are issued for the installation of new equipment, for the manufacture of tools, or machines, or for the erection of buildings. Expenditures on such orders in- crease the permanent capital investment of the business. Their issuance must have executive approval and be provided for in the budget of the concern. When plant-increase orders are completed, the value of the production is charged to plant investment. Expense orders, also known as "standing orders," are issued for the replacement or repair of buildings, equipment, or tools. They are designed to authorize and set in motion all repair work — never new installations — and are usually requested by the department for which the work is to be done. The cost of the labor and the material used is charged direct to the departmental or general expense account covering the par- ticular kind of expenditure incurred, and not to Work in Process. No increase in inventory or in plant results from such an order because no assets are being created. Charging the Stores Accounts When a manufacturing or a plant increase order is com- pleted by the finishing of the work called for, it is closed out as detailed in later chapters. At that time the controlling 38 PRINCIPLES OF CONTROL work in process account is credited and a stores account or a plant investment account is charged. Stores accounts are also charged in another way. Any kind of material — raw material, supplies, component parts, or finished product — may be withdrawn from stores in excess of requirements and returned thereto. Since the material has been charged out for a specific purpose or order on which it cannot be used, the order should be credited with its value. To that end it must be returned to stores and the charge transferred to the stores account. This is explained in detail later. CHAPTER IV THE STORES RECORD FORM Purposes of the Stores Record The stores record or ledger is the essential record con- cerned with the control of materials; when fully developed it becomes the most important single record for regulating both production and purchasing. The ancestor of the modern record form is the perpetual or continuous inventory card, the need for which developed with the needs of storeskeeping and the necessity of knowing at any time the amount of each item of stores on hand without making a physical count or examina- tion. Modern methods have so developed the possibilities of the original record that it is now used for purposes of pro- duction and accounting. The stores organization must exercise the same control over materials which a bank considers necessary in the con- duct of its business. Whatever material is in the storesrooms must be recorded and controlled financially and physically. Anything "withdrawn" from stores must be charged to the recipient and credited to the "bank," and whatever is received into the stores must be included in the inventory accounts and thus charged to the stores account and credited to the deliverer. Stocks on hand, whether purchased or manufac- tured, represent money and on occasion may be a very ready method of obtaining money. The record for materials, there- fore, is as necessary as a ledger is for cash, and it is just as important to know the total value of materials on hand as to know the cash balance. 39 40 PRINCIPLES OF CONTROL Information Furnished by Stores Record Though the information recorded on the stores ledger, card, or sheet varies for obvious reasons with the conditions and requirements of manufacture, the essential data entered on the record in a complete system of materials control com- prise : 1. A description of the material. 2. The factory requirements for each kind of material. 3. The quantities "on hand," "on order," and "allotted to pro- duction." 4. The quantity to be ordered when the time comes to procure a fresh supply either by production or purchase. 5. The unit price at which the particular item of stores is to be priced on requisitions. 6. The quantity consumed during given periods. 7. The value of the quantity on hand. General Purposes of Information The general purposes of this information have been sum- marized by J. P. Jordan ^ as follows : A standard stock record form takes into consideration all features. By this is meant that it is not sufficient to consider production control necessities alone, or either cost necessities, purchasing or any other individual requirement. Likewise, all kinds of material should be considered; Raw Materials, Supply Stores, Finished Parts, Sub-assembled Parts, and Fully Finished Assembled Parts. Thus the stores record enables production or purchasing so to be planned as to insure having material on hand exactly in the quantities wanted at any time; it enables the factory manager to meet the sales department's schedules of delivery; it furnishes the only practical method of eliminating errors or omissions in ordering and securing materials for stock; it helps to reduce to the lowest possible minimum the dead stock Service Bulletin of C. E. Knoeppel and Company, Inc. THE STORES RECORD FORM 4i which cannot be used for Its original purpose; and it guards against the production or procurement of an excessive supply of a certain kind, thus avoiding the tying up of working cap- ital, and needless expenditure for insurance, taxes, and storage space. As an aid to purchasing, the stores record accumulates statistics as to the consumption of materials of every sort during the period covered by the life of the record ; it records the departments or the purpose for which items have been used and the accounts to which they have been charged. When the purchasing agent wishes to know if it is opportune to enter into a contract for a large quantity of material, he has only to refer to the stores records for information concerning past consumption and estimates of future requirements and thus determine probable future needs. As an aid to proper expense and financial control, it fur- nishes the exact cost of all material used for production and for expense, all material received into stock and on hand. Without these details, the inventory values for financial state- ments can be secured only by physical inventory. Finally, as an aid to the head of the control department the stores record should indicate the orders to be filled, the quantities on order, and how their completion is to be scheduled. Methods of Keeping the Record There are two ways in which the record can be kept — by using loose-leaf books, or loose card files. The loose-leaf book is to be preferred in a highly developed system of con- trol on account of the greater convenience in using sheets of a size large enough to permit the entry thereon of the necessary data. Cards of a large size are expensive in the first instance and awkward to handle. Under simple conditions of manu- facture, however, a simple inventory record card may answer 42 PRINCIPLES OF CONTROL all requirements, in which case they are to be preferred to sheets. Entries can be more easily made on cards of a man- ageable size than on small loose-leaf sheets which need to be clamped together. Whether cards or sheets be used, the loose-leaf principle is essential for speed in handling, thus cutting down the cost of operating the record. Occasionally stock records are kept in bound books but this method is so inelastic for indexing that there is nothing to recommend it and there are many disadvantages in its use. Obviously the amount of space which the record of a particular item of stores may require for its entries during the life of the book cannot be accurately esti- mated to allow for the allotment of the proper number of consecutive pages to that item. Furthermore, new materials will be stocked from time to time and new sheets or record cards must be made out for them. New sheets cannot be slipped into the bound book in the alphabetical order of their descriptive title or symbol, but must be entered where space is available in the book. A cumbersome index is then needed for reference purposes. This disadvantage is alone sufficient to condemn the use of a bound record. Development of Stores Record Form The ruling of the record and the amount of information it may be designed to record are determined by the system of control in use. The study of its development from the simple to the relatively complex will furnish a clear understanding of the theory governing its operation. The simplest type of stores record and the type still used in the many simple systems of stores control is the perpetual inventory card previously referred to. When any concern grows to a size big enough to require a special storage place for the materials and supplies used, with an employee to care for them and hand them out as required, an inventory must be THE STORES RECORD FORM 43 kept of the quantities used, on hand, and to be procured when wanted, if the material purchases are to be subject to any sort of systematic handhng and control. Such a record is illustrated in Form 4. UNIT MATERIAL LOCATION UNIT VALUE DATf QUANT*' REC'D QUANTV DELVD. BAL.ON HAND VALUE ON HAND REMARKS Form 4. Simple Perpetual Invento y with Price and Value Spaces. (Size 5 X 3.) For each item of stores a card is made out describing in its heading the nature of the item, its location in the stores- room, the unit of issue, and the unit price. The unit of issue, whether in pounds, dozens, feet, cubic measure, or in single articles, should be stated on the card, and stores should be issued only in units of the stated size — this for the purpose of insuring accuracy in pricing, a matter to be explained later. Below the heading of the card in the columns shown in the illustration are entered the date of each issue, the quantities of the item received and delivered, the balance on hand and its value. Control of Ordering by "Maximum" and "Minimum" Quanti- ties In the use of the simple record illustrated above, the replenishment of stores is left to the judgment of the stores- 44 PRINCIPLES OF CONTROL keeper, who must notify the purchasing department or the manufacturing department when a new supply is needed. This loose method of relying on judgment instead of experience as to when an item of stores and how much of it shall be ordered, can be avoided by determining the maximum and minimum quantities to be kept on hand, or, as sometimes termed, the "minimum ordering quantity" and "ordering point." The minimum quantity is the smallest quantity desirable to be on hand unless an order is outstanding for a new supply. It should be sufficient to last until the new supply arrives ; thus the ordering point is reached when the stock sinks to the minimum quantity. The maximum quantity is the largest quantity expedient to order at one time and desirable to have on hand. Under ideal conditions the quantity ordered should arrive at the time of the issue of the last unit of the old supply. Thus the maximum is the largest quantity which could be on hand. As such an exact schedule cannot be maintained in practice, it is customary to increase the ideal minimum by a margin of safety. Thus, if the average consumption of an item is I GO units per week and it requires two weeks to obtain a new stock, the minimum would be the sum of 200 units plus the margin of safety — say of 100 units — or a total of 300 units. An order is placed when only 300 units remain in stock or are on order. Keeping Track of Available Quantity Almost as important as the designating of maximum and minimum quantities is the record for the storeskeeper's in- formation, of the fact that a fresh supply is on order. Unless an entry to this effect is made on the record for ready refer- ence, it is necessary to review the order files, otherwise mis- takes are apt to occur either in failing to order when required or in duplicating a request. Columns for recording this data THE STORES RECORD FORM 45 regarding orders are therefore a desirable addition. They usually appear on the left side of the form. Form 5 shows UNIT MAXIMUM MATERIAL LOCATION MINIMUM UNIT VALUE ON ORDER DATE QUANTITY BALANCE ON HAND VALUE ON HAND REMARKS ORDER NO. QUANTITY RECEIVED DELVD 1 Form 5. Simple Stores Record Form with " Ordered " Columns. (Size 6 x 4.) a stores record card designed to give this additional informa- tion. Since the time to order is indicated on the record itself, receipts must be offset against outstanding orders to show when an order is completed. Form 6 illustrates a record in which the data as to the quantities on order and received is shown in some detail. The material on order plus the quantity on hand is known as the quantity "available" for requirements. The stock of a material is never considered as down to minimum so long as the quantity available is greater than the minimum point. The columnar arrangement is illustrated in Form 7. Co-ordinating Requirements and Schedules If the only materials information required for production management is that covered by records of the quantities of 46 PRINCIPLES OF CONTROL ! (0 lU a 6 z K Ul UJ I 3 a z z o S -1 h 2 Q Z < I z iii "^ "~ PS t- z UJ o 3 a H li it ah SI 00 hi ° z Ul »- z 0Z< 1 z < 5iS h -~ _ _ ^ _ p^ p_^ ^ " 1 — o 3 ^ ~ [ — 1 1 — 1 ■ 1 rr ■ ■'- -^ ' luQ a oa^ 0<° i "■'oi > Q Q -a > a a u (0 iii ?Jp a. g III n P O a o u I §"? nf lU a GO 10 cc to %i lU ID h m O z i Pi THE STORES RECORD FORM 47 i Ul z h III u 5 2 a lU _ < _ i ■ g ill Z 3 2 i 3 > a 11 if i y 004 ,< 1*1 lU to u a i IF Q z. < I z o ots — — r 3i8 J / § u UJ a •0 : t i a a « i <: f u :Ji- — 1— oo il 11 ¥ 1 o m " — a UJ Q a o §4 nl Pa ii •i 1 Qq §1 11 _i 3 tf ^'^ -i- . w o p^ 48 PRINCIPLES OF CONTROL materials and supplies on hand and to be maintained, the forms so far described serve the purpose. The data shown on such records is all that is called for under simple conditions when production is determined by sales requirements as they arise. Where, however, production is planned ahead and carried out on schedule in accordance with an estimated sales program, it is necessary, in order to estimate the requirements for future production, to co-ordinate the three factors of labor, equipment, and materials. Columns for recording "requirements" of each article are shown on Form 8. These figures may be estimates of sales or of production, actual shipping orders or other reliable and pertinent data. Such data will usually be expressed in terms of finished product, which must be translated into component parts and raw materials and then posted to those records. These requirements are paired up with the quantity avail- able — due "on order" and "on hand" — to make certain that the requirement is covered surely and safely in all respects by purchase or by production. If the requirement is not covered, an order for more material must be immediately written. Appropriating Material Occasionally, a still closer control over materials is needed. Requirement statistics are usually estimates made considerably prior to the time of actual need. When materials are used for a number of purposes, it may be of advantage "to reserve" or "to appropriate" the quantities needed for specific orders. These quantities must be more closely compared with those on hand and available than the requirements quantities, for the time of actual need is closer. The arrangement of the additional columns required is shown on Forms 7 and 8. The detail of the stores system required by plants and industries varies. Some need a stock record containing all the preceding routine, while others will appropriate or reserve only THE STORES RECORD FORM 49 a few important or "key" materials. However large the sheet or complicated in appearance, the design must be arranged according to the needs. "Ordering Quantity" and "Ordering Point" In the modern stores record the terms of "maximum" and "minimum" have been superseded by the terms "ordering quantity" and "ordering point" as the latter more fully rep- resent the actual procedure. The ordering quantity is the smallest quantity which ordinarily it is economical to procure either by purchase or manufacture at any one time. In setting the minimum figure for this ordering quantity, the length of time required to secure the new stock, the cost of beginning production, or the loss of the gains of large-scale purchase are matters taken into consideration. The upper limit of the quantity is governed by the costs of and convenience of storing the materials during the period it lies in the storeroom await- ing use. The ordering point is the amount which ordinarily would be needed to meet average or somewhat more than average requirements during the time the new stock is being procured. A third quantity known as the "danger point" may also be usefully indicated. Unlike the other two terms which apply to the available quantity, this term applies to the quantity on hand and is the point at which inquiry should be made to see that the scheduled delivery time of whatever amount is on order is adhered to. These quantities are shown in the heading of Form 7. "Running Totals" versus "Balances" The stock record forms so far shown have columns for entering the balance or quantity of an item remaining on hand after each withdrawal, and for this reason the record is sometimes referred to as the "stores balance sheets." The 50 PRINCIPLES OP CONTROL practical use of such balance columns Is open to question. The following is quoted from a service bulletin regarding this subject written by J. P. Jordan and sent to the staff of the C. E. Knoeppel and Company organization: After many tests during actual operation of Stock Records, it waa proved that the number of times a "Balance" was actually used in comparison to the number of times it zvas computed was very small. By the same long series of experiments, it was found that the extra work necessary to answer questions from all sources such as from Purchasing, Production, Sales and other depart- ments as to the quantities used in given times was enormous. The reason for this was that by the "Balance" method, it was necessary each time to add the entries for the period de- sired in full detail. By the "Running Total" method, this or any figure is available by simply subtracting any two figures. Furthermore, as to accuracy — addition is easy; it is there- fore far more accurate than subtraction. By the "Running Total" method, the clerical work is all addition, except for the comparatively few times an actual balance is required. And most always, only a glance is required to add the new item entry to the running total, and likewise closely enough give the observation necessary as to "Balance." "Balances" tell only a daily story of a "Net Result," while "Running Totals" tell at a glance the same story, and will also answer any and all questions instantly as to "Quantity to Date," or for a week, month, year, etc. There is hardly an item but what the Stock Record clerks should watch as to length of time in stock, the speed or move- ment, etc. ; and by doing this make the Stock Record a living and intensely useful instrument. In few systems of materials control is it considered neces- sary to show on the stock record the balance of stores on hand. Form 8 is a standard form developed for the purpose of recording all information that can with advantage be entered on the stores ledger and on which no column is provided to show balances. THE STORES RECORD FORM 51 s " "^ "1 1 ■ SI i - 10 i i 1 i is z L I ~ 1 z i i ^ L a z s 3 1 i t " I i > 1 ■ S3 1 Q 3 a - z S r~ 1 1 f 1 a L ° ; \ h a. ^ - a i 1 i f a < J 7 a 1 5 t < J J a 'o O P. <: O u a> P4 ^0 o 52 PRINCIPLES OF CONTROL Heading of a Stock Record Particular attention is called to the heading of Form 8 in which provision is made for : 1. A full description of the articles, with its symbol, size, type, etc. 2. The unit, unit weight, and the cubic space it occupies. 3. Its location in storage — the storesroom and the detailed loca- tion therein. 4. The source of supply, time required to obtain, and its com- position. 5. Its use. 6. The controlling account in which its value is carried. 7. Consumption statistics during past periods. 8. Data of "ordering point" and "ordering quantity," expressed as "maximum" and "minimum," with the date such quan- tities were set. While this completes the discussion of the fully developed record form, it should be noted that special cases may demand the addition of other information to that already described. For instance, in one case known to the writer it is required to know for purposes of control the exact location in the storesroom of every case of product. In another plant de- liveries of all products are analyzed in three columns, headed "Consignment Sales," "Cash Sales," and "To Factory Ex- pense." The purposes of such columns are evident and the necessity for their use can be provided for as required. By a study of conditions, it is possible to design special columns to fit any special need and occasion. Opening a Stores Record When it is decided to open a stores record, the first thing to do is to take an inventory of the stocks of all materials on hand. All items should be listed, standardized, classified, and symbolized according to their function as will be explained in detail in later chapters. THE STORES RECORD FORM 53 Every material, a stock of which is to be maintained in the general, the component parts, and the finished product stores, should be represented by a stores ledger card or sheet and should be a standard material. All other materials and supplies should be included in the by-product stores records. The unit cost price or value of the material should be secured from the cost department or purchasing department, or by estimate as may be necessary. After the details have been filled in, the records should be filed alphabetically by class and definition, or according to symbol, if it has been decided to symbolize the items. Then as soon as the "ordering point" and "ordering quantity" are decided upon, the record is ready to be put into operation. The Handling of Various Classes of Materials In a simple storeskeeping system the perpetual inventory record is only maintained for such raw materials and supplies as are purchased or manufactured for use in production, that is, in the shops. In a complete system of materials con- trol it is advisable to include in the general stores classi- fication those records relating to items used for other purposes beside production. There need be no difference in the method of maintaining the records because of a difference in source or purpose of the materials or in their stage of processing into finished product. The same forms can be used, sheets can be in- dexed according to symbol or definition, balances and entries can be posted or recorded, and all the other transactions can be carried out in the same way. In Chapters XI and XVIII on the "Control of Inventory" and "Graphic Produc- tion Control," it will be shown that the same principles and methods are applied to the ordering or replenishment of com- ponent parts and finished product items as to the ordering of general stores. 54 PRINCIPLES OF CONTROL Increasing Inventories In factory operation it often becomes necessary to stock material which may have been previously specially ordered as occasion demanded or which has never been used at all. In Chapter XI, "Control of Inventory," it is shown that the stores records clerk is responsible for determining the quantity of stock to be kept on hand. Any department wishing to in- crease that quantity by the procurement of non-stocked ma- terial or by an increase in the ordering quantity of material already stocked, should furnish reasons for such requests in writing. When ordering new material for stock it is necessary to ascertain whether or not the supply is to be renewed when exhausted. If the stock is to be replenished, careful delibera- tion and investigation are needed before approving its purchase or manufacture. The reason for this is that material already on hand can often be made to serve the purpose of the new material requested. No new item should be permanently in- cluded in the stores lists unless it is to be a standard item and stocks in the future are to be ordered without a detailed in- vestigation of the purposes of their consumption. Materials the stocks of which are not to be replenished will, as a rule, soon be withdrawn from stores and the responsibility for their cost will be passed to the account receiving the benefit. The latter class of material is usually segregated in the stores ledger under the heading "Unclassified Stores," while the for- mer is in the section devoted to the "classified" items. To authorize the stores department to secure a stock of new stores, the stores record department should be given an "order to stock material" (Form 9) as the authority to secure the first stock of new material. The form here illustrated gives the description and definition of the material, the initial and probable future consumption, together with any other details which could aid in determining the proper ordering THE STORES RECORD FORM 55 point and ordering quantity, and any other data of aid in fill- ing the order. The order, whenever the orderer is able to furnish them, should be accompanied by drawings or other ORDER TO STOCK MATERIAL NO. MATERIAL. UNIT MATERIAL. DESCBIPTIOIM DETAILED ePeCIFICATIONS OF MATERIAi. REMARKS ON CON5UMPTION. STORAGE. ETC. PROBASLE CON SUMPTION APPROVED STANDARCl DEFINITION AND UNIT ASSIONEO SYMSOl. ASSIGNED OROERIKJC APPROVED BTOwes o%£onD p» Form 9. Order to Stock Material. (Size 6x4.) proper specifications. If these cannot be supplied, the stores records department should draw up the specifications by refer- ence to another department or to any available information descriptive of their nature and physical properties. Such an order should be signed by an authority in the use of this material, such as the head of the engineering depart- ment. The procurement of a new item of stores not only in- creases the inventory account and may involve a heavy expenditure, but when previous experience with the new material is lacking there is a chance that some or all of it may be wasted through the bad judgment of the ordering authority. Upon receipt of an order to stock material, the stores records clerk checks the form, determines whether the material is to be manufactured or purchased, classifies and symbolizes 56 PRINCIPLES OF CONTROL it, orders its procurement, has a stores record made out and filed in the proper place. The record is now ready for use in the same way as any sheet covering material previously stocked. The Unclassified Stores Record Sheet Although subject to the same general considerations as the classified stores, materials not to be reordered when the stock is exhausted need not be recorded in as great detail as classified materials, although the "ordering point" and "order- ing quantity" should be given as "zero." Form lo is an un- MATERIAL 5YMB0L 5 392 5 nATF ORDER MO ORDCBED ON REQ. NO. FDR DELIVERY BY QUANT/TY UNIT ST0PE5 SYMBOL AND LOCATION JPECIFICATION NO RESERVED FOR TITLE AND DESCRIPTION OF MATERIAL DATE QUANTITY Avd. - VALUE i ACCOUNT MATERIAL ISSUED TO, NOTES, ETC. | RECEIVED ISSUED BALANCE Form lo. Unclassified Stores Record. (Size 8J^ x 53^.) classified stores record possessing several advantages. The heading is designed to be made out as a duplicate copy of the order requisition. The lower half is a somewhat simple stores record to be filed by the materials symbol, S (see Chapter VIII) and its serial number. As the sheets are serially numbered with the symbol in advance, their use automatically classifies the record in the files. Since the material is ordered either from a specific "order to stock material," it is only necessary THE STORES RECORD FORM 57 to write the charge or use upon the record in one place, thereby automatically reserving the incoming stock for that purpose. The uses of the remaining columns are the same as for the forms explained in the preceding discussion. This record covers only material ordered for one specific purpose and whose stock is not to be replenished when ex- hausted. When the final issuance occurs, the balance on hand will become zero, the record of the material automatically be- comes dead and is filed by the material symbol in the per- manent dead file. CHAPTER V PRICING THE STORES RECORDS Necessity of Accurate Prices For the accurate control of materials it is essential that the unit value used on stores papers for pricing materials, parts, and supplies be accurate. To insure this accuracy care- ful attention needs to be given to two matters : the correct recording of the total and unit value of the goods received into stores ; and care in the clerical work of entering prices on stores and cost documents and in extending the price figures. The total and unit material values should appear on every stores record sheet — the total value to determine the unit value and for statistical purposes, the unit value to be used in pricing requisitions. Though in many storeskeeping systems values are not shown on stock records, it is apparent that if a concern wishes to know accurate costs of their manufactures, and to draw up a monthly profit and loss statement, it cannot do so unless the value of the materials consumed is recorded. Advantages of Pricing Stores Record The arguments for carrying values on stores records are that the practice makes for accuracy and economy and is use- ful for control and statistical purposes. It is the only way to price requisitions at the actual cost of the material used. When the price is secured from other records such as an invoice or cost sheet, the person pricing the requisition cannot be certain that the price applies to the material used. Each item of the inventory should be cleared 58 PRICING THE STORES RECORDS 59 out and charged to requisitions at actual cost if the stores ledger accounts are to balance with the controlling account in the general ledger. As every requisition is entered upon a stores record to show the delivery of material, if the price for costing purposes is secured from another record, a second clerical operation is necessary with an increased possibility of error. Thus for both accuracy and convenience sake the stores records should show the price of each item. To secure all the benefits of the pricing of a perpetual inventory, the items of stores should be systematically counted or otherwise checked in order to verify the records periodically and avoid the necessity of a shut-down for inventory taking. The cycle of checking each section of the stores ledger, that is, every item in a section or classification, should be completed at least once a year for the purpose of verifying the agreement between the total of all balances in this section and the balance of the inventory control account on the general ledger (see Chapter III). When the cycle of checking the quantities has been completed, and the individual sheets show each item to have been verified, on a given date the balances on hand of all items are reckoned. These balances are priced and reckoned and the total value for the account is computed by means of an adding machine. If all invoices and cost sheets chargeable to stores have been entered on their detail records in the ledger and posted in total to the proper account in the general ledger, the figures of the control accounts and the sections of the stores ledger should agree. This agreement could not be obtained if values were not recorded on the stores records. A final advantage of the pricing of the record is the possession of all available and useful information in one place, affording a complete fund of statistical information regarding the items of stores used. For instance, the inspection of the stores records shows at a glance such information as quantities 60 PRINCIPLES OF CONTROL purchased and quantities used, speed of use, comparative prices of materials, comparative investments, size of issuances, obso- lete material, and slow-moving material. The whole story is told in one place, with no other records to refer to. Recording Values In operating the stores records it is unnecessary to extend the amount or value of each issue in the "issued" columns. It is sufficient to record the price at which material has been issued, thus indicating the price entered on the requisition and the value of the withdrawal. To enter this extension, the stores clerk must stop his post- ing to extend the amount or a second reference and posting must be made if the extension is made later. The above observation does not apply, however, to the "received" columns in which the full amount should be entered. The value of the goods received should be determined at the time the new material becomes part of the existing stock, so that if there is any change in the unit price at which the requisitions are to be charged, the fact can be noted on the stores record. To ascertain the unit price of purchased materials, refer- ence must be made to the vendor's invoice, to which should be added any transportation bills, so as to determine the total cost of the material delivered to the storesroom. Until the invoice is checked for accuracy, purchased materials should not be formally taken into stores by entry upon the records. To ascertain the unit price of manufactured parts it is neces- sary to refer to the cost records supplied by the cost depart- ment. The unit price of the manufactured parts taken into stores is ascertained from the "report on cost of manufactured ma- terial" (Form ii). This report is made out in the cost de- partment as soon as the costing is completed, and is forwarded PRICING THE STORES RECORDS 6i to the stores records clerk for the entry of unit and total value on the stores ledger. MATERIAL SYMBOL REPORT ON C05T OF MANUFACTURED MATERIAL DESCRIPTION ORDER 5YM50L QUANTITY ORDERED COMPLETED REPORT MADE UP BY I DATE CO ENTERED OM ORDER ENTERED ON 5T0RE5 RECORD UNIT 5T0RES CON- TROL CHARGED IN PROCESS COM TROL CREDITED Form II. Report on Cost of Manufactured Material. (Size 5 x 3.) Components of Material Costs The components of the cost of manufactured materials — direct labor, material, and burden — and the method and com- pilation of the costs, are discussed in Chapter X on cost accounting. The cost of purchased material is the invoice price plus the inward transportation charges which are often in- correctly absorbed as burden. This is discussed in Chap- ter XXIV. Some concerns attempt to distribute storage charges over the material stored, resulting in complex and cumbersome clerical effort. These should be included in general overhead, except where a storesroom serves one department when its expense is a part of that department's burden. Materials are frequently received into the storesroom before the complete cost is known. Partial deliveries exaggerate this situation. The question soon arises, following such a receipt, as to whether that material should be entered on the record 62 PRINCIPLES OP CONTROL and then issued before the cost is reckoned. If so, at what price should it be issued? A rigid rule that no material can be issued until the price has been secured, causes delays in pro- duction. On the other hand, no materials should be in the storesroom without having been charged to the stores inventory account. It is preferable to break the latter rule. Two courses of action are open. The requisition may be held until the actual price is known or an estimated price may be used. If the requisition is held until the value is known, the accounting and clerical work is retarded and generally be- comes quite confused. As the accounts involved by the par- ticular requisition are related to others, a very desirable effect is produced. The more satisfactory solution is to use the estimated cost price. The material being issued in advance of the reckon- ing of its cost, should be priced at the last known price or by an estimate, and stores credited and the account charged with that amount. Any error in the estimate must be adjusted to the account receiving the material. Predetermining Costs of All Materials This difficulty of obtaining promptly the price at which items are to be entered on stores records has led to the practice of predetermining the price figure before any material or manufactured parts are actually received. The department placing the order usually determines the estimated price and advises the stores records clerk by entering the estimated figure on the copy of the purchase or manufacturing order furnished to him. When materials are purchased, it is a simple matter to determine the price if the purchasing agent asks for quotations before the purchase order is sent, especially if the material is purchased f.o.b. destination. The unit price is then readily determined after subtracting trade discounts. Later if the PRICING THE STORES RECORDS 63 price is changed, or if it is not known when the order is placed but is learned before the material is received, the pur- chasing department notifies the stores records clerk by sending him a copy of a supplementary purchase order showing the corrected price. Otherwise the price is estimated, as for manufactured materials, from records of past prices, esti- mates, the judgment of managers or buyers, or any other data considered reliable and recent. If sufficient investigation is made and the subject is treated as a matter requiring judg- ment, the price agreed upon will be so near to the actual as to make an adjustment on the stores records seldom worth while. As noted, the use of any other than actual cost prices re- quires an adjustment to be made somewhere to maintain the financial accounts in balance. Frequently, two general ledger profits and loss accounts are set up — "Purchase Cost Adjust- ment" account, and "Manufacture Cost Adjustment" account. The accounts are charged with the actual costs, and credited with the estimated amounts at which the material has been charged to stores. The balances of the accounts are carried into profit and loss periodically. Should a large discrepancy arise between actual and estimated costs on any item, the difference, as before noted, may be individually adjusted on the requisition or stores records to absorb part or all the difference. With careful estimating, the total debits and credits for a period should balance approximately. In estimating the price of items it is well to err on the safe side and intentionally to create a credit balance, especially when the above accounts are first opened. The results of the first few months' operation will reveal the mistakes in pricing and future estimates can be more accurately made. This procedure is desirable in many businesses but not in all. It should be installed only after thorough study of the requirements and possibilities of meeting them by the actual cost method. 64 PRINCIPLES OF CONTROL Methods of Pricing Requisitions There are two much debated methods for pricing requisitions withdrawing materials from stores : to use the actual price of each lot of material so long as any of that lot is on hand; or to use the average price of two or more differently priced lots. In many plants both methods are used for pricing because the application should differ : ( i ) according to the costs it is desired to obtain, and (2) according to the material. Regardless of the method of pricing, it is apparent that the total material costs of the business as a whole for the year will be substantially the same; but for each cost period and for each individual job during the year the material costs will be somewhat different under the various methods. Actual Costs versus Standard Costs The method to be adopted depends upon whether the business should have: (i) actual costs, or (2) standard costs. Actual costs require that a requisition be priced with the actual price of material issued. Thus, since the oldest material is issued first, the price used is the oldest. This results in con- siderable fluctuation in costs from period to period, or between similar orders, particularly when market or other conditions are causing considerable or abnormal fluctuation in prices. Actual costs are said to be more desirable because they are real costs and therefore show real profits. Their disadvantage is that when production costs are compared with other periods or with selling prices, the difference reflects the fluctuation in the actual material costs. Selling prices based on actual costs are sometimes too high to obtain business or too low to make a profit under average conditions. Standard Costs Because standard costs are not actual costs, does not mean that they are inaccurate. Such costs are intended to PRICING THE STORES RECORDS 65 reflect the cost of manufacture under normal or average con- ditions, and are especially desirable in businesses manufacturing a staple or standard article. Cycles of higher and lower prices are soon reflected in higher or lower costs even with standard costs. Interpretation of cost statements with the possibility of increasing the profit or the necessity of paring the profit, is easily made from the knowledge of general business conditions. Standard costs furnish a more equable comparison of re- sults between periods, between different plants and different systems of management. For this reason the trend seems to be toward standard costs as evidenced by the movement among various trade associations, such as the Foundrymen's and the Typographers' Associations, for uniform and standard methods of cost accounting. By such means the executive is able to compare his costs with the costs of other firms in the same trade, thereby deducing whether his organization is as efficient as his competitor's and whether he will be able to meet competition profitably or not. The real ability of his organization is shown by the ability of each function to make good in its own activities, that is, whether his purchasing department is able to make money by contracts at opportune times, whether his control depart- ment is able to accomplish the maximum with the smallest amount of inventory and of overhead expense, and whether his foremen receive a proper quantitative production from the employees under their direction. Determining the ability of various functions to accomplish their purpose is illustrated below in the amount of profits in purchases as shown by pricing requisitions at current prices. Actual Cost Methods of Pricing Requisitions All materials purchased or manufactured especially for a certain order, should be priced at actual cost. In special order manufacture a large part of the materials used may be specially 66 PRINCIPLES OF CONTROL secured, in which case to ascertain the profit or loss it is neces- sary to cost the materials at actual price. In fact, to use the actual cost for pricing all materials other than staples is the best practice. Where a staple of one general kind is in stock but varies slightly in quality, the actual price should be used. For instance, a clothing manufacturer has various lots of linings, all of the same general grade but varying a little in price. He receives an order on which the cost must be favorable. A lining of that grade but of the lowest price is selected for the order. The requisition for the lot actually used should be priced with that lot's cost. Frequently staples are priced by using the oldest price recorded on the stores record regardless of how many different prices there are. The arithmetic of the method is illustrated below : Receipts Jan. 4 500 units at $.50. Feb. 15 100 " " .70. 18 200 " " .60.. As material is issued, the 50-cent price of the first receipt is used in pricing requisitions so long as any of the 500 units received at that price remain in stock. The requisition of February 20 calls for 300 units; it is filled by 200 units at $.50 (the balance of the first receipt of 500) and 100 units at $.70 received on February 15. This method of using the oldest price until the quantity covered by the price is exhausted, conforms with the policy of giving out the oldest stock first to prevent, if possible, any deterioration from age, obsolescence, or other cause. Actual prices thus reflect actual costs and in turn actual profits — and not current or average conditions and cost. Deliveries 250 Jan. 18 300 units at $.50.. .$150 70 Feb. 20 200 " " .50.. . 100 120 100 " " .70.. • 70 " 23 50 " " .60.. • 30 1 Balance 150 r , 1 c " .60.. . 90 PRICING THE STORES RECORDS 67 Average Cost Method for Pricing Requisitions An average unit cost for pricing requisitions may under certain conditions be the best in the case of staple raw materials, standard component parts, and finished products. The method involves more calculation than the actual price method, and hence is more open to error. The figuring of the average price involves its recalculation every time any material is received, as illustrated below: Receipt Jan. 4 500 units at $ .50 $250 Delivery " 18 300 Balance 200 Receipt Feb. 15 100 Balance 300 Delivery Feb. 20 300 •50 150 .50 100 .70 70 566 170 .566 170 As material is received, the quantity and total value is added to balances of quantity and value on hand, and a new average unit price is calculated. If the new material costs more than the old, the value of the old material is written up and that of the new material is written down, as shown above. Average prices tend toward giving standard or average costs whose advantages have been described in previous pages. Pricing Requisitions at Current Prices Materials, while always priced out at cost, are not always used in costing at cost prices. Certain industries accumulate the speculative profits on purchases where the number of major raw materials is not great. The practice is included as a part of the standard cost systems of several trade associa- tions. The practice as applied to the iron and steel industry is illustrated as follows : Pig iron receipts for charging to stores at the contract price per ton. When requisitioned the iron is credited to stores at its contract price, and charged to a "Pig Iron Adjust- ment" account; at the same time the requisition is priced with 68 PRINCIPLES OF CONTROL the current market price of pig iron, and the adjustment account is credited with the amount. If the adjustment account shows a credit balance, this represents a profit due to the higher market price as compared with the contract price; if the account shows a debit balance, there is a corresponding loss. The advantages of this procedure are threefold : ( i ) it furnishes a more standard or uniform cost, and it conforms with the principle of basing costs upon current market condi- tions; (2) it reflects the efficiency of the purchasing department in forecasting the trend of the market and in buying under favorable conditions ; (3) it segregates a profit and loss variable for independent judgment. Inventory Adjustments In every storesroom some materials and parts become obsolete or deteriorate in quality before being used or prove unfit for the purpose for which they were secured. This deteriorated material clogs the inventory accounts when allowed to remain in stores. It should be disposed of and charged off to "Loss from Deterioration of Materials" account as soon as possible, so that the inventory accounts may reflect the true value of the stock and represent actual working capital. Despite every care mistakes are bound to be made from time to time in the amount of material given out by stores- keepers ; or materials may waste away from evaporation or may be lost through pilfering or theft. Discrepancies in consequence are revealed when actual count is made and the count is com- pared with the quantity called for by the stores record. Some storeskeepers write up the unit value of the material on hand to cover sufficiently the cost of the shortage. This practice is to be discouraged as its effect is to hide the loss or shelter the party responsible for the safekeeping of stores Such dis- crepancies when discovered should be charged off to a "Loss in PRICING THE STORES RECORDS 69 Inventory Adjustment" account. If the charges to this account indicate that the discrepancies are more than should occur in the routine of receiving and withdrawing stores, an investiga- tion should follow-. CHAPTER VI OPERATING THE STORES RECORDS Reporting Delivery of Materials to Stores In previous chapters reference has been made to the de- livery of materials and manufactured parts into stores. Such deliveries are reported to the control department and entered on the stores records through the medium of material re- ceived reports (Forms 48 and 82, pages 231, 386, 387). It is possible to use one form to report the receipt of both raw ma- terial purchases and manufactured parts, but as the forms may be made to serve supplementary purposes, it is recommended that separate reports be used. A purchased material received report should show : 1. The number of the purchase order to which the material applies. 2. From whom received. 3. The date received. 4. The symbol and description of the material. 5. The quantity received, rejected, and accepted. 6. The storesroom to which the accepted material has been sent. 7. The signature of the inspector. 8. Any other data of interest to the department receiving the reports. The routine of receiving purchases is described in Part IV where Form 82 (pages 386 and 387) illustrates the report made out by the receiving department upon receiving any material from a vendor on a purchase order. Here it is sufficient to explain that one copy of the report is forwarded to the control department and is posted to the record in the same way as the 70 OPERATING THE STORES RECORDS 71 "manufactured material received report" to be discussed be- low. Form 48 (page 231) is a "manufactured material received report." As described in Part III, the record is used as a route card covering a batch or lot of the material throughout its process of manufacture into finished parts. When the parts are received in stores, the card is forwarded to the control department where the two kinds of received reports are treated alike. That is, the quantity received is entered in the "received" section of the proper stores ledger card cr sheet after which the reports are forwarded to the cost department. The total and unit value of the material must be secured as soon as possible after receipt, as requisitions must be priced as soon as material is issued. The cost of manufactured ma- terials is reported by the cost department on Form 11 (page 61), while purchased materials cost is secured from the pur- chase invoices. The Stores Requisition Material is issued from stores as required, upon presenta- tion of a stores requisition (Form 12), which like a check drawn upon a bank, is an order for the delivery of the amount of stores designated thereon. The information on any requisition should include : 1. The symbol of the account to which the value of the mate- rial is to be charged upon issuance. This symbol denotes whether it is to be charged to a departmental expense account or to a production order. 2. The quantity of material desired and its unit. 3. The symbol and description of the material wanted. 4. The department and its location or the production unit to which delivery is to be made. 5. The time when delivery is to be made. 6. The approving signature of a duly authorized party and the date of approval. 72 PRINCIPLES OF CONTROL Form 12 Is the ordinary type of stores requisition. While this provides for the ordering of only one kind of article, there are occasions when it is convenient to order several items of STORES SYMBOt. MOLD rOR MATERIAL ON OODER NO. CHARGE ACCOUN T STORES Rf:QUI5ITI0N DATE REQUIRED APPOOVED DATE APPROVED NOTICE TO REOUISITIONER: USE ONLY SPACE BETWEEN HEAVY LINES APPORTIONED OEOUCTEO FROM EXTENDED CHECKED TAO QECORD DELIVERED AMOUh4T TOTAL VALINE Form 12. Stores Requisition, such as used in a very detailed system. (Size 6 X 4.) the same type or kind on the same requisition, as illustrated by the stores requisition copy of a shipping order (Form 13) and by Form 49 (page 232). More than one class of material should never be ordered on the same requisition. The first and most important feature of the requisition is its charge symbol, designating the account to which the mate- rials or supplies should be charged. The cost department, when making up expense and burden statements and production cost statements, checks these charges, and the party who has signed the requisition should be held responsible for author- izing the charge to the account designated thereon. The second feature of the requisition is the quantity and unit of quantity. There is little likelihood of the quantity 1 1 OPERATING THE STORES RECORDS 73 S5 t 1 1 I I P 2 I a d .<0 ^ S5 z 1 Q. lU :} = 5 h^ D 2 a 12 8 3 I 10 i^ ^3 i 13 I > 5 liJ ^ a 1 i to «o Z \ v~ o ID i 6 (0 Q UJ 2 P o a \ z a a I wS o u: 1- a Q u 10 > lU £ z Ui Q Q t > X IU _I iu £o < 1 Id / 1 a < if z a. < > s QH) 1? ' 1 1 -1 5 u 1 1- a QI 1^ UJO i ■I K Q Q lU 2 a D 3 Hi (0 « a <0 ?: i p \ V Q 01 lU 2i \ Q tu > IU 2 I p O a CO O h a <■ a a < 5 2 a // Q. a < a < I p^ 74 PRINCIPLES OF CONTROL being omitted, but the unit is a detail often overlooked. A requisition may be received reading: "5-Midvale High Speed Steel i" round" and the party ordering the items wants five feet; but if this material is bought by the pound and the stores clerk issues it in terms of pounds, the requisitioner will not receive what he wants. The unit of issue should be stated when possible to avoid the necessity of the storeskeepers having to translate the quantity ordered from one unit of measurement into another. The persons who ordinarily write the requisi- tions should be acquainted with the common units of each class of material. The description of the material and its symbol are neces- sary information for locating readily the proper stores record sheet and the material itself. Particular attention should be paid to the accuracy of these two items as an incorrect or in- sufficient symbol may result in a misunderstanding as to the material desired by the requisitioner or in an incorrect entry on the stores ledger. When the storeskeeper receives requi- sitions calling for "3 screw-drivers such as we got last month," "500 sheets of paper," or "2 lbs. of nails," unless he is a tele- pathic mind-reader, he cannot be sure of the requisitioner's requirements. The description, therefore, should be complete. The symbol is both the index to the stores ledger and a safe- guard against any misunderstanding as to the kind of material wanted. It is a commonly recognized means of identifying material. In a factory of any size the requisition should not only designate the particular department or the production unit to which the material is to be delivered, but also the exact loca- tion within the department. Definite instructions of this kind save confusion in delivery and the time of the requisitioner when material is not on hand when wanted. Often the stores department is blamed for not supplying the material ordered, when it really has delivered it but at an unknown place. OPERATING THE STORES RECORDS 75 In a large organization where the control department is responsible for the delivery of materials and parts to depart- ments and machines as wanted, the time should be stated on the requisition so that the storeskeepers may plan their work ahead. The stores department should be given the longest time possible to deliver the material which is of course delivered at the con- venience of the storeskeepers subject to the requisitioner's schedule. Each requisition should be countersigned by the proper authority before it is accepted. The stores records clerk should have a file of the signatures C)f those authorized to approve requisitions and of the accounts they are authorized to charge. The right of signing requisitions should be dele- gated by the general manager or by each department head. No requisition should be honored as an order on stores until properly approved. Routing the Stores Requisitions Every stores requisition for material or parts of any kind, chargeable to a production order should originate in the pro- duction control department. When the requisition is made out, the quantity of material needed should be reserved as de- scribed in Chapter IV, if that is to be done, following which the requisition can be sent to the storesroom. Miscellaneous requisitions not originating in the control department, amounts for which are not to be appropriated, are sent direct to the storeskeeper where they are immediately checked. Requisitions i-: supplies chargeable to expense are usually filled by immediate delivery. Handling the Requisition in the Storesroom If a requisition is not correct in form it should not be filled, but with a slip explaining the cause of non-delivery as shown in Form 14, it should be returned to the originator for 76 PRINCIPLES OF CONTROL correction. A teller in a bank before he pays a check, care- fully scrutinizes the signature of the drawer and the indorser, TO DATP The attached requisition is returned for correction. The items checlr OR MOVE TAG NO. NOTICE TO WPITER : USE ONLY SPACE BETKEEM HEAVY LINES INSPECTED LOCATION IN WEcervEO Aooeo To EXTENDED CHECKED STORES CHAROED ACCOOMT 1 OY OATt »v OATC. TAG RECORD Form i6. Stores Return. (Size 6 x 4.) and to deliver them on requisition as wanted, chargeable to burden. When this practice is permitted, the only check on waste is an unusual and excessive consumption sufficient to attract the attention of the management. A better method of control is to determine by experiment the approximate quantity of glue or ink needed for each job or process or each day's output, and to cover this quantity by a "stores requisition" issued and handled in the usual way except that the operating department keeps the reserve supply at all times and that the requisition does not pass through the storesroom. The control department thus has some check on the consumption of the material or supply used. 80 PRINCIPLES OF CONTROL Standard Parts Lists Record As previously explained, a bill of material similar to the "standard parts lists record" (Form 44, page 228), is often used instead of a requisition to withdraw materials or manu- factured parts from stores. Where goods are made for stock, the bill of material or the standard parts record when once made up is a permanent record of the materials or parts re- quired in the production of a particular order. If more material is needed than is designated on the bill of material, the extra material can of course be requisitioned according to the need. The Order Requisition When the ordering point is reached for the replenishment of an item of stores, either a "purchase order requisition" (Form 57, page 287), or a "production order requisition" (Form 17) is made out; at the same time, the requisition number and the quantity ordered are entered on the proper stores ledger record in the "ordered" columns. One form could be used for both ordering purposes, but as by elaborating the base of each form it is impossible to make it serve a secondary purpose in the control department or the purchasing department, it is recommended that distinct forms be used. As it is stated on each stores ledger record whether the item is procured by manufacture or purchase, reference to the ledger indicates the kind of order requisition required. Each order requisition should state the stores symbol, describe the material, give its location in the storesroom, the material's specification number, the purpose of placing the order, the quantity and unit desired, the time wanted, and the account to be charged. It is desirable, although not necessary, also to state the "ordering point" and the "ordering quantity" for classified stores. This information is for the department pro- OPERATING THE STORES RECORDS 8l curing the material in case conditions indicate that a change in the ordering quantity might be advisable. Order requisitions should be made out in duplicate. The second copy is retained by the stores records clerk, and the TO CONTROL DEPARTMENT PLEASE SECURE THE FOLLOWING MATERIAL BY PRODUCTIOM ORDER REQUISITION NO. 3471 DATE WRITTEN. REQUISITIONED BY_ ORDERING WRITTEN BY APPROVED BV JEOUiSITION. DELK PRODUCTION ORDER Form 17. Production Order Requisition. (Size SJ/^ x 514-) first copy after approval by the department head is forwarded to the production or purchasing department, as the class of order requisitioned may be. The unclassified stores record sheet (Form lo, page 56) serves as copy two for all un- classified orders. The preliminary work preparatory to placing the order is begun at once by the department receiving the order requisition. After the writing of the order, one copy is sent to the stores records clerk for his information and the noting of its order number on the record. Periodically, at least once each week, the stores records clerk should review the records, glancing at the balances and their relation to the "ordering point" and the "danger point." 82 PRINCIPLES OF CONTROL In a large organization much may happen between the date of placing an order and the scheduled date for receipt of the material. If the danger point is reached, Form i8 should be NOTir.F TO THE THE SUPPLY ON HAND OF THE FOLLOWING MATERIAL : .DEPARTMENT SYMBOI pF.<^rDlDTIOM UA"; PAI 1 FW TO TMF OAMr.FD POINT WHICH Will. 1 AST HAVi THE FOLLOWING ORDERS ARE OUTSTANDING ORDER DATE ORDER SYMBOL QUANTITY DUE PREVIOUSLY 5CHEDULED DELIVERY DATE NEW SCHEDULE FOR DELIVERY PLEASE LOOK UP IMMEDIATELY AND FILL N THE EXPECTED DELIVERY DATE 2Toaes aecoROS C4.erk ADOITIONAL REPORT 3CM£DUUIKlO CLERK Form i8. Notice of " Danger Point." (Size 6 x 4.) used. Particularly is this likely to happen when materials are not all ordered at certain times strictly in accordance with estimated requirements. Mechanical Posting of Records Though there are several types of calculating machines on the market, the mechanical method has little advantage over hand-work for the keeping of stock records, except that work can be done more neatly and possibly more accurately by machine. So far no machine has been devised which can do the work connected with entries on a highly developed stores ledger any quicker than by hand. OPERATING THE STORES RECORDS 83 Accuracy of Stores Records To be of full value the stores record must be correct in both quantities and values. Like any other ledger or record, it can be checked to the accuracy of a penny if need be, but such exactitude is unnecessary. Reasonable accuracy is all that is required. The entries of values are the easiest to check, and here accuracy is of great importance. If the posting of DAILY RECORD CF BALANCE IN 600K NO. CON TROL i DATE RECEIPTS issues BALANCE am RECEIPTS ISSUES BALANCE DATE RECE WCE \ 1 1 - - - — ^ — ~ 1 II 1 r \ Form ig . Daily Rec ;ord of I balance. (Size 14 X I I-) total values issued is omitted, as suggested in the preceding chapter, and if balances of quantities and values are not reckoned, running totals eliminate the errors which result from using balances. Of course, it is possible to make an error but it can be easily found. The smaller the number of records in a group, the easier it is to locate an error. Sometimes it is desirable to group the records in smaller units with a corre- sponding control and then to keep a daily balance of that small group. This can be done by inserting Form 19 as the first 84 PRINCIPLES OF CONTROL sheet in the group. Such a division of the stores ledger account into groups is also valuable for statistical purposes. Errors of the Storesroom To check the balance of the quantity on hand as shown by the stores records with the actual quantity ni the storesroom requires a physical count of the latter. The keeping of a tag on each bin in the storesroom for recording the stock in that bin furnishes one method of checks, as described in Chapter XIV. When a tag is filled with entries and the bin has been inventoried or when a lot is exhausted, the tag is sent to the stores record to be checked with its entries and discrepancies traced. Of course the bin tag may be wrong. Entries of de- liveries may be made on it in error or may have been omitted, or a requisition covering an issue may have been lost, or mistakes may have been made in the count of quantities issued. Mistakes in descriptions and units of materials cause dis- crepancies, or inaccuracies may result from the issuing of wrong materials and units. Again, one record may be properly made but the other may be wrong. This last error can be largely avoided by the use of proper symbols and standard descriptions, so that the material is defined to both parties in the same terms. Any error must then be due to carelessness. It is possible to check such errors by looking up the correspond- ing requisitions in the cost department filed by the charge account symbols. Mistakes are frequently made in the quantity of material delivered on requisition. Particularly is this true of items issued in large quantities by weight or by count. Automatic scales for counting by weight may be out of adjustment, the use of "tote boxes" holding specific quantities may lead to slight inaccuracies, or a physical count may be incorrect and there is no method of check after the material has left the storesroom. OPERATING THE STORES RECORDS 85 Again, employees may confuse stocks of two materials merely because they appear alike, resulting in the delivery of the wrong thing or in the mixing of stocks. This may happen particularly when goods after delivery to a requisitioner are returned unused and without a proper return form filled out (Form i6). A good method of making certain that the stores record is accurate and so prevent the purchase or manufacture of ma- REQUEST FOR COUNT OF 5TOCK BEQUESTED COUMTED 5T0RE5 RECOB05 Form 20. Request for Count of Stock. (Size 5 x 3 j terial when not wanted, is to have the stock on hand inven- toried, whenever an order requisition is written. Form 20 is used to request such a count. The storesroom report, when checked with the quantity which the record shows as being on hand, gives greater assurance that the material is actually required. All discrepancies not adjusted by correcting original entries, should be adjusted by writing off the difference to a Stores Inventory Adjustment account. If the record is checked with an actual inventory from time to time, the balance will be corrected periodically and it will be approximately correct at all times. Errors can only be eliminated by careful work. CHAPTER VII CLASSIFICATION AND SYMBOLIZATION Business Classification Factory buildings may be classified as power houses, machine shops, and foundries. Men are classified as engineers, draftsmen, managers, bankers, machinists, etc., on the basis of the kind of work they do. Materials are classified as raw materials, supplies, component parts, or finished products, on the basis of their use in the business. Accounts are classified according to their use and the nature of the transactions re- corded in the account — that is, into expense accounts, inven- tory accounts, cash accounts, etc. In these few examples it is seen that the classification is according to use; that is, on a functional basis. These general classes are then subdivided into smaller groups to secure still further the control desired over the records. When the group classification has proceeded as far as seems necessary, we then identify the separate material, man, or activity within each classification or division. An employee's name is his usual method of identification though in business he may be given a number. Such a number is merely a distinguishing mark to make it easier to keep the records of his service. Every business recognizes the need for classification and for some method of indicating that classification by the use of identification marks. A manager may first classify his orders into purchase orders or sales orders, then number each class serially and distinguish one class from the other by prefixing an initial P or S before the number as an identification mark. The departments of a business may be numbered or identified 86 CLASSIFICATION AND SYMBOLIZATION 87 by letters. The materials may be numbered from i to 10,000, Some systems of classification and an abbreviated system for indicating it, are found in every business. Advantage of a Uniform System Though classification is the basis of all systems and records, there is not always a definite and intelligently directed effort on the part of the management to correlate the various classi- fications and methods of identification into a single unified system. To illustrate, in a large organization material may be given number 1394; an order of a series may bear this number, and an employee be allotted this number. When 1394 appears what is meant? But if the system were properly devised, each person or object or order would be distinctly identified, with no danger of confusion. Symbols at times "just happen" and are originated as the need arises, or as the person using them thinks best. Hence haphazard methods of classification and identification come into existence and continue to exist. The result is that only those who devise and use the symbols understand the marks of the various groupings or the history of their origin. Confusion and misunderstanding are the result. Planning a Classification System In any comprehensive system of classification, the group- ings of the activities of the business must be carefully planned. The first question to be asked is, What groupings will be of most practical use in this business? It is useless to classify in great detail a large number of products, materials, processes, and activities unless the classification will result in saving time and clerical work. The maintenance of the classification costs money, and the returns secured from it must justify the cost. To classify the activities of a business, it is first necessary to see where the results of a business are finally expressed. 88 PRINCIPLES OF CONTROL These records are usually in the accounting books. All the records, no matter for what purpose maintained, either affect or bear some relation to the figures entered in the financial accounts. The records of all materials, machines, employees, etc., are all summarized in various accounts that make up the final book of account — the general ledger. Accordingly, then, the system of classification should be based on the accounts kept in the general ledger. The First Steps in Classification After it has been decided what general groups of things are to be classified, the first step is to make a complete list of all products, materials, men, and machines according to their main classification, and then further classify them into sub- classes. Probably the primary classifications or groupings will have been previously made on a fairly accurate basis — such as the grouping of materials as supplies, component parts, and finished product. Subsidiary classifications and records may also be already in existence, such as inventory lists and opera- tion lists, and these groupings will be adhered to. In devising the classification scheme, lists or groupings already in exist- ence should be compared with the new system of classification to make sure that nothing has been omitted. Having grouped all items under their proper classification, each item is given a distinctive symbol and such description as will distinguish it from every other item in the list. This is important, for confusion will result if one symbol or description represents two or more different items. Finally all items should be so symbolized that each has its proper and only place in its own group. It is not to be expected that the system of classification will be functional throughout. Common sense must govern. In general the basic and most important classifications may be based on the various financial accounts in the general ledger. CLASSIFICATION AND SYMBOLIZATION 89 Within these primary classifications, subdivisions may be marked off on the functional basis and the smallest groups may be based on the physical nature of the objects. Within each group the basis of further classification has to be decided anew. For instance a group of articles may be used only in making a particular part of a machine product. This group may be classified on a functional basis, that is, on J:he basis of the use to which the whole group is to be put. But within the group the articles might be listed, not by the uses which they served in making up that particular product, but by the materials of which they are composed, wood, iron, brass, etc. Thus the first step is to list by classes, divided into groups, and each group arranged in order so that every product or material which the business uses or has on hand is included within the group of its classification. The next step is to delete from the list all items which cannot be considered as an article of standard use. Standardization is considered in detail in Chapter XII. The point here to note is that the classi- fication list should include every product, material, account, etc., to be used or maintained in the future. Symbolization It is a little known fact that names are not sufficient for the definite identification of one thing among many similar things unless the description is long and detailed. This will be evident to anyone who tries to identify adequately the various small items that form a part of his desk furniture. Without a detailed description, names are ambiguous and may mean two, three, or a dozen different things. An accurate method of providing an identification mark which will make the name definite and intelligible is the method of symbolization. A name is of course a symbol of an object, but in the narrower sense a symbol is defined as a concise representation 90 PRINCIPLES OF CONTROL of a name and a description. While any mark that can be rapidly made will fit the definition of a symbol, in practice sym- bols are made of letters or numbers or both. Symbolization proceeds hand in hand with the final classification. By symboli- zation all the elements in the classification can be permanently identified and maintained in their order for record keeping. The symbol of an object should be so devised that it can be recognized without constant reference to a code. Thus if S is the symbol for supplies, C for service departments, S for shipping, and B material used for binding packages, then SCSiB means string used by shipping department for binding packages and the symbol may be readily memorized if it is remembered that each character suggests its own meaning. Use of Symbols Facilitates Clerical Work Symbols, in addition to being an aid to ready identifica- tion, facilitate the routine of clerical work. When everything has been symbolized, the various records can be arranged in alphabetical or numerical order by merely referring to the symbols. Thus almost every paper on which a symbol is writ- ten is already indexed and can be immediately filed by that symbol. Stores record sheets are filed by material symbols; orders, by the order symbols; machinery record cards, by machinery symbols; while inventory accounts, expense ac- counts, and cost accounts are arranged in the order of their symbols for these classes. It thus becomes a simple matter to interpret each symbol as it occurs, as a glance tells the whole story. Mistakes are readily noticed, for a symbol that repre- sents an impossible combination of letters is easily detected and corrected. Use of Symbols Maintains Standards Symbols are also of aid in the maintenance of standards. If the purchasing department, for instance, is authorized to CLASSIFICATION AND SYMBOLIZATION 9^ purchase according to a definite specification a certain grade of paper, it is immaterial, so long as the paper bought meets the specification of its physical qualities, whether it is purchased from one concern or another, or what is its brand. Employees, however, when they handle this paper and see a different name applied to it by its manufacturer, a different term of color, or a different method of packing from what had been used on the paper previously in stock, often are confused, and fail to recognize that it is the same kind of paper under a different name or under a description differing from the standard de- scription. If, then, it be identified by symbol rather than by name, the employee at once knows that it is not different in quality and intended use from the previous lot. Confusion cannot result, standards will not be lowered. Non-standard material cannot be included in the standard list and items received will be properly described. To make the symbols permanent and to prevent their degeneration through clerical errors or unauthorized change, their determination should be entrusted to the person who has charge of methods and systems. As each new standard ma- terial or other object is chosen, a new symbol is allotted to it so as to classify it in its proper group and to identify it in the records of the organization. Numerical and Alphabetical Systems There are two basic kinds of symbol systems : numerical and alphabetical. The first is usually built up like the decimal system devised by Dewey for use in indexing libraries. The second is based on the letters of the alphabet and is to be preferred to the numerical for the reasons already discussed. The ideal system, however, is neither a purely numerical nor alphabetical system, but a combination of the two. Whatever the system, the requirements of a symbol are that it be brief, unique, and suggestive. The development of the ^i PRINCIPLES OF CONTROL individual symbol, like the development of the classification system, should not be carried beyond the point of utility and the saving of clerical labor. Brevity in the matter of symbols is easily attained, for any symbol is certain to be more brief than the name for which it stands. But brevity alone in a symbol is not sufficient, as it must not be too short and simple to be efficient. In the use of the numerical system we are limited to ten basic classifications, unless the symbol is complicated by the use of dots and dashes, for the separation of items. This use of signs should be avoided as the chance of errors in copying and reading symbols is too great. The alphabetical system gives us twenty-three characters for classes — I, O, and Q are not used because of their similarity to numerals. Requirements of Symbols Each symbol must be such that there will be no other symbol like it. Each item must be represented by one symbol, and one symbol must represent only one thing. This quality of distinction is a matter of mechanics in drafting the symbol system. Another requirement is that of suggestiveness, that is, the symbol should bear some obvious relation to the words it stands for. Thus S readily suggests supplies or sales, and C can be seen to bear some relation to service. This quality is some- times called "mnemonic." Therefore the use of letters as symbols is generally known as the "mnemonic" system. This consideration is a strong argument in favor of the alphabetical as against the numerical system. Not all advantages, however, belong to the mnemonic symbols. Many large concerns use numerical symbols because of their adaptation to the requirements of mechanical tabulating equipment in the compilation of managerial data. This equip- ment is designed to accommodate a maximum of ten symbols in CLASSIFICATION AND SYMBOLIZATION any position, and all symbols in a given position must belong to the same class. As it is impossible to develop a practical mnemonic symbolization suitable for use with this equipment, many concerns now using or which expect to use this equipment do not use mnemonic symbols in their installations. In the following chapter the mixed system is discussed and its advantages explained. Its study will enable the reader to devise a strictly numerical system suitable for use on mechanical tabulating equipment. CHAPTER VIII CLASSIFICATION AND SYMBOLIZATION OF MATERIALS Problem of Classification In a small organization the work of classifying and symbolizing the stores items is a relatively simple matter compared with the problems involved in the classification of the inventories of a large organization. The underlying principles are, however, the same. Closely related to the principles ex- plained in this chapter are the matters discussed in the chapters on "Standards and Specifications" (Chapter XII) and "Con- trol of Inventory" (Chapter XI). Before stores can be classified and symbolized they must be standardized and their nature specified; and before the inventory can be controlled it is necessary to determine the classifications of the stores ledger and other inventory accounts for the purpose of opening the necessary controlling accounts in the general ledger. Though the discussion of !► CD ^1 ^ 1 r DAY WORK- IN - PPOCCift WORK' IN- pRoccaa WORK -IN - PROCESS - ETC. ETC. EXPENSE 1 7 3 4 ? 6 -TO- 1 — 1 1 IT 1 ■ 21 ZZ 13 24 1 JS 1 76 27 16 »9 SO 91 TOWl Form 24. Summary of Materials Used — Debit. (Size 11 x 83^.) The total of last column must check total material charges on monthly expense and burden statements Handling the Stores Returns Accounting for returned material is the reverse of the pro- cedure described above. As previously explained, such de- liveries should always be accompanied by a stores return ( Form 16, page 79), and the amount credited to the party or the account returning the stores items should be the same as that charged when issued. The return can be priced from the stores record if the date of the delivery is known. In case the transaction occurred at some unknown time in the past, the cost or accounting department may be required to furnish the correct figure or an estimated figure may have to be used. When customers and departments return stores items which have proved defective, the cost of putting the articles into sal- able or usable condition should be charged to whatever activity 124 . PRINCIPLES OF CONTROL is responsible for the deficiency. If defective through material or workmanship, the cost becomes a charge to the burden ac- count of the manufacturing department responsible for the defects or to the vendor of the material, if possible. Repairs or adjustments made for customers, as a matter of sales policy, are sales expenses and should be charged thereto. Reporting Deliveries to Stores The delivery of purchased materials to stores is reported on a purchased materials received report. The nature of this form and its routing are to be discussed in Chapters XXVI and XXVII, as it does not enter into the cost accounting work. It is sufficient here to say that the stores accounts are charged and vouchers payable are credited through the general books of accounts. Manufactured parts received reports are forwarded to the control department for entry on the stores records. Such re- ports may take a number of different forms. Some firms use the same report as for purchased material. Others use a some- what similar but simpler form. The route card (Form 48, page 231), illustrates a simple but adequate method for most plants to report deliveries into stores. A manufactured parts received report should show the de- partment last working on the order, the symbol and description of the order, the quantity sent and accepted, and the signature of the inspector. The route card mentioned above accompanies the material from its beginning to its completion and delivery to the storesroom as manufactured parts or finished goods. When orders have been completed and the costs reckoned, as discussed later in this chapter, the unit cost is reported to the stores records clerk by means of Form 11 (page 61) for entry on the ledger and for pricing requisitions as the parts are issued. When the plant is operated on a "to order" basis, formal finished product stock records may not be in operation, COSTING OF ORDERS 1 25 in which case the cost department usually prices requisitions and performs all operations of crediting finished product stores and charging cost of sales. The cost department also tabulates the value of all manufacturing orders to make the credits to Work in Process and charges to Component Parts Stores or Finished Products Stores, as explained previously. Journal Entries The transfer of charges or credits from one general ledger account to another is done by journal entry showing the amounts to be posted to the appropriate control and the detail accounts in the general and the supporting ledgers. Such journal entries cover the summarization of time cards, stores requisitions, stores returns and manufactured parts received reports, thus recording the various transfers of material values from stores accounts to work in process accounts, and vice versa. In addition, journal entries are used for the distribution of expense charges to work in process and the department bur- den accounts, and for other miscellaneous transfers. A journal entry consists of a tabulation of the accounts and the amounts to be debited and credited, with an explanation of the reason for making the transfers, as here illustrated : J. E. No. 943 Jan. 31 KR - Component Parts Stores $1,000.00 To KR - Work in Process $1,000.00 K65RF2 $700.00 K71RF7 300.00 Orders completed during the month. The first symbol indicates the Component Parts Stores ac- count to be debited; the second symbol above designates the Work in Process account to be credited ; the symbols below in- dicate that the detail amounts are from certain supporting work in process cost sheets. The positions of the amounts designate whether they refer to general ledger or to supporting 126 PRINCIPLES OF CONTROL ledger accounts. Should the details be of considerable length it would involve too much clerical work to list all of them in the journal entry, and reference would be made to the working paper, giving the details. So long as the details appear some- where in permanent form, they need not be given in the journal entry. When the summarized charges or credits to the control accounts are posted, the detail entries must also be made before the transfer can be considered as finished. Journals, like ledgers and other records, can be either bound or loose-leaf books. The loose-leaf journal method permits entries to be prepared separately and by several departments, and then arranged in chronological order in a binder. Such a .innQNii rwTOY voiirMFQ Nn ISZ OETAILJ V conrnOL s 0«,T CREDIT DCaiT CREDIT WaiTTEH BV APPROVE O BY Cf^TERCD Br Form 25. Journal Voucher. (Size 1 1 x 83^.) journal is illustrated by the journal voucher (Form 25). In the upper right-hand corner is a space JEV — for entry of the serial index number of the voucher. Just below is written the date on which the transfer is made. The individual loose-leaf voucher is written out like an ordinary journal entry, with the COSTING OF ORDERS 127 equal debit and credit and full explanation. This form pro- vides columns for showing detailed accounts as well as con- trol accounts, if the details are not too lengthy. Handling Expense Debit Slips As will be explained in detail later, the values of purchased material to be charged to the stores ledger control accounts are secured through the voucher register (Form 88, page 396) ruled with columns for distributing the charges. One column is for the entry of amounts chargeable to the stores materials accounts. The credits in the voucher register are usually to "vouchers payable." Another distribution column in the f ORDEQ NUMBER INVOICE DATE OR NUMBER VOUCHER NUMBER DATE OF CHAOOE EXPENSE LEDGER 5LIP 1 M M M ACCOUNT NUM6EB 1 1 1 CBEDIT ACCT. Jell 1 1 1 1 1 1 AMOUNT OPR. QUANTITY DESCRIPTION PRICE UNIT AMOUNT 1 CftEOlT ACCT. DEBIT ACCT. AMOUNT REMARKS TOTAL Form 26. Expense Ledger Slip. (Size 7Hx334-) voucher register may be used for entering purchase amounts chargeable to expense and burden accounts and headed, for example, "Expense Ledger Accounts, A-D." For each entry in this column, an expense ledger slip (Form 26) is made out and passed to the cost department, where they are filed by account number like time cards and stores requisitions until the end of the month when they are totaled for the expense and burden statements. 128 PRINCIPLES OF CONTROL Making Up Expense and Burden Statements For purposes of analysis and control, the totals of expense and burden for each department are listed on monthly state- ments to show the actual amount of each kind of expense and burden incurred in each department. For comparative pur- poses, the amounts for the previous year should be shown in a parallel column. These monthly expense and burden state- ments are made up as soon as possible after the last cost re- ports for the month have been received and handled as described above. Then reports of all kinds are totaled by account symbols and listed. Some departments' expenses are to be apportioned among other departments. Accordingly, journal vouchers are made out and the proper postings made. Tabulating Production Order Costs It has been stated that production order costs are figured on the work in process cost sheets, and such sheets become finished goods cost sheets as soon as orders are reported as completed. Form 27 represents such a loose-leaf cost sheet or tabulation. This record sometimes serves as a notification from the control department to the cost department of the work to be done, and thus takes the place of a production order because it shows : 1. The order symbol 2. The quantity ordered 3. The date of the order 4. The ordered material's symbol 5. The ordered material's description 6. "^he operations on the material The form here shown (Form 27) is used for the tabulation of ordinary operation and assembly costs. A description of the method of making entries on it is unnecessary, except that the total amount for each operation and each kind of material is posted rather than each detail charge. COSTING OF ORDERS 129 COST OR ESTIMATE SHEET NAME OF ARTICLE ORDER NO. ADDITIONAL DESCRIPTION DATE NAME AND DESCRIPTION OF MATERIAL UNIT ?f^N,Tj UNIT COST TOTAL COST 1 • TOTAL COST OF MATERIAL DIRECT LABOR SUMMARY 1 NO. OPERATION AMOUNT ' HOURS OJjl>0|KJ amoukTt KIND OF COST TOTAL COST COST PER UNIT | MATERIAL Direct labor BURDEN TOTAL PLANT COST ADMINISTRATIVE COST TOTAL SELLING COST TOTAL • % PROFIT SELLING PRICE -ESTIMATE - QUOTED OROCO l-tlSXO«Y 1 OA-re ORDERED STAC?TEO COMPLETED CO»-l^lLATIO»a COI-IOtLEO TOTAL rtK'O COSTS RSRORTeO ^S' TO srroPtES 6V KEcoaos ev REMARKS Form 27. Cost or Estimate Sheet. (Size83^xll. The Work in Process Control Accounts For the sake of simpHcity it has so far been assumed that all production orders are charged to one Work in Process 130 PRINCIPLES OF CONTROL account. It is often necessary for the purpose of analysis and control to divide Work in Process into three accounts — one each for Material in Process, Direct Labor in Process, and Burden in Process — and in very large plants to have separate accounts for each department. The total of the divided work in process accounts should equal the total of the one account if one only were used. The Burden in Process account of a divided work in pro- cess account requires special mention. In using predetermined burden rates for computing costs a rate is reckoned which, when used over a period of a year, is expected approximately to equal the amount of actual burden which it is expected will be incurred during the year. When a furnace must be torn down and relined, for instance, the cost should be distributed over its period of life. In accounting for this burden, it is customary to use two burden accounts for each department — the "Burden Actual" and the "Burden Credit" accounts. To the first is charged all burden as it is accumulated, that is, the actual burden costs. To the second is credited all burden distributed to production orders in proportion to the direct labor incurred thereon for the period at the predetermined rate. By comparing the amounts of the two accounts, it is possible at all times to see whether the predetermined rate is large enough to absorb all the actual burden incurred, or whether the estimated burden charge is too great and is pen- alizing the jobs done. The difference between actual and pre- determined burden is shown on the monthly profit and loss statement. Among other advantages, the use of this predeter- mined burden rate permits the compilation of costs before the actual burden rate for the period is determined, and permits costs to be more nearly standard or uniform. This completes the brief description of manufacture up to the point where the deliveries therefrom are made to the storesroom. CHAPTER XI CONTROL OF INVENTORY Effect of Policy on Inventory We have seen that the inventories comprise two classes of accounts — the stores accounts and the work in process accounts — shown in the balance sheet in various ways, as the inventories of general stores, worked materials stores, finished product stores, by-product stores, and work in process for the respec- tive classifications. The management is interested in the total values of the inventories as a guide in shaping future financial policy, for these totals, with those of the plant assets, represent most of the invested capital of the business. If the concern is in need of cash, the reduction of the inventories by sale or by decreasing production and purchases is a method of supply- ing the need. If the concern has a surplus of ready money, it may be practical to increase the inventories and thus save money by the purchase or the production of materials in ad- vance of need. In the control of the inventory the result of any changes in policy should be carefully kept in mind. To lower the inventory of materials on hand and ''in process" will probably improve the immediate financial position of a concern ; but the greater the quantity of stores within reasonable limits, the bet- ter will the stores department be able to supply the needs of the consuming departments. From the point of view of quantity the needs of the consuming departments should first be considered, while the limitations of good finance govern the uppermost level to which the value of the inventory should go. The financial position of a concern suffers as soon as 131 132 PRINCIPLES OF CONTROL the inventory amounts become too high, and it is to guard against this condition that a control of the upper limit of the amount is desired. The useless, wasteful, and unnecessary outlay of cash for materials not needed can be avoided by regulating the total values. Inventory Carrying Charges The carrying charges for all materials in stock, which charges include insurance, taxes, depreciation, rent, and manual and clerical labor, plus the interest to be earned on the invest- ment, probably amount to from io% to 20% per annum of the value of the stores. For instance, a certain material cost- ing $200 may be held in inventory for six months before being used and its carrying charges may amount to $20, yet the expense must be absorbed as overhead and not as an increase in the cost of the material. Strictly speaking, that material at the end of six months has cost $220 — but is still worth only $200. These charges should for strict accuracy be included as part of the costs of the materials used, but the detailed accounting necessary to do this makes it impracticable. If the inventory of certain materials is allowed to increase or even to remain stationary, there is also the possibility that the material will suffer damage or will deteriorate to a value far under its cost; or it may become entirely obsolete and not usable for the purpose for which procured. There is also the possibility of the market falling in price at the very time the stocks are at their highest, and the true value of whatever is on hand is decreased accordingly. Hence, the management in deciding upon the maximum quantity must give some thought to carrying costs and the chances of loss of stock. Charges increase proportionately with the quantity stored, and the length of time the item is in stock and may quickly overcome the advantages of buying or of manufacturing solely for the sake CONTROL OF INVENTORY 133 of a low unit price. An accurate estimate, however, -can easily be made and should always be made when considering the carrying of materials in stores. This estimate should be fig- ured as a per cent of the value of the material. It is not to be supposed that every one of these factors will be minutely determined for every material every time an order is to be requisitioned, but if the subordinate to whom this matter is entrusted, is given the proper records and sta- tistics and is kept informed of current general conditions, it quickly becomes second nature to determine the expediency of placing orders. The work becomes routine, takes but little time, and each correct judgment insures accuracy in succeed- ing estimates. The Consideration of Quantity Manufacturing and sales policy govern the lowest limit to which the inventory should be allowed to drop. That limit represents the consumption during the time required to obtain a new supply. The sales department requires the quantities in finished product storesrooms to be such as will meet their schedules. There are the same advantages of lower unit costs in large-scale production as in large-scale purchase, and the quantity put in process should not be allowed to drop below the point where such advantages can be secured. Finally, the manufacture of the components in process should be so co- ordinated that they will be finished on time when required for final assembly operations. In this matter there is often a lack of balance, resulting either in an oversupply of items or parts which will not be required for some time, or in holding up subsequent operations of assembly. The deal is, of course, the greatest amount of business possible with the least amount of capital invested per unit of product manufactured over a given period. 134 PRINCIPLES OF CONTROL Control Procedure The specific methods and forms to be used to effect the control of inventory will be described later. Here it is neces- sary to emphasize the need of a well-organized and definite method of procedure to carry out the work. A mere decision of the management does not accomplish this control any more than a decision that sales must increase brings more orders. There must be a system of applying the decision in detail to the separate groups of stores and then to the single items. The method must be simple in plan and in operation so that all may comprehend it. At the same time it must be thorough and uniform and if it is to be inexpensive in operation it must pro- vide for handling an expansion or contraction of stores with ease and speed. Finally it is of the highest importance in controlling inventories that the inventory figures presented in the monthly balance sheet be correct, otherwise any policies decided upon will be inconsistent with the actual conditions. Accordingly, then, the stores department must be clerically up to date and the records accurate. The controls of the stores and work in process accounts should show the true condition of the stores inventories and the work in process. Therefore the materials ready to be turned into stores should be promptly forwarded by the pro- duction departments to the storesroom, so that work in process accounts may represent only materials actually in process. Determination of Ordering Points The management exercises control over the inventories only to the extent of indicating the maximum total values of the different classifications to be maintained for a given period. This decision must of course be based on general business con- ditions, the financial status of the concern, unfilled sales orders, turnover, and any other factors which bear upon manufactur- ing policy. When the market is falling and a period of re- CONTROL OF INVENTORY 135 trenchment has set in, inventories must be reduced to the lowest Hmits of safety and any surplus converted into cash as soon as possible. When the market is rising and a period of expansion and increase in volume of business is looked for, heavy con- tracts are naturally placed for the purchase of materials. In either case, however, the figures to which the totals are to be reduced or raised should be definitely determined. After the amounts of the controlling accounts have been limited and apportioned to their subcontrols, the work of con- trolling the separate items is left to a subordinate. Certain instructions for his direction should be drawn up, such as the maximum period during which stock is to be kept on hand and the minimum value of the single order to be placed. Be- cause the work of ordering new supplies is given to a sub- ordinate, it is not unimportant. The routine of ordering materials included in the inven- tories as explained in Chapter VI, is governed by the ordering point and economic ordering quantity — data which are entered on the stores record. A mistake of judgment in fixing too low an ordering point may result in a loss, through delays in the manufacturing departments, out of proportion to the small economy effected. An "economic ordering quantity" is too low when it increases the unit cost unnecessarily. As previously stated, the quantity making up the ordering point should be the total of the amount required for average or expected consumption during the time ordinarily taken to secure a new supply plus a margin of safety. Errors of cal- culation in requirements, unavoidable delays in deliveries, in- creases in consumption — all these factors must be covered by the margin of safety. Determination of Minimum Ordering Quantity The minimum ordering quantity should be the minimum quantity which can be economically purchased or manufactured 136 PRINCIPLES OF CONTROL at one time and then stored until wanted. To determine this requires a review of all the factors of stores handling expenses which influence the economic cost, as well as the purchasing or manufacturing expense. In practice the upper limit of the ordering quantity is set by the sales or consumption schedule. The amount which the stores records clerk requests on an order requisition and the balance available at the time the requisition is signed, are not necessarily the same as the "order- ing quantity" and "ordering point" entered on the stores record. These quantities are intended to serve as guides to the form- ing of a judgment on each requisition. Conditions are chang- ing from day to day and the signature of the head of the stores record department should not be affixed to an order requisition until each requisition has been studied and the con- ditions affecting the order have been reviewed. Economic Minimum of Manufacturing Cost In determining the quantities of materials to be purchased no special problems arise, as their cost is given in the quota- tions of sellers, to be discussed in a later chapter. In deter- mining the minimum quantity of parts to be made, the control department has to consult the manufacturing and estimating departments. The initial cost is largely governed by the time required for preparation and for setting up the machines, and this cost is the most important consideration in determining the "minimum quantity" to be put into process. Usually the costs of materials and labor vary directly with the number of units completed. For instance, in making a part for a machine tool it might require two hours to set up a lathe for turning that part, and if only one part is ordered, the unit cost is of course proportionately high. The clerical work of placing the order probably costs over $i in each case. Though as a rule the more parts ordered, the smaller will be the unit cost of manu- facture, this unit cost soon reaches an economic minimum. CONTROL OF INVENTORY 137 Graphing the Consumption As an aid to the forming of a correct judgment, when an it^m of stores reaches the "ordering point," its consumption should be reviewed to see if a change has been made expedient by changing conditions. Form 28 is designed to make such a review easy. It will be noted that the lower part of the form graphically presents the record of consumption for a period of two years. Whenever the stock falls to the ordering point, one of the cards is made out to show the consumption to date. From left to right the lines represent the months, while from the bottom to the top, the spaces are for the quantities con- sumed, using whatever scale best suits the case. The spaces above the graph are filled in by the stores records clerk and by a person familiar with the securing of the material, such as a member of the purchasing or the production control department. When the executive of the control department responsible for the "ordering quantities" and "points" studies this chart, he is able to tell at a glance the trend of the consumption for the period charted. This information, with his general and his specific information of future manufacturing requirements, enables him to make any needed changes in the ordering point and ordering quantity. If a change is made, the new quan- tities are placed on the stores record and the proper action taken while the chart is filed by its symbol until the ordering point is again reached. Then the consumption curve and other data are brought up to date and the card is again ready for the decision of the reviewer. The expense of maintaining these graphs is very slight. The cards can be used again and again and little time is needed to bring them to date. The system has been used at a weekly cost of about $30 in a stores organization handling over 2Q,ooo items inventorying over $400,000. Inventories were cut $100,000, saving at least $10,000 in carrying charges alone — and the operating cost was $1,500 a year. 138 PRINCIPLES OF CONTROL STORES 5YMBOL APPROXIMATE S UNIT UNIT PRICE ■ DESCRIPTION ON HAND ON ORDER APPORT DEFICIT NO. AVAILABLE IF ANY DATE FILLED IN 6Y TIME REQUIRED TO OBTAIN MINIMUM ECONOM IC ORDERING QUANTITY DATE FILLED IN BY JFMAMJJASON ■> J F M. A M U g. A ,S ' '■ 'e stored in the same bin. If it is inieoess^-. t- -''-. :-^ items in one space, they should be separi : i inch if in bins, lOr three ™»rft>^ if on piatiorms. Tdsdb «ar eqtnproent in reg^ar use in storesrooms will be prawidedl witii specia^ -"[z-":-. marked so as to show the purpyose iof wukIi dbey L' Identifying the Materials Tbe idea] method of designating materia! would be not only to label each lot and package temporarily, but in such a way as ■would i"'-- '^-- —ify individual items after separation from the Vr '^' '^"^.V -.,-r-,<^'-''-,A-. because from time to time it -. -i gin and past history of a lot -J aitide can be identified by ; r ; . ,^.. . .^ny Q2.n be, and every package - ■■ -:d. Such labels should give the stand- ' tiie tnatoial, its symbol, and the number of Titained therein. Other obvious details not always to are that y^'-'-^<^--'^^^nn mafks on packages when -^rr;ld preferab^.. :!t, or be con^asous. There- he package is usually fbe best place for lal>eling, ' ' t number of labels will show, I ;.. .<.ages bdng misplaced. The Bin Tag A useful means of identification and a supplementary con- trol record is a tag atta<:hed to each lot Usually known as STOWING MATERIAL ITS a^ "Ian rag," it is used for ail materials stowed in stsefcs as AveH a® in bins. Tbe bin tag serves the otdctitioHai purpose ot in- ventorying- the material in tfte lot T ~ '.t when the material :s tirst received, ar - - ^^ on which it was received, the le*; tiie umt of issne asad thit y TCtSeS J^'-^CL -JT ''• ;escs*p^on cecnveo ■'** -'O*'*^ ^*'- ■AT :Ecirw-«? 1 jufcMTiTv ^reer. - ^ - ^.' •ATF ■"^L- TT.^ _ - -.r.e?' ^■~ .:i.--^-' quaittLtT r««tvesL It i&- s«asrt with tfac: inatemL ta tfaer scora^ spact aj*i k^K: with tteit ittaterrdi a.t ait ttroesx A cottveaKstt wtty te ppivtittt it trT:?m !x' ^r tbfi: ■" S: stoweil is to havti a nmtai Ik .^^ i. . ^ ^ .' rhsi insK,.^ . aft: bin or lucictid i« squh* ace % 8 OL < Z 5 UJ > X Z 1- -1 i < bB u 3 Q. «0 y v- Z D U 1 «) 7 F J 11 - III X a rt z X s. !-■ 2 < 3 ^ b A p ? 10 a < UJ a 2 u Q i E < PHYSICAL INVENTORY W0RK-IN-PR0CE55 period end 1 e a < _| 1 il , < a 1 < 1 3 \ *8 1 i i 2 L 5 d 2 u C PL, ^ P^ 200 PRINCIPLES OF CONTROL the ledger accounts. Differences are journalized to Profit and Loss. This completes the description of taking inventories — a not unpleasant job when carefully planned and co-ordinated by a supervising authority who realizes its importance and the importance of planning before acting^. CHAPTER XVI ORGANIZATION OF THE MATERIALS CONTROL DEPARTMENT Summary of Responsibility- While the work incident to the control of materials has been discussed in detail, so far little has been said about the internal organization of the department responsible for its performance. The functions to be performed may be reviewed before taking up the discussion of the organization which performs them. The function of control may be summarized in the five steps of : 1. Determining the probable materials requirements. 2. Securing and storing an adequate supply. 3. Issuing and delivering stores as wanted. 4. Recording all stores transactions on suitable records. 5. Furnishing the data for cost and financial accounting relat- ing to stores. This enumeration summarizes in skeleton form the entire function of materials control, in which is centralized the scattered efforts which the several departments of the organi- zation may have been making to control materials. Relation of Storeskeeping to Other Functions As developed in previous chapters, the storeskeeping func- tion occupies a position of service in the organization of the business as a whole, equal to the personnel or the inspection functions. Like them, it should be responsible to the head of the manufacturing organization, as the production departments' 201 202 PRINCIPLES OF CONTROL results depend to a large extent upon the furnishing, when and as wanted, of the materials required in production. Relations with a Production Control Department As discussed in Chapter II, the stores records are a part of the production organization's tools. The materials control department should become a part of the production control department in any concern having a real production control department. Such concerns at present are few in number, but they are growing, since complete production control is of vital importance to production success. This will be appreciated more fully after the study of Part III, and the reader will see what work is added to materials control to form a complete production control department. Co-operation between the Storeskeeping Groups The two distinct phases to the task of storeskeeping — the clerical and the physical — demand different qualifications of the employees. The clerks handling the stores records check the storage clerks, recording what they have done and should do. At the same time the second group, although its work is largely physical, has its records necessary for its own infor- mation in performing its work and which at the same time serve as a check on the purely clerical group. Co-operation between the two groups can be obtained through friendly rivalry and mutual assistance in the difficul- ties which arise in the ordinary routine work — and difficulties occur frequently enough. It is best, especially in a high-speed concern, to have the two groups under the same head, so long as he is trustworthy and reliable and capable of keeping the two kinds of work distinct and separate and at a high state of efficiency while securing the necessary co-operation. In a large concern each kind of work will require a suffi- cient number of employees and space to make an easily MATERIALS CONTROL DEPARTMENT 203 administered force, and the securing of a specialist to head each of the two kinds of work will not be a useless expendi- ture of money. Even in a small concern, it is almost necessary for efficient administration to have a "general storeskeeper" responsible for the storage group to the materials control supervisor, while the materials control supervisor continues as the active head of the clerical group. Communicating between the Two Groups The two stores divisions in some organizations are located next door to each other for easy communication. The clerical control group will require a very small amount of space as compared with the storage group, and in a compact organiza- tion it is a convenience for it to occupy a corner of the main storesroom. Where, however, the plant is extensive, it is more important for the clerical division to be closer to the planning, cost, and other factory office departments than to the storage division, as reference to the records is frequently made by the other departments with need for a speedy answer. Wherever the two stores divisions may be located, some method of speedy communication between the two is required for a quick passing of papers when emergency matters require attention. Any method of communication may be employed which is convenient and certain. Some organizations use overhead basket carriers, others a scheduled messenger service, or again a pneumatic tube system may be installed. Mechanical methods afford a much more frequent and satisfactory service than can be maintained by messenger. In a large organiza- tion using the tube method, a tube is sent as soon as papers collect to fill one and messages pass continually to and fro. Organizing the Materials Control Department The internal organization of the materials control depart- ment should be laid out along functional lines, the principles of 204 PRINCIPLES OF CONTROL the division of work corresponding to the duties to be per- formed and the possibihty of placing each duty in charge of a responsible head. Such separation of duties along functional lines creates what are called "sections.'' While in this discussion the control work is assumed to be sectionalized internally by operations into a larger number of sections than would be necessary in a small concern, the basis and the need for such an organization in some plants should be visualized and understood even though the volume of work in most plants is insufficient to justify establishing all of the various sections. The relationships or duties shown on the chart in Form 38 exist in every stores organization even if it requires but one person to conduct the entire work. As the departments increase in size and importance, they can be divided into the sections required for proper control purposes. Functional Organization It is not out of place briefly to consider the chief advantages of organization along functional lines. First, it leads to the development of specialists and the centralization of each kind of work under one responsible head. Secondly, the individual is assigned to the particular job to which he is best fitted. If he has the ability and inclination to advance, he has ample opportunity to learn the work of all the sections. The head of each section, like the head of the entire department, is selected with a view to his ability to control the conduct of the entire work of his section. He plans all the special or un- usual work to be done and sees that it is properly carried out. The routine work, once established and put in operation, takes care of itself so long as conditions remain the same. While the sectional organization permits the head of each section to exercise a certain amount of authority over its routine, with the necessary assumption of responsibility for its success, any question or matter involving departmental policy MATERIALS CONTROL DEPARTMENT 205 a. K I- < a UJ Q 1/1 Q DC OZ 00 a^ <0> UJq a" K u Q. 5 S 5i F §5° D y < O $ O g S 55 3 m ii .f < ^ 3 > " O O 3 13 L o -J a pc Q Q - a Q I- t uj y 1 a z z 2 o ? a < o o < < I o o I iu 2 o ' Q ° ij ;qz z Pi 206 PRINCIPLES OF CONTROL is referred to the department head. Thus the heads of the sections are the right-hand men of the department head. Function of the Planning Section of the Stores Records Division The most important section of the control department is the planning section. This section first receives all stores requisitions, stores returns, and authorizations to stock from whatever source they arise. Upon receipt these are checked for completeness and for the correctness of the items called for. For instance, a stores requisition should be correct as to the account symbol to which the material is to be charged, the quantity and unit desired, the material's symbol and defini- tion, the delivery time and the delivery point, and the signature of the party approving the requisition. While checking these items the clerk can at the same time sort them by the class of material required. In this way each stock of requisitions is ready for the clerk working on the stores records for that class of material. If any item is incorrect and cannot safely be corrected by the checker without changing the spirit of the order, he must return it to the originator for correction. The planning section also carefully checks the authoriza- tions to stock (Form 9, page 55) or stores requisitions for unclassified material before releasing them in order to deter- mine whether standard material cannot be substituted for the non-standard material ordered or to determine if any material in the by-product stores would answer the purpose. Here the head of the planning section will doubtless have to consult the department head who has ordered the material. If the request to stock is approved, the planning section sets the ordering point and ordering quantity, classifies and symbolizes the material in the general scheme of standardiza- tion, establishes a unit of issue, secures a specification, and determines whether the material is to be purchased or manu- MATERIALS CONTROL DEPARTMENT 207 factured. The planning section also determines the particular storesroom to which the material is to be delivered upon receipt, if it is necessary to store it elsewhere than in the general stores- room. All this information is entered on the authorizations, after which they are distributed to the recording section for preparing a stores record sheet and ordering the necessary quantity. Changes in standards, symbols, and specifications should be made only on the approval of the planning section. The control of inventory should be centered in this section through the periodic reviews of the ordering points and quantities. Estimates or specific orders showing requirements of materials during coming periods are received by the head of the planning section and translated into terms of quantities of finished products, component parts, and raw materials and supplies ready for posting to the requirement columns of the stores records. When purchase or production order requisitions have been written from the data on the records and then checked, they should be forwarded to the planning section for its final approval of the requisition of a new stock of that material and of the schedule for delivery. When signed the requisi- tions are forwarded to the proper department — purchasing or production. Rejection reports, covering questions regarding acceptance of materials received on orders and referred to the materials control department by the inspection department should also be handled by the planning section, which investigates whether or not the questionable material is acceptable for the purpose for which it was procured. This section arranges for taking all inventories, both book and physical. In order to control the department's work, it is also responsible for any changes in departmental routine and procedure in handling the various papers. In short, when this section completes its work, the 208 PRINCIPLES OF CONTROL work of the department is closely outlined and would be re- duced to routine if new matters did not constantly recur for decision. To this section falls the task of removing obstacles in the way of the smooth running of the whole department. Personnel of the Planning Section This planning work requires two types of employees. The routine half is covered by such rules and regulations as to reduce it to a simple clerical job requiring little originality or initiative. The head of the section, however, should be a person who is always "on his toes," resourceful, and possessed of initiative and reliability. To him must be made known much information about the policies of the management and future plans of a more or less confidential nature. He must be able to recognize the point of view of his employers as well as that of the men under him in various questions referred to him for decision. Knowledge of the technical features of materials is desirable because standardization and specifications are handled by his section. He should be in sympathy with this philosophy of storeskeeping, since on him depends its success or failure. The Function of the Recording Section The recording section of the materials control department is entrusted with the work of maintaining the stores records, both for classified and unclassified materials. This includes the responsibility for keeping the supply above the "ordering point" and of watching for the "danger point." This section also posts all entries to the stores ledger records from requisi- tions, stores returns, material received reports, and copies of orders. From these papers the work of recording requirements, reservations, deliveries, and receipts is performed, those hand- ling the work being on the lookout always to see that when the "ordering point" is reached an order requisition for the re- plenishment of stock is written. I MATERIALS CONTROL DEPARTMENT 209 When an authorization to stock is received from the plan- ning section, a record sheet is written at once, using data on the authorization for filling in the heading on the sheet. The proper order requisition is then written and the sheet filed by the material symbol among the other record sheets. Stores requisitions and returns are priced from the stores records at the time of delivery or receipt. If the value of the transaction is to be recorded, the requisition or return is ex- tended at once and the figures are entered thereon. The recording section clerk also checks the ledger sheets each time a physical inventory of any material is made or a bin tag is received. The work on order requisitions consists merely in checking the clerical entries and in requesting the storage division to take a physical inventory of the stock to make certain the material is needed before forwarding the requisitions to the planning section for final approval. A copy of the order which results from the order requisition is received and checked with the duplicate requisition to prevent the possibility of any error occurring in writing the order. The head of the recording section should be an individual who is of a careful type of mind and who is painstaking enough to spend the time needed to run down any apparent error in his records. He should take pleasure in neatness and in keeping his records up to date and in the best condition. His work requires little initiative, but much painstaking attention to details. Function of the Scheduling Section. The scheduling section of the materials department is to follow up the delivery of orders whenever requested by a member of the recording section or other authority, and to see that the schedules planned for are maintained. This position requires a clerk with some initiative to visit the manufacturing, 14 210 PRINCIPLES OP CONTROL purchasing, and other departments which have anything to do with the procurement of the ordered materials. Only in organizations of exceptional size is the work of scheduling and following up orders of sufficient magnitude to keep employed more than one or two clerks. Function of Accounting Section The accounting section reckons the values of and tabulates the stores requisitions and returns handled by the recording section. Its purpose in so doing is (as explained in Chapter X) to distribute the charges and credits to the stores accounts and to summarize the stores requisitions and returns and the material received reports for posting to the control accounts. The control totals are reported to the cost department with the original papers and the summary distribution sheet. At the end of each month the journal voucher is written and forwarded to the cost department, covering the charges and credits to stores during the period. When physical inventories are taken and the inventory sheets have been priced, the accounting section extends the individual entries and totals them as a check against the accuracy of the balance of the control accounts. This kind of detailed clerical work affords little variety from day to day, and has few interesting features to relieve its monotony. The head of the section should know something of the theory of accounting and of the specialized field of cost accounting. Organizing the Small Materials Control Department In all save very large organizations, the scheduling section would be combined with the planning section, and the account- ing with the recording. These combinations retain the necessary checks, but still concentrate similar work without loss in efficiency so long as the volume of details is not large enough to require high specialization. MATERIALS CONTROL DEPARTMENT 211 Organizing the Storage Division The storage division of an extensive plant may be divided into three sections, corresponding with the three spaces set aside for particular work, as discussed in Chapter XIII, "Arranging and Equipping the Storesroom," and as shown in Form 39. As in the clerical division, the chief section of the storage division is also a planning section whose task is to arrange the work of the other sections. It receives all incoming stores from the receiving and manufacturing departments after they have been passed by the inspectors. It directs the materials to the proper storesroom, or to the recipient in the case of unclassified materials for immediate delivery. The material is receipted for by the planning section signing the materials received reports, which are then forwarded to the stores records. After reservation, all requisitions are received by the plan- ning section from the recording section, and the move tag (Form 32, page 181) for that requisition is written at once. If the material is wanted immediately the requisition is sent to the proper storesroom. Requisitions for material not on hand and not calling for immediate delivery are filed in a tickler file until time for the delivery to be made. The determination of standard methods for storing ma- terials and the general layout of the storesrooms are also handled by the planning section. All special problems of storage are decided by the head of the planning section and for this reason he should be a specialist in the methods and applica- tions of the principles of storage. Moreover, it is his duty to investigate complaints about the service rendered by the stores departments, such as the non-delivery of material when wanted. The Stowage Section of the Storage Division The stowage section is the custodian of stores. Clerks in this section receive the materials which the planning section has signed for, stow them according to standard methods in the 212 PRINCIPLES OP CONTROL _J o a t- 1- z z O U u Z ^& < St ^ tt R uj ^Q < s L z o > O P i 2 C< t o 2 Q: £ 2 ^ a t 2&5 , e Er ^ zg| >" ~, p ^ § <'^8 10 n -^ -J y S I 1" 2 a a -J < ") o o < 2 s < g3 o I ?^ "^ '-' MATERIALS CONTROL DEPARTMENT 213 proper storage spaces, and safeguard them until requisitioned. Then they make the entries on the bin tag, remove the material from the storage space, attach the move tag to it, and forward it to the delivery section and the requisition to the stores records. If there are a number of storesrooms, each should be under the control of the head of the stowage section so far as the physical work and arrangement are concerned. No work requires more careful attention to detail, and the employees of the section must be willing and capable of exerting the care required. The Delivery Section The delivery section packs, routes, and delivers the stores which the stowage section collects on requisitions. As before noted, these may require packing and it is often possible to consolidate several items for the same department into one package. When the packages are done up and routed, they are loaded on the trucks for the deliveryman to take to their destination. The main part of the move tag is signed by the recipient and is brought back by the deliveryman as the receipt for the safe delivery of the material. These receipts are turned over to the planning section for temporary filing, until such time as no question is expected to arise concerning the delivery of the material. In the small concern the functions of planning and delivery are usually combined. It will be seen that most of the storage work is physical and calls for little clerical ability. PART III PROCUREMENT BY MANUFACTURE CHAPTER XVII ORGANIZATION OF PRODUCTION CONTROL DEPARTMENT Function of the Department Up to this point the discussion has covered the work of materials control so far as concerns the determining of the values of the inventories carried in stores and the movement of materials, parts, and finished goods into and out of the storesrooms. The relationship between the system of materials control and the work of the manufacturing departments has been indicated only in broad outline, without detailed considera- tion of the method of fitting the materials control system into the whole scheme of production control. To describe in detail the standard methods of production control and consider their adaptation to varying conditions of plant and manufacture would involve the discussion of principles and methods of management that are not properly comprised within the title of this book. Both in a small plant making a few simple products or producing one type of article, as a foundry, a glass works, a twine mill, etc., and in a large organization manufacturing a multiplicity of products, the management should bring all cleri- cal functions and activities assisting the manufacturing depart- ments under one supervising head. A "production control department" should be formed of the materials control, order or planning, and other related departments, for the purpose of gathering the reins of manufacturing management in one supervising hand. The materials control department then becomes, so to speak, one of the right-hand men of the produc- tion control department, as illustrated in the chart shown in Form 40. 217 2l8 PROCUREMENT BY MANUFACTURE PRODUCTION CONTROL DEPARTMENfT PDODUCTION CONTBOL MANAGER MATERIALS CONTROL DIVISION OBDt.'? CONTROL DIVISION DI5PATCHINQ DIVISION TOOL CONTROL DIVISION MATePIAL CONTROL 5UPlRVI50R ORDER CONTOOL SUPERVISOR DISPATCHING ■ SUPERVISOR TOOL CONTROL SUPERVISOR Form 40. Organization Chart of Production Control Department The work of the unified production department may be divided into three broad divisions, the functions of which are : 1. To standardize the articles to be produced, the operations to be performed, the materials and tools to be used, the jigs, fixtures, and gauges required for carrying out the operations. 2. The laying out or planning of the work to be done and the formulation of the responsibilities of the departments to which its performance is allotted. 3. The balancing and grouping of men, materials, and machines so that the work called for by production, plant, or ex- pense orders may be accomplished within a prearranged schedule. Order Handling Procedure Before describing the organization of the production control department, it is advisable to give further consideration to the orders by means of which work is controlled and the factory activities are set in motion. It is an axiom of production control that no shop should begin any work except by the authority of an order of some kind, and that all time spent and materials used must be charged PRODUCTION CONTROL DEPARTMENT 219 to the proper order. The forms and records employed to collect these charges will be discussed in following chapters. For present purposes it is only necessary to describe the general methods of planning the factory activities. The nature of the three types of factory orders — production, plant, and ex- pense — has been described in an earlier chapter. Production orders are based on the estimated sales budget, and schedules are originated from the stores records and scheduled as far ahead as the nature of the business permits for the delivery of specified quantities of finished product to the finished stockroom — assuming that the production is for stock, as should be the case in every factory manufacturing a standard product. The planning of the production orders begins as soon as the schedules of production requirements have been drawn up. Determining the possibility of meeting the schedule is the first step. If the parts or finished products called for are standard articles previously manufactured, all the data will be on file relating to materials, tools, jigs, and dies, if any, required for the work, as well as standard practice records describing the nature of the operations required by the order and the time necessary to complete them. If the products called for are of a new type, the above data must be carefully drawn up and made a permanent record, using as a basis such past experience on work of a similar kind as will permit the requirements of the order to be specified and planned for. The method of planning the preliminary work before a production order is set in motion is reserved for later discussion. Plant increase or plant betterment orders, though few in number, require detailed planning in the same way as produc- tion orders. They differ from production orders only in two ways. As previously explained, they are charged to a suitable asset account instead of to finished product, and they are initiated by a request received from a department for their performance, or the policy of the management calling for 220 PROCUREMENT BY MANUFACTURE certain betterments to be carried out or certain additions to the plant, fixtures, patterns, etc., to be made. As a rule plant orders are fitted into the production scheme as circumstances permit, and they are often issued as a means of taking up the slack during dull periods of business. Expense orders, as previously stated, are issued for plant repairs or for activities chargeable to some expense account. Such work is set in motion by the production control depart- ment when the necessity arises, whether or not a request may have been received for its performance. Such orders call for little or no planning and are the simplest kind to handle. Usually the work to be done is of a minor character and often a sufficient description of the job cannot be secured to permit a detailed plan. The control consists in scheduling a worker to do the job by a certain time. The Production Control Department This central department is to become the planning and scheduling function for the manufacturing departments. It is a production control department in that it is responsible for telling "what to work on" as w^Il as "the rate at which produc- tion operations are to be carried out." More specifically, this function is to co-ordinate the workings of all operating depart- ments so that operations of manufacture may be accomplished most economically and on schedule. To do this it must have control of the stores records, as was stated in the previous discussions, and accordingly will take over all the work outlined as the function of the department handling the stores records. The production control personnel will consist of: 1. The production control manager 2. Materials control supervisor 3. Order control supervisor 4. Dispatching supervisor 5. Tool control supervisor. I PRODUCTION CONTROL DEPARTMENT 221 together with as many clerks subordinate to the respective supervisors as will be necessary for carrying out the work. This organization is charted on Form 40. The Production Control Manager The production control manager is an expert production engineer with the technical ability to supervise the methods of manufacture and the executive ability to direct the perform- ance of the personnel of the production department. As an engineer he should be versed in the principles and practice of shop control ; as an executive it is his function to co-ordinate the production departments' efforts with the actual requirements of the business as determined by such schedules of sales and pro- duction preferences as are outlined to him by the management. In his engineering capacity he should draw up data and statis- tics for filing and future use of the total capacity of all pro- ductive units; in his executive capacity he anticipates and reports available productive capacity, and plans for its efficient utilization. Thus his duties comprise not only the planning for the work to be done but the supervision of its performance and the efficiency of its execution. Materials Control Supervisor The work of this division has been thoroughly discussed in the preceding chapters. With the formation of the produc- tion control department, all materials control is incorporated herein and becomes the basis of the work of other divisions of the department. Nothing further need be discussed regarding its work. Order Control Supervisor The order control supervisor is the scheduler of the pro- duction department. He draws up the time-table by which materials are delivered to machines, and a steady stream of 222 PROCUREMENT BY MANUFACTURE work is kept in process up to the capacity of men and machines. Following the receipt of the requests for production (most of which come from the materials control supervisor), he makes up the production orders and schedules them in their proper sequence upon the "control board" (to be explained in next chapter) prior to the dispatching of the work to the production departments. He is responsible for seeing that the time a given order will be in process is indicated by making out time cards which when placed upon the control board serve as signals and time-table to the progress and record clerk and to the foremen. By means of his control board and its subsidiary progress record, he is at all times able to furnish information to any party regarding the progress of an order and the schedule it is expected to maintain. By his scheduling in proper sequence and on the proper dates, he controls the activi- ties of the manufacturing departments. The record of the progress of shop operations performed on parts and assemblies on various orders is connected with the maintenance of time standards as materials flow through the factory. By means of these comparative records of sched- uled standard time and "actual times" of performance, the order control supervisor maintains a continuous check on shop performance and collects the data required for the revision of standard production rates and for the more accurate planning of future orders. The Dispatching Supervisor The function of dispatchers is the dispatching of the cur- rent jobs to the departments responsible for their completion and the clerical work of the records which can be most con- veniently handled in operating departments. They should have a complete knowledge of all "jobs being worked on" and their "starting times" and "quitting times," as well as "next jobs ahead" by preference, and whether the proper instructions, PRODUCTION CONTROL DEPARTMENT 223 materials, tools, and so on, necessary for the successful doing of work, are or will be available at the start of "next jobs." Also, in co-operation with the foremen, they assist in the development and connection of standardized methods and practice, so that all question as to "where," "how," and "in what time" jobs are to be done are more fully known and are reduced to permanent record in writing so classified and filed as to be readily available when wanted. The work of the dispatchers is explained in more detail in Chapter XIX. Tool Control Supervisor The tool control supervisor occupies a position regarding small tools similar to the materials control supervisor's position regarding materials. He is responsible for the storing of all small tools, jigs, fixtures, dies, templates, patterns, and draw- ings, which responsibility includes the supervision of the tool cribs and other storage places. He must plan and schedule the use of these tools so that they will always be in working con- dition and ready for use. This involves the forwarding of all tools needing repairs to the proper department, requesting the order control supervisor to schedule that work. If tools cannot be available when wanted for production, the order clerk should be informed of the fact in order properly to schedule his jobs. When new tools are needed, the tool supervisor orders them. Another of his functions is to work with the equipment engineer and the manufacturing executives in the development of new and better tools and machine practice. CHAPTER XVIII GRAPHIC PRODUCTION CONTROL * Necessity for Graphic Method The aim of factory management, baldly stated, is to produce the largest quantity of product with the minimum expenditure of time and effort and with the minimum investment of plant, machines, and inventories. In consequence, the most important of managerial functions is to regulate the flow of work in process through the shops in accordance with this aim. The effort of men applied to materials through tools and machines must be so co-ordinated that smooth operation is insured in every detail between the receipt of the raw material and its dispatch as finished goods. To insure this smoothness of operation it is not sufficient to have a system of records; the system must function properly and the management must be acquainted, from hour to hour, if necessary, with the manner in which the factory machine as a whole is functioning. This in- formation should be visualized in some way. When we ask the time of day and somebody replies 12:35, we mentally visualize the hands of the clock in a certain position; but a glance at a clock is a much quicker method of getting the knowledge. Similarly a planning board which visualizes the progress of factory activities as a clock visualizes the progress of time is a much quicker method of reporting the progress of work to the management. For this reason, in modern factory ^ The procedure described in this and the following chapter has been developed by the C. E. Knoeppel organization and is explained in detail in Mr. Knoeppel's work, "Graphic Production Control." The principles stated are applicable to all plants, but the details described are those of an "equipment type" of production control system, such as could be used in the more usual machine and assembly plant manufacturing a standard product. Necessarily the procedure must be modified in its details to fit the special conditions in each plant. 224 Form 41. Control Board GRAPHIC PRODUCTION CONTROL 225 Operation the graphic method has become the standard method of control. Function or Purpose The function or purpose of a definite procedure for handling production orders, from their receipt to their final completion in the shop, is primarily to produce more parts per unit of time — thereby reducing costs — and to meet sales re- quirements. The key to this is the establishment of standard hourly- production rates representing the quantity of production that should be produced on each operation in a given time. Inas- much as wage, burden, and production rates are directly related to time, this is a means whereby not only rates of production but also the costs of production may be controlled. By use of control boards, dispatch boards, and the related auxiliary elements of definite shop control, work may be scheduled to the places best able to execute it, as well as being scheduled relative to the dependence of successive operations on each other. By suitable regular and "up-to-the-minute" reports of machine irregularities and idleness, absent operators, and other contingencies affecting operations, conditions which hold up production, can be quickly remedied and even antici- pated. Available productive capacities may be anticipated and reported as they arise. Thus, this visualization of current operating conditions gives a basis for keeping the investment in productive capacities continually producing maximum profits. The following tabulation presents the various advantages : 1. A complete production schedule fitted to sales schedules as to quantities and as to dates for completion. 2. A complete control of the inventories of raw materials, finished parts, materials in process, and finished product. 3. A scheduling of all shop production units as far ahead as the work ahead will last. 226 PROCUREMENT BY MANUFACTURE 4. A balancing of amount of work ahead of various produc- tion units so as to maintain proper co-ordination and re- lationship. 5. A complete knowledge of all jobs ahead of various units. 6. A knowledge that all necessary material is on hand before an operation is started. 7. A knowledge that all necessary tools are on hand before an operation is started. 8. The recording of the progress of an order through the shops in order that all parts may be ready for assemblies, both minor and major, and may be finished at times wanted. 9. Recording of the standard time for each operation and the actual time of performance, so that a continuous revision of standard hourly production rates is brought about. 10. A recording of the factors of production through charts, tables, and graphs so that analysis of variations in factors of production may be observed and faults may be remedied. 11. A continuous reporting to the management of the progress of orders. 12. A collection of data to enable the proper costing of products and basis of estimate. 13. Statistics and tables of comparison, showing production re- sults for the month and year to date, for use of manage- ment. 14. An analysis of the causes of results and failures, and the corrective measures to be applied if necessary. Means or Machinery of Performance The production order handling procedure is closely related to several means or mechanisms. They are as follows : I. Control boards (Form 41), which really are maps of all productive units of a shop. They are visible files of time cards prior to going into operation in a shop. They allow these cards to be scheduled ahead of the production units upon which the work is to be performed, in accordance with the duration of the operations and the sequence of performance. They are the means of showing how close the shop is operating to the scheduled standards. Form 42. Dispatch Board GRAPHIC PRODUCTION CONTROL 227 4- Dispatch boards (Form 42), for display of the "jobs work- ing on" and "next jobs to do" for every production unit in a shop. Standard machine practice card (Form 43), to be filed on the control board opposite the appropriate machine. It shows the type, capacity, rating, and power of the machine and its specialties. Standard parts list records (Form 44), giving complete bills of material for each finished product; that is, informa- tion as to quantity of each part required, class of material, assembly sequence, piece and assembly symbols, symbols of blue-print records and production analysis records, and so on, for each part or material required. DESCRIPTIVE NAME LOCATION a SYMBOL RANGE TOOL CHARTS SETTING CHARTS POWER BELT PWR. PULLEY R.P.M. C-S PULLEY R.P.M. OPERATIONS DONE SPECIALTIES QTAIMnARn PRflPTirr ^"'^ '^ ^"^ CORRECT STANDARD PRACTICE FOR ABOVE PRODUCTION JIHilUHnU rnHl/MV/E UNIT. ARRANGED THIS WAY FOR QUICK REFERENCE Form 43. Standard Machine Practice Card (face and reverse) . (Size 7% x 3^.) 228 PROCUREMENT BY MANUFACTURE OH §3 Si s J i« 32 3 £a «) 3? 2« J < tS- 2ff ^ u 8 I >; 1 Q i ^1 lUiO p •> 3 a o > a5 ^ i z a V U q: 12 I < z 1 0-. a i_ ^ 3 O I J5 a t -1 2 X 3 !l 2 < c s ^ Q a 1 Z o f p o u 1- < 1 « z lU D $ cr ^■^ O 1 O «o is o a in Q. o i o a < a o z < u < o Ui K y> z a 2 r o 1- z a °2 ijo DO _i U 3 lu j5 1— X 5 O o u •no 1 S &. 3 a a g o § 2 0. o o h 5 a. a < 8 2 < a Q a z « it! z to 2 c 4 g > 1 I 6 2 a z o ?5 -llJ z < a s s 2 1 ' n Id 1- lA H Z s * u. O < O ~~~ ""^ — . o n U Q. bl U ~a> O 3 4 o o (M O a *■ OD W X in z — — tt Z r* 4 (M > ►- k 0. o Ifl w « H (M lA o 0. O 0! Ik ae Z a. o (9 N N 4 ►- On K — 3 3 4 a u 0. 4 tt z oo 4 o L O U(M ® ___ Ul — a.— 3C0 K O S ^• K O -> 4 < > o 5- 11. o < Z z E 1 -1 — 0(0 bl s 4 O S VI u s o o L Ll- C >- a Ou) bl > »- ^ ^ z 4 1 tt u»^ O 3 K 4 (/) — I/I o a. O un bl Q z o ^ §2 (A o *• 4 > o:_ J H ^ 0.- 4 L O ^» u S o 3 O . o < b. " O 0. O O 0> E a. o o o 4 CO e 4 Ol 3 z t* O ° (0 O K O K 0. O < z Z < > o ■ > U) z o Z 8 o o o t . • <» TO >J A. a (M bl Q 1 - O c K 4 1- tt Z 4 O 1 __ 1 ..1 GRAPHIC PRODUCTION CONTROL 231 . ORDER NO. PART OB OROUP BLUE-PRINT STARTING PLACE THIS DATE QUAN. ON ORDER QUAN. THIS LOT NUMBER LOTS LOT NUMBER STARTED MFR. CONTRACT TO BE COMPLETEO' ■ FINISHED MFR. INSTRUCTIONS SHOP IDEMTJFICATION AND INSTRUCTION RECORD KEEP THIS CARD WITH WORK. UNTIL COMPLETED AND RECEIVED BY PROPER DEPARTMENT. THEN RETURN TO CONTROL DEPARTMEMT, z t3 d 2 Z. h- D a 1 u I z 2'S 00 lU < a! 1 ^ i r z a K) T m IS r- (j> Form 48. Identification, Instruction, and Routing Card (green; face and reverse) . (Size 6 x 4.) 232 PROCUREMENT BY MANUFACTURE 13. Inspection reports (Form 52), reporting all defective pro- duction of parts. 14. Idle equipment (Form 53), reporting periods of idleness, with statement of cause, probable duration, and action to be taken to remedy. 15. Control progress strips (Form 54), for registering on the control board accomplishment in the shop on production orders. f ORDER NO FOO PART OD OPOUD TIME WANTED DEL OEPT IVER won no PLACE OUAN.ONOROEO DATE MATERIAL REQUISITION (STOCK) II 1 II 1 1 ORDER NUMSEQ 1 1 1 COEDIT »CCT. 1 II DEBJT «CCT aJol.Lt II OPR. FlU. FROM OOV^TITY FILLEO irMOOL DESCRIPTION INEtOHT a <0 PO(CE UM,T AMOUNT 1 CWKTE FIU.EO nu.Ei> BV RECEIVED BY ITEMS BELOW ABE TO BE FILLED IN ONLY BY OFFICE. SIONEO BY 1 COeCMT ACCT. DtOlT ACCI. RECAOOtO BV TOTAL AMOUNT ENTEBEO BV PRICED BV EXTENDED BV Form 49. Material Requisition Card (pink). (Size 7^x3}^.) f ORDER NUMBER oeF>T ^ OUANTirv ON ORDER MATERIAL CREDIT IJJJJJJ III CREOITACCT .eLLIt ' 'Joi' ' J J SENT TO RETO^ED SYMBOL OE5CQIPT(OM «E.OHT 0. PR.CE UN,T AMOUNT 1 RATE RECO RECP. ITEMS BELOW ARC TO BE FiLLEO JN ONLY 6y OFFICE SIONEO BV 1 CPEDlTACCT. DE6IT ACCT RECAPPED 6V TOTAL AMOUWT 6NTEREP Oy PRICED BY Form 50. Material Credit Card (white card, red ink). (Size 7^x3)^). GRAPHIC PRODUCTION CONTROL 233 16. Signal tags for control board (Form 55) and progress records, indicating conditions to be watched and giving reasons for idleness where hold-up is actually occurring. Also closely related to the regular mechanism of handling a production order are detailed shipping orders (Form 13, page y^)) ^"d purchased material received reports (Form 82, pages 386, 387). ORDER NO. PAPT on GPOUP TO QUANT. ON ORDER WORKER ORDER NUMBER I m n m n rr DEC>r. |WKG PLACE. OPERATION DFCTV. GOOD LAB.HRS. LABOR BURDEN £ OPR 5TO.HRLV PROD. I I I I I I M I j I I I I I I I N DEPARTMENT moRKINO PLACE ht/Mftcn OPCRATTOHS DESCRIPTIVE TtME CAPD(OIPECT) TOTAL GOOD LAST BALANCE BAL. TO DO NEXT 3.H. CHADOE TIME ANALYSIS STOPPING TIMES STARTING TIMES ELAPSED TIMES MACHINE l-IOURS THIS 0^4. NO. THIS OPERATION NAME LABOR AMT B.RATE BURDEN CARD BV CHECKED Form 51. Direct Labor Time Card (white). (Size 75^x3^.) Blue-print copies of all the above standard production analysis records should be furnished to every foreman and shop executive who is interested in them. Each tool crib should have a complete set. /.. ii«/0OKEQS THIS DATE . OUANTITV TO FOntVADD THIS MATERIAL IS SCRAP AND CANNOT BE UTILIZED FOR ITS ORIGINAL PURPOSE. A CARD IS ATTACHED SO AS TO PREVENT THIS MATERIAL BECOMINO MIXED tVITH GOOD WORK. STD. PROD. RATE 1 . DISPOSAL DIRECTIONS 5EN0 TO CONTPCM. MD5, DEDUCTION 1 . OUA^.T(TY ReA50M5 SCRAPPED INSPECTOR'S SUGGESTIONS FOB REMEDY PROCESS &. FINAL INSPECTION REPORT Form 52. Process and Final Inspection Report (pink slip, duplicate on card stock). (Size7Hx3J€-) 234 PROCUREMENT BY MANUFACTURE /OEPT. NO. MACHtNC NO. IDLE EQUIPMENT REPORT OATC 1 NO POWER 5 MISCELLANEOUS 3 HEOULAH 1 1 DEOT 1 1 1 3 1 1 Mouns 1 1 1 t 1 CARD BV TIME ANALYSIS | SiNO PUR. z STOP NO MATEDIAI. 2 AWAITIN0.3ET-UP 6 HOU»S lOLe 5TANO BY eOUtPT 3 START CNTERED ELAPiED NO OOOEHS 3 AWAITING TOOLS 7 REMARKS on UMOCDRCMia AWAITING IN2T1HXTION5 Form 53. Idle Equipment Report (red card). (Size 7%x3}4-) Description of Control Boards Prior to tracing the movements of a production order, it would be well to give a description of control boards and dis- patch boards and how they function. Control boards are 7 ft, 9^ in. long, 8 ft. 2^ in. high, with a base 10 in. high, 33 in. wide, supporting the upright part. Extending across the center are 50 time-scale strip pockets, made of sheet steel, i}i in. deep and 60 in. long. These strip pockets overlap, being spaced i^^ in. apart, making a total height of pockets 6 ft. 3 in. Above and below these strip pockets are steel clips i ^ in. wide and extending the width of the distribution pockets. These are holders for the date and day cards. On each side of and parallel to the strip pockets are 50 steel clips i>4 in. wide and 5^ in. long, for holding description and number cards of the production units to be controlled : i.e., two cards to each unit. On the left-hand edge of the board are 100 filing pockets, i.e., two pockets opposite each strip pocket. The upper is for holding the standard practice card of the machine (Form 43). The lower is for holding time cards (Form 51 ) after the opera- GRAPHIC PRODUCTION CONTROL 235 tion is performed and prior to extension and computation. On the right-hand side of the board are 50 distribution pockets, i.e., one to each strip pocket for holding time cards not yet scheduled. There are metal frames sliding on the upper and lower date scales, holding two colored plumb lines for framing the cur- rent date. These lines are an appropriate number of hours apart, i.e., one working day, the significance being that cards within the cords are regular and safe. Those cards behind the cords are behind schedule and dangerous, and call this fact to the attention of the control super- visor so that remedial measures may be taken. Both sides of the board are utilized, one being the duplicate of the other. Thus 100 machines may be controlled by means of one board. This, in brief, is the mechanical con- struction of the control board. Control Board Operation Control boards are really maps of the production units of the shop. Each pro- duction unit stands by itself, and relations between operations on all production units are established on a time basis because the graphical scale of time is the same for all production units. The information available on the control board is as follows : Ah 236 PROCUREMENT BY MANUFACTURE 5- Hours of work scheduled ahead for each production unit. Hours of work ahead for which material is available. Times at which deliveries of material must be made from preceding operations or production units. Times at which deliveries of material must be made to next operation or production unit. Production unit or place at which previous operations are done, or source of routing. 6. Production unit or place at which next operation is to be done, or next place of routing. 7. The shop order number, unit, quantities upon order, schedule, descriptive name, and number of parts, operation or opera- tions done at one setting, and the standard production per unit of time on any order. 8. The ability of the shop to keep up with production rates and schedules. 9. Causes of hold-ups and idleness and remedies for the trouble. Handling and scheduling a large number of unclassified tickets with facility presupposes that means of definite distri- bution are available. This is ad- mirably taken care of on the control board by means of the distribution pockets. Graphical scales for scheduling work against production units are arranged to post 300 hours of work against each machine, bench, floor, or other working place. The date scale is arranged above the strip pockets so that each day takes up a space equal to the number of shop working hours for a day. As time progresses, the vertical plumb lines separated by space equal to one day are moved across the face of the board. Com- parison of the graphical progress of the work at each production unit with the position of these cords indicates whether the work is ahead or behind schedule. IDLE NO POWER WATCH- OUT MORE ORDERS (red card) (green card) Form 55. Signal Tags for Con- trol Board. (Size % x 23^.) GRAPHIC PRODUCTION CONTROL !237 The means of conveying instruction to go ahead on the work scheduled on control boards to the place where operations are actually carried on is furnished by workers' time cards (Form 51). As work is performed, accomplishments and elapsed time consumed in work are registered on this ticket. It then returns to the control board, and is used as a basis of registering progress, recording the success of the shop in meeting standard production rates. Description of Dispatch Boards Dispatch boards are of two general types : ( i ) unit dispatch boards covering but one production unit, and (2) group dis- patch boards, as illustrated in Form 42 (page 226), covering a number of production units, which are closely related. Usually production units are formed of a worker and a machine. Sometimes, as in maintenance work, when a machine is not used, the production unit becomes the worker only. At other times, a production unit is composed of a crew or gang of workers and one machine as in a rolling mill. In a machine shop, where the number of machines is greater than workers, a production unit is a machine to which a worker will be assigned. Usually unit dispatch boards are placed upon or close to the production unit served. They are used where there are only a few machines in a department, or where the machines are scattered in location. Group dispatch boards are constructed like a number of unit boards mounted upon a single base, and are used where the machines are located close together for con- venient service by the dispatcher, foreman, and inspector, as well as the workers. The dispatch board illustrated is fitted for 40 production units, 20 on each side. For each production unit there is an identification marker and two clips arranged vertically. The identification marker gives the symbol of the production unit and a short description. 238 PROCUREMENT BY MANUFACTURE The two clips are for holding the time cards brought by the dispatcher to the dispatch board from the control board. Dispatch Board Operation In the upper clips are filed the time cards for the jobs to be done, arranged in the order of their schedule : i.e., the first "job to do" is placed first, etc. The lower clip is for filing the time card of the "job doing," this card being transferred from the upper clip to the lower when the worker starts the job. Upon the table of the group dispatch board are two trays, one of which has two pockets and the other several. The first pocket of one tray is for placing the time cards for completed jobs which have not yet been process-inspected. When the time cards are process-inspected, they are ready for posting to con- trol board and are placed in the second pocket. The second tray is for holding surplus stocks of time cards and similar forms. At all times the dispatch boards show : 1. The jobs ahead for each production unit during the next working day, ready to be worked upon and the sequence in which they are to be performed. 2. The production units working and the workers who are at- tending them. 3. The production units idle, as each unit without a "job work- ing on" time card in its lower clip must have an idle machine report thereon. 4. The jobs being worked upon, the quantity to be completed on the operations, and when they should be completed. 5. The routing, showing the previous, present, and next opera- tion of the jobs being worked upon. 6. The standard hourly production rate of the "operation doing" and the succeeding operation. The above procedure is called "dispatching" and will -be described in more detail in the next chapter. CHAPTER XIX OPERATION OF PRODUCTION CONTROL MECHANISM Origin of the Production Order The routine of handling orders is illustrated in detail by a graphical chart (Form 56) . The manufacturing orders origi- nating from the stores records comprise the bulk of the orders to be controlled. As the procedure for their origin is the start of the production order handling procedure, it is necessary to trace them. Customers' orders of purchase are authority for considera- tion of the starting of manufacturing orders. But any plant manufacturing "for stock" and not "to sales order" must allow sufficient time for such manufacture; hence, customers' orders are considered en masse to determine sales requirements over a coming period. On the first of each month the selling depart- ment compiles a schedule for the production department, show- ing definite expected requirements of each kind of finished product during the coming month. The production department uses this schedule as a basis of its production schedule. Any very unusual requirement, such as a special bedplate for a lathe, would be taken from the purchase orders themselves as the occasions arise. A tentative schedule is also made up six months in advance for general guidance in determining production policies and programs during that period. Upon receipt, the quantities from the monthly schedule are posted to the requirements column of the finished product 239 240 PROCUREMENT BY MANUFACTURE stores record. The requirement, with a consideration for the quantity to be shipped before the first of the coming month and the quantity of the margin of safety, is compared with the quantity on order and the amount on hand to determine the amount available, as described in Chapter XI on "Control of Inventory." If the requirement is greater than the amount available, a progress and follow-up record card (Form 47, page 230) is made up for the minimum economic quantity to be produced, or for a greater quantity if needed or more expedient to be ordered at this particular time. Standard Practice Records These record cards are matched with the several produc- tion analysis records (Forms 44-46, page 228) to obtain the data necessary to plan the order. These reference records are made up once to cover every part and product made, becom- ing then master records subject to correction and revision as conditions of manufacture change. Production analysis records must be kept accurate and up to date. This includes every copy in both office and shop. When matching the record card with these master files, if no records are found for that product, the production control manager, working with the engineering department, must make up temporary but complete records as a means of planning this production. From judgment based upon accomplishment on the order, permanent records will be made up and issued in the regular way. The temporary records will be based upon the following: 1. Work of similar nature which has been done before. 2. The control manager's knowledge of the practical produc- tion rates possible. 3. Conferences with the foremen, and in some cases conferences with the workmen, as to what can be done. PRODUCTION CONTROL MECHANISM 241 Standard Parts List Record If the product is an assembly, the standard parts Hsts record (Form 44, page 228) is the first record used. It shows a tabu- lation in order of assembly of all parts and materials used in any product, together with the following pertinent information about each part : 1. Name of the part. 2. Legend of source and the assembly sequence. 3. Other applications of the part. 4. Quantity used in each product. 5. Material used in the part. Standard Production Analysis Records The progress and follow-up record card (Form 47, page 230) is then matched with the two standard production analysis records. Standard production analysis form (45, page 228) shows the complete manufacturing data for one part or one assembly. The following data is necessary for each order : 1. Name of part. 2. Small tool requirements per 1,000 pieces. 3. Operation name and number in proper sequence. 4. Routings of production units on which each operation can be done best. 5. Standard ratings of time required to set-up the operation, and the standard hourly production rate known as the "SHP" for the operation. Standard production analysis form (46, page 228) shows: 1. Standard manufacturing lot or batch quantity, which is the quantity to be kept together as a routing unit. Each lot has an individual identification and routing card (Form 48, page 231). 2. Average number of days required to complete lots or batches from raw material. 3. A graphic chart of the "best flow" for successive opera- tions, showing the minimum possible time to make 1,000 pieces. This possible time is that which accomplishment 16 242 PROCUREMENT BY MANUFACTURE is to be measured by instead of allowing parts in process to drift. 4. The raw material or parts requirements for making 1,000 pieces. The quantity required for an order will be some multiple of this quantity. Thus full data on manufacturing details and requirements of subassemblies, parts, and raw materials are determined. These requirements are posted to the stores record, paired up with the available, and a progress and follow-up record card is written up if more are required. The process of determining the order quantities is continued until all materials and parts are ordered. Raw materials and any parts secured by purchase should be covered by a purchase order requisition instead of a progress card. The individual progress and follow-up record (Form 47, page 230) is written up in detail to show the following infor- mation : 1. Order date and order number. 2. Material symbol and name. 3. The quantity on order. 4. The scheduled date to begin and to complete the order. 5. If special manufacture for a shipping order, the name of the customer and the shipping order number. 6. The operations in sequence, but never more than five as this number is sufficient to key all work. 7. The working place of each "key" operation, the name of the operation, and the standard hourly production rate. Progress and follow-up records are filed by order number in one of three files : production orders not yet started, in process, or finished, depending on the condition of the order. Over the proper date at the top of the card a signal tab is placed for indicating when the order should be reviewed for any condition requiring attention and judgment in exercising control. Each production control form has a specific service to per- PRODUCTION CONTROL MECHANISM 243 form in operating and maintaining a control of production and of costs. These forms are the means of control of all shop activities. It must not be expected, however, that the printed matter itself controls. When we speak of "control," we mean that the control mechanism properly carried out according to definitely written instructions will furnish a guide-post and time-table for initiative on the part of all shop and office execu- tives, so that there will be no confusion and no overlapping of responsibilities and control. Cost Sheet When the progress and follow-up record is being written up, the cost sheet (Form 27, page 129) should be made out and forwarded to the cost department as notice or authorization to place the order in the work in process record file. Identification, Instruction, and Routing Cards Identification, instruction, and routing cards (Form 48, page 231) are next made out — one for each batch or lot quantity as shown by the production analysis record. The following information is placed on each card; 1. Order number and order and lot quantity. 2. Part number. 3. Starting working place. 4. Any special instructions regarding how operations are to be carried out or regarding the disposition of completed product. 5. Source of raw material and final destination of finished parts. 6. Routing and operations in proper sequence, with production unit numbers on which each operation is to be done. Workers' Time Cards Workers' time cards (Form 51, page 233) are made up, one card for each production unit, for each day, for each operation 244 PROCUREMENT BY MANUFACTURE — SO that they will be sufficient for recording the schedule, as well as reporting the progress and time taken on all the opera- tions necessary to carry out the work. Cards are made up in sufficient quantity so that there will be detailed daily reports on all work done on each order. Each card has a time scale for ten hours corresponding to the date and day scales. Information used in making up time cards comes from progress and follow-up records and standard production analysis records. The information placed on each time card is as follows : 1. Order number and order and lot or batch quantity. 2. Part number. 3. The working places where the operations are to be done on that operation, the preceding and the succeeding. 4. Standard hourly production rates for that operation and the next. 5. The description and number of the operation. 6. The last balance to do, which is placed only on the first card for each operation and is equivalent in that case to the quantity on the order. Time cards are made up to the extent of the number of hours required to do the work, in time increments equivalent to the number of days it takes to do the work or order. The order quantity divided by the rate determines the number of working hours required. The number of hours of work divided by the daily working period in hours indicates the number of workers' time cards needed to carry out each specific operation. A vertical penciled line is drawn across the graphic time scale on the time card at the end of the time period covered by each card. Standard Operation Symbol Code A great deal of time as well as space can be saved by adopting standard mnemonic symbols for writing out opera- tion descriptions. This saving in time is effected not only in the PRODUCTION CONTROL MECHANISM 245 actual writing out, but also in the case of interpretation when all persons having occasion to use records use the same language. Examples are: Broach, Brch; Center, Ctr. Various combina- tions can be made by use of (-) ; Burr-Bevel, Brr-Bvl. Also groups of successive but independent operations can be made up by use of (/) : Bore, Chamfer, Countersink, Br/Chfr/Cs. Additions and subtractions to list can be made for special cir- cumstances or for those required for specific departmental operation groups. Stores Requisitions Stores requisitions (Form 49, page 232) are made up to cover the exact quantity of raw material or parts needed to complete the order. One requisition is made out for a quantity convenient to be issued at one time — 500 pounds of rod stock for automatic screw jobs, two truck loads for assemblies, and so on. Stores requisitions are written up to show the following : 1. Order number and order and batch quantity. 2. Working place where material is to be used — this is the delivery point for the material. 3. The time the material is wanted. 4. The kind and unit of material wanted. 5. The exact quantity to be delivered. 6. The signature of the party ordering the material. Scheduling Jobs on Control Board The control board slides or pockets, located in the middle ^ sectioi: and into which time cards are inserted, are always kept filled with the graphical progress strips (Form 54, page 235). These control strips are for graphical registry of progress from such reports of production as come in from the shop on current workers' finished time cards. Workers' time cards, backed by identification, instruction, and routing cards and material requisitions, are next posted and 246 PROCUREMENT BY MANUFACTURE scheduled on the control board in the spaces taken up by the production units which are to carry out the work. At the top of the control board, by means of cardboard, daily date cards, each of which is made a length equivalent to the shop hours on that date, shows how the regular daily work- ing periods line up with jobs scheduled on the control board face. Time cards to be posted on control boards, of course, must be scheduled at those places and under those dates where there is available productive capacity. The cards are placed on the control board so that they overlap each other and the left-hand edge of each one lines up with the penciled line located on the graphical scale of the preceding card. In this way the total extent of the graphical scale on cards posted on the control board indicates the total number of hours of work ahead of specific working places. That is, the order is scheduled to finish on the date wanted. The preceding operation is then scheduled to have the material ready for the completing operation. In the case of orders for assembling, all parts must be ready on the date specified. The control board is of sufficient width to schedule 300 hours of work ahead of each production unit, or working place. Should work ahead of any specific working place be in excess of available space on the board, surplus time cards with other records which back them up are filed in proper sequence in the distribution pockets on the right-hand side or are re- scheduled to other machines. Registering Material Available for Production Since no production can start until the material is available, the next step is to determine this fact. The quantity available, as reckoned in terms of hours of work, is registered on the time cards with a green crayon. The minimum amount of material to be available ahead of any machine should be PRODUCTION CONTROL MECHANISM 247 Standardized at two or three days' supply. If none at all, or less than the standard amount is on hand, a green signal "Watch Out— More Material" (Form 55, page 236) is posted at that point as warning and notice of need for action. Forwarding Requisitions to Storage Division When jobs posted on control boards are about ready to start, that is, one, two, or three days ahead, and jobs scheduled before them have gone ahead as planned, the identification, instruction, and routing cards and the material requisitions are removed and forwarded to the storage division, so as to get things ready before the current time cards have been posted on dispatch boards out in the shops. The storage division secures the material from the stor- age place and delivers it to the layout place in the operating department. The identification, instruction, and routing cards are attached to the material while the stores requisition is for- warded to the control department for entry on the stores record. Dispatching Work to Shops Periodically, day by day, the jobs located on the control board as the next jobs to do and whose material is indicated as being available, are dispatched as the next jobs to do — that is, dispatch clerks remove from control board cards for a day's work and post them to dispatch boards located in operating departments. Thus the shop's performance is under control. The next job to do is filed in the upper clip on the dispatch board as the front card of those filed there. The practice of filing the "first job to be done" on top never leaves any question as to the sequence of working. As soon as the next day's cards are posted to the dispatch board, the operating department foreman should review the board for his information concerning the work ahead to be done the next day. When checking up material available on the floor, 248 PROCUREMENT BY MANUFACTURE he secures the necessary tools, set-up charts, and instruction sheets from the tool crib. Knowledge as to what is required is obtained from the tool crib's file of production analysis records showing these detail data. These are placed with the material at the machine or layout places. In addition to these jobs, he should also review work ahead on the control board from time to time. The foremen are responsible as well as dispatch clerks for making certain that all materials and tools are ready for the jobs scheduled. He should assure himself of this fact at all times. Starting and Quitting Jobs and Registering Accomplishments When jobs are about to start, the foreman or set-up man goes to the layout place and secures the material and tools used for carrying out the work. Material and tools for the "next job ahead" should be ready at the working place for the worker, before he actually finishes the preceding job. In this way all delays are avoided. When an operator starts his next job, he time-stamps or writes his "quitting time" and the quantity completed on the time card for the job finished and files it in the "not yet process inspected tray" on the dispatch board. Process inspectors or foremen, as the case may be, periodically make the rounds of dispatch stations and working places and inspect and certify registration regarding accomplishments noted on time cards, placing the cards in the second tray, so that the dispatcher may secure it on his next round or trip. The operator also registers his starting time on the time card covering the job which he is starting. He places this time card, "job now working upon," in the lower of the two dispatch board clips. Inspection Reports Whenever parts are rejected as defective, a regular inspec- tion report (Form 52, page 233) is made out, giving the quan- PRODUCTION CONTROL MECHANISM 249 titles good and defective. The defectives are analyzed as to possible salvaging and the reasons for defects. Inspection re- ports revert to the control department with the time cards, and are used for analysis of causes and for planning the salvaging work. The duplicate of the report is attached to the rejected material. Periodically, files of defective parts are used for compiling the summarized rejection report and for the issuance of orders for salvaging such quantities as are not defective beyond repair. The salvaging orders are to be planned, scheduled, and routed in the same way as regular production orders. Dispatchers delivering current time cards for work to do also have the function of collecting workers' finished time cards as soon as the finished work is inspected. Dispatchers, when making their periodic rounds of dispatch boards and working places, make these collections as well as check the registration of time, and available material and tools at machines. Dis- patchers can anticipate changes of conditions and then check the condition on their next round. Conditions requiring the at- tention of the control clerk are registered on the control board by "watch out" signals (Form 55, page 236). The dispatcher carries these reports to the control depart- ment and files them on left-hand sides of control board, opposite machines or working places which did the work. Computations Made by Dispatchers However, before the dispatcher files the time cards on the control board, he computes the following : 1. Elapsed time. 2. Total pieces produced, good and defective, and the balance good to do, which is noted on the next card for the job. 3. Hours of credit at the standard production rates for the operation just completed, as well as the hours of debit as represented in raw material for next operation. 250 PROCUREMENT BY MANUFACTURE Handling Irregular Conditions Dispatchers also collect stores requisitions, inspection re- ports, and idleness reports. Whenever a machine or a worker is idle, foremen are required to make out an idle equipment report (Form 53, page 234) to show: 1. The unit or worker idle. 2. Cause of idleness and probable duration. 3. Starting time of idleness. 4. Suggested remedy. This card is then filed on the dispatch board in place of the time card for the job just interrupted or completed. The time card is closed out as previously described. The dispatcher brings the report to the control board, registers the condition of idleness by means of the proper signal, and returns the report to the dispatch board from where he secured it. It remains there until the period of idleness is ended. This idle time signal on the control board face is tagged at the time that the idleness started, and is left in place until the quitting time registration on the idle time report is brought to the control board by the dispatcher and filed in the distribution pocket with the time cards. He then removes the signal. Any order whose regular schedule of performance is inter- rupted should be rescheduled as carefully and accurately as when first scheduled. It may be that the completion date may be set ahead or vice versa. Registering on Control Board Progress on Orders Order clerks periodically post accomplishments and duration of idle times, as registered on time cards and idle machine cards, to graphical progress scales on control board. From time cards: I. Hours of credit for good work completed at the standard rates of production are posted in black on progress regis- ter strips. PRODUCTION CONTROL MECHANISM 25 1 2. Hours of debit for good work completed, which exist as available material for the next operation, are posted in green on graphical scales of time cards. Green-colored registrations, that is, available material, are always posted on time cards since before any work can be done the material with which to work must be ready. 3. Defective material, that is, hours of work at standard rates of production spent on material which is defective, is indicated on the last time card of any order, by filling the graphical scale in the reverse direction with red crayon. This work must be repeated, providing it is possible to secure additional raw material for the operation. From idle machine and worker reports : I. Length of time the machine or worker was idle. This is registered in red crayon. Posting Accomplishments to Progress and Follow-Up Records After registrations of progress have been made on control board graphical scales, accomplishments in unit quantities, both good and defective, are registered on progress and follow-up records by progress clerk from the time cards. When posting, the progress clerk is always alert for marked discrepancies between the actual elapsed time and the standard hours of accomplishment. Such cards are called to the attention of the production manager for investigation and, if necessary, for the revision of the standard hourly production rate or the disciplining of the worker. Making Up the Pay-Rolls Time cards, after these registrations have been made, are kept until all the cards for the day have been posted. Dis- patchers on the morning of each day sort the time cards for the previous day by worker number and check them with clock cards. The total time for each worker must be accounted for each day, and must equal the elapsed time as shown by the clock 252 PROCUREMENT BY MANUFACTURE cards. This operation is necessary for all workers paid from time cards. Each day's cards are then forwarded to the pay- roll and cost departments for the compilation of their reports. The time cards for the workers paid from these cards are rated and extended, and any bonus is added to determine the labor cost of the production, after which the earnings for each worker are entered on the pay-roll record. Piece-work cards may be rated in advance of the work, at the same time as the order data is written upon the cards prior to filing on control boards. The cost department now requires the cards for making up the routine shop efficiency reports and for costing orders. Departmental Efficiency Reports The departmental efficiency reports are first made up. Time cards arranged by operating departments are the basis of this report. The elapsed time in hours and the hours of credit of each department's cards are added separately. Dividing the hours of credit by the elapsed time in hours gives the percentage of efficiency or ability to meet the standard hourly production rates. The total time divided by the number of cards gives the average time per job — a measure of the success in obtaining long runs. This can be better measured by the average number of jobs per worker, allowing for the continuation of any job from the day before. Departmental Idle Time Reports The idle machine and worker cards are totaled by depart- ments and by causes of idleness for making up the departmental idle time reports to determine the causes and extent of idleness. This is a particularly important matter to determine for key departments when the required standard time for completing orders approaches the available machine time. Idle time is productive of nothing but financial loss and STANDARD PRACTICE RECORDS PARTS LrST5.rw«-- SOURCES OF STORES RECEIPTS & DISBURSEMENTS OTHfR 1>tAN FROM- CLWRCNT PPOOUCTION OROCRj ^ r / FORM 56 PRODUCTION CONTROL MECHANISM 253 should be carefully watched. Its cause may be too much machine tool equipment or not enough ; but whatever the cause, investment means fixed charges and dividends must be earned on that investment. This completes the description of graphic production con- trol. Such control is simply definite paths and procedures previously planned out and to be followed at certain scheduled rates. Such foresight is in contradistinction to usual methods where efforts are spasmodic and scattered and results are obtained in haphazard fashion. PART IV PROCUREMENT BY PURCHASE CHAPTER XX THE FUNCTION OF THE PURCHASING DEPARTMENT Preliminary View of the Purchasing Department The purchasing department is a comparatively new factor in business organization. Its general adoption reflects changing conditions in purchasing and an increasing realization of the important part played by good buying in the success of any business enterprise. There are many large concerns, however, which still persist in the old method of departmental buying. As the practice of exact cost-keeping becomes more uni- versal and the dislocation due to the war becomes a memory, prices will become more and more stationary. The prices quoted by most responsible firms are no longer tentative prices pur- posely placed high to provide a margin to which a discount can be applied or that can be cut down by the purchaser without destroying the profit. Exact knowledge on both sides is in- creasingly taking the place of persuasive methods. The modern purchaser as well as the salesman knows his goods and fre- quently the purchaser is the better informed of the two. More is demanded of the buyer today than such mastery of the essential psychology as makes it possible for him to drive a satisfactory bargain. He must have the requisite technical in- formation required for the solution of his purchasing problems, and the accumulation and maintenance of this store of knowl- edge is possible only in a functionalized department of highly paid specialists, devoting all their time to the work of pur- chasing, 17 257 258 PROCUREMENT BY PURCHASE Defects of Departmental Buying Whatever are the apparent advantages of the older method of entrusting this important function to the individual depart- ment head, they are vastly overbalanced by its disadvantages. The department head knows what he wants, but here his qualifications for the task of purchasing usually end. Almost anyone can place an order and secure a delivery if the market conditions are normal. It is in determining the proper price and selling terms, and in securing delivery when the market is the least bit tight, that the untrained buyer is at a distinct dis- advantage. The individual department head is seldom equipped with the necessary knowledge of market conditions. Records of previous quotations and purchases alone do not enable him to determine whether the price quoted is reasonable today or whether it will not be excessive tomorrow. He does not ap- preciate the accumulative value of advantageous discounts or the importance of those elements that insure prompt delivery. He does not realize the value to the business as a whole of ad- vantageous relations with vendors. He fails to see the relation of his purchases to the activities of the entire organization. He has necessarily a narrow view, limited to the interests of his own department. Most serious of all, the department head generally fails to realize that buying, like selling, is an art as well as a science. When a mere order giver is brought in contact with a salesman who is something more than an order taker, the former suffers from a handicap of which he may never be conscious but which will inevitably be reflected in the expenditures of his department. The salesman is a specialist. He knows the conditions of his market, he knows his products and his competitor's products, their strong and weak points. He holds his position by virtue of his ability to make the purchaser want what he has to sell. The more important the purchase to be made, the more capable is the salesman sent to effect a sale and the less the chance the THE PURCHASING DEPARTMENT 259 occasional buyer has of holding his own in concluding a reason- able bargain. The mere element of time taken from the productive and executive work with which the department heads are especially concerned bulks large in the aggregate. When promiscuous purchasing prevails, much of the time spent in the details of purchase transactions is profitable only to the salesman. For the active head of an important department, it represents a misappropriation of time which alone goes far to justify the creation of a distinct purchasing department. Specialized Purchasing It is coming to be generally realized that the specialization of the purchasing function is a vital necessity to every enterprise. To install a purchasing department, a group of professional buyers is organized, who understand and appreciate both the problems and difficulties of the purchasing function and the needs of the departments which they serve. To this department will come both the specific requests of the control department for material and supplies which must be purchased outside, and the technical questions regarding what the market offers in a variety of materials. For the content of the purchase requisi- tions or requests for information, the purchasing department is not primarily responsible. It is its function to get: (i) what is wanted, (2) when it is wanted, and (3) at the lowest pos- sible price — consistent with the quality demanded for the par- ticular purpose for which the material is sought. The Purchasing Agent The selection of a purchasing agent, the man who is to direct the department, is of the highest importance. It is no longer sufficient to pick any bright man and "give him a chance." A man who has been specially trained must be selected. Today the purchasing agent has become a constructive force C60 PROCUREMENT BY PURCHASE in his organization. He is a student of the market, with a definite and timely knowledge of its trend in every leading com- modity. He is a keen judge of commercial conditions. He knows the details of transportation and the constant changes in rates that play such an important part in ultimate costs. He knows the standing and character of the firms from which he buys; which are reliable and which must be closely watched. He knows all there is to know of the financial and production conditions of his own firm, and he correlates his purchases if they are extensive with the credit fluctuations of the seasons. Such a man commands an excellent salary, but if he be truly competent he will save it many times over in the course of the year. Increased Profits through Savings The properly organized and properly operated purchasing department is not an added expense. It is, on the contrary, one more of the fruits of scientific management directed to the reduction of costs. This country during the last decade has passed through a period of unexampled expansion. Intensive efforts along the lines of salesmanship have brought commercial expansion in many lines to the limits of the available market. Sales and profits have been limited only by production capacity. Today, however, many concerns are approaching a point where the future increase of profits must come from economical ad- ministration and from savings in every department rather than from increased sales. Shorter hours, increased cost of materials, an ever-mounting cost of doing business, to say nothing of the inevitable salary increases in every department — all emphasize the necessity of reducing costs. The task of re- trenchment may begin in the work of the purchasing depart- ment, rightly organized and correctly operated. There was a time when the cost of labor was the largest factor in the pro- duction cost of most products. The cost of the raw material THE PURCHASING DEPARTMENT 261 was relatively small and all effort was concentrated in reducing the labor cost. This led to the adoption of automatic machinery and of other labor-saving devices. But today direct materials form a larger proportion of the production cost than before and must be closely reckoned with, while "burden," the third element of costs, is largely made up of expense materials, as illustrated in Form 3 (page 29). To reduce material costs is just as important a matter as to reduce the labor costs — and it is here that the purchasing department becomes one of the chief factors concerned in the increase of profits through savings. The success or failure of a commercial organization is often the direct result of good or bad purchasing. Good Buying Good buying does not mean necessarily purchasing at the lowest market price. The purchasing agent who sets out to make a record for himself, to "show results" regardless of any other consideration, reveals himself as a man of narrow vision, deficient in qualities that make for success in this work. Good buying means rather that the purchase has been made with accurate foresight, at the lowest possible price consistent with the requirements of the requisition. It implies an intel- ligent understanding and an exact knowledge of the materials, manufacturing processes, market prices, sources of supply, trade customs and usages involved, and the interrelations of purchasing with the other activities of the organization. Poor buying, on the other hand, is promiscuous and haphazard. It may be intuitive, based on rumor and guess, a gamble in which the buyer sometimes wins, but sooner or later inevitably must lose. Or it may be exceedingly conservative, following a settled course and making little use of readily available infor- mation. In either case the buying is unscientific and likely to result in loss. Before we can approach a standard of purchasing that can 262 PROCUREMENT BY PURCHASE be called good buying, a general knowledge of values must be supplemented by the more specific knowledge of conditions. This knowledge the efficient purchasing department will have collected and so tabulated as to have constantly available. When any transaction is compiled it should be possible to check up and to justify any detail with accuracy and precision. Records It is by virtue of its record that the efficiency of a purchasing department may be largely judged. To a large extent they will be the detailed tabulation of its experience. They will include the complete listing of past orders, showing at a glance the sources of supply, the prices, the selling terms, and everything else that will make possible the duplication of the order and indi- cate whether or not an exact re-order is advisable. Besides this specific information, the purchasing department should be the repository for the general information that will determine such vital questions as when large orders for material can be placed to the best advantage. The answers to such ques- tions depend upon the condition and trend of the market. One cannot afford to guess or gamble but must call into considera- tion every bit of available data on every factor that has a bear- ing on market conditions. To this end the purchasing depart- ment may concern itself with the collection and compilation of detailed statistics of at least a few basal commodities. This work under proper supervision soon becomes a matter of routine but its value is cumulative. As a part of its record-keeping function, the purchasing de- partment will also be called upon to collect, classify, and index catalogues and informative advertising matter with which it comes in contact. The value of technical catalogues cannot be overestimated. They are not only a source of specific facts, but they are veritable mines of useful general information which should not be overlooked. While they are primarily adver- THE PURCHASING DEPARTMENT 263 tising mediums, the spirit and policy of modern advertising makes them usually reliable; their statements can generally be taken without discount. Perhaps most important are the price lists of every concern with which the department does business or by whom it is solicited. Books and periodicals pertaining to materials should also find their ultimate place in the pur- chasing department, unless the organization maintains a special business library. Contact with the Outside In its contact with the commercial world the purchasing de- partment, to an extent equaled only by the sales department, has in its keeping the good name of the firm. On its treatment of the many concerns with which it deals, the reputation of the firm for fair dealing, courtesy, precision, promptness, and reliability largely depends. In its handling of disputes which are bound to arise, the need of a consistent and sound policy and method of procedure will be evident. The business relations of the purchasing department with outsiders are usually covered by agreements in which the vendor is bound by a legal tie. The legal rights of a purchaser are usually adequately secured by the written terms of the contract, but the numerous little details of service, slight in themselves but large in the aggregate, are obtainable only to the extent that the vendor wants to render them or thinks it expedient so to do. It rests with the purchasing agent to establish and maintain with his vendors a relationship that will make them want to do business with him and eager to meet his every wish. Personal Relations with Vendors The purchasing agent who elects to keep salesmen at arm's length and to disregard the value of personal relations may sacrifice more than he gains. The human element in business cannot be disregarded. The man who knows how to capitalize 264 PROCUREMENT BY PURCHASE it will always have a great advantage over the man who ignores it. Business is business, but friendship is not without a legiti- mate place in business relations. Every man can best judge his own contact along these lines. He must not allow friendship to influence his business judgment and he must know to what length he can safely allow personal relations with selling agents to go, without affecting his decision. It would seem that a broad-minded purchasing agent could safely give friendship as readily as it is offered and have no difficulty in determining its limits. Kindness, courtesy, fair dealing, frankness, even when they are used to inform the salesman that he has lost the order, all inspire friendship without sacrifice of anything on the part of the buyer. Their small expenditure not infrequently brings large returns. Thousands of dollars have been saved to buyers by the advance information given them by friendly selling agents relative to market conditions and future price changes. The wise purchasing agent will seek the good-will of selling representatives as much as his own good-will is sought. He will speak well of them so far as possible in his correspondence with their employers and he will make it his business to see that they receive credit for all sales effected through their efforts. He will show them and their employers that his business can be secured in fair competition on the basis of price, quality, and service and that they will receive payment without undue delay. In short, he will appreciate the practical advantage of causing himself to be considered as a valuable customer. The desire of the salesman to meet the wishes of a house whose good-will and whose trade he values and of a purchasing agent whom he likes and therefore wishes to help is an advantage in buying, which should be fostered. On the other hand, no buyer can afford to rest under the suspicion that he can be influenced by the direct or indirect ac- ceptance of gratuities. Such a suspicion will offset all the ad- vantages that he may have built up along the lines suggested. THE PURCHASING DEPARTMENT 265 Then neither he nor his house can be regarded as desirable customers. The good-will which is of such value and advantage will give place to mutual suspicion and distrust from which all parties concerned will suffer. Justifying Its Existence If the purchasing department is to justify itself, it must do all the good that the individual buyers have done in the past and at the same time overcome the evils of the old method. It must clearly demonstrate its superiority by performing more efficiently its essential functions. There are at least seven factors which every purchasing agent must have constantly in mind in determining his pur- chase if he is to make the selection that will at once satisfy his consuming department, the treasurer, and the best interests of the business : 1. He must be sure that the article selected is perfectly adapted to the use to which it is to be put. 2. He must satisfy himself that its quality meets the specifica- tions of the requisition. 3. He must be sure the quality is uniform throughout the ship- ment. 4. He must purchase it at the best price consistent with the requirements and on the most advantageous terms. 5. He must be confident that he can effect the delivery on the date on which the purchase will be required. 6. He must determine the proper quantity to meet the current needs, with due regard to the seasonal demand and supply, 7. He must obtain a guarantee of stated prices for a fixed period and, if possible, protection against a decline of prices during the period carried by the agreement. The Seven Stages of Purchasing When the purchasing department functions, its work de- velops through seven distinct stages which occur in the follow- ing order : 266 PROCUREMENT BY PURCHASE 1. Determination of the articles. 2. Learning what the market offers. 3. Selecting the vendor. 4. Determining the price. 5. Making the contract. 6. Effecting the delivery. 7. Completing the contract. I. Determining the Article In this stage the attitude of the purchasing department is somewhat passive. While it may suggest changes, the order requisition which gives rise to the purchase order comes as the expression of a specific request of another department head or by reason of the depletion of stock. This requisition may call for a supply of any standard material to be obtained by pur- chase. It is the work of the purchasing department to secure it. The purchasing agent may properly question both the quality and quantity requisitioned, but he cannot make any change without the approval of the requisitioner. When the purchasing agent has asked and received the confirmation of the depart- ment head or of a higher authority regarding any questionable details of the requisition, it devolves upon him to secure what is wanted; responsibility for the details of the requisition is no longer his. In appealing from the detail of the requisition the pur- chasing agent must be sure that he will not subject the requisi- tioner to delay or inconvenience. Time is often a most important element in the case of purchases. The failure of materials to arrive promptly may destroy the entire working schedule of the factory. The routine should proceed, if neces- sary, to the point of placing an order with the privilege of cancellation later. It must be assumed that the materials called for under the conditions specified in the requisition are de- manded in good faith, that the material ordered is just what is needed, and that the delivery time named is the exact time at THE PURCHASING DEPARTMENT 267 which this material must be available if the schedule of opera- tions is to be followed. 2. Knowing the Market The purchasing department must at all times know what the market offers. This is a point, in connection with the problem of determining the proper article, in which the pur- chasing department can function very actively. It is the business of the purchasing department to inform itself regarding all new materials as rapidly as they appear in the market. In this, salesmen become of real educational help. The trade papers usually offer the first information of the ap- pearance of a new product. Such information should be col- lected by the purchasing department and at once referred, not to the user of the older standard, but to the authority who may direct the substitution of the new one. It is one of the faults of the older system of departmental purchases that the depart- ment head frequently is more willing to defend his present standards than to experiment with new ones. The delay, in- convenience, and expense involved in such changes, the im- mediate disadvantage to gain a problematical future advantage, the influence of natural conservatism, and the tendency to let well enough alone — all operate to discourage such experiments and ultimately to retard progress. It is the function of the purchasing department, which is affected by none of these considerations, to call attention to the new article, to arrange for its demonstration, to know the result of the trial and the reasons for its rejection if is not accepted, and to give the producer an opportunity of adapting it to the needs of the organization if such a course be practicable. 3. Selecting the Vendor In addition to knowing what the market offers, the pur- chasing agent must know the vendors. Among them he must ^J«l^ 268 PROCUREMENT BY PURCHASE be able to make such a choice for trading purposes as to avoid the losses in time, money, and efficiency that come from the selection of the unreliable vendor. The vendor who will not or cannot meet his contractual obligations should be known. The results of his failures are borne ultimately by his customers. The records of the purchasing department will contain the names of several reliable sources of every kind of material which may be demanded. Of every one of these sources the department will have complete information along several lines of inquiry. There will be a complete record of past transactions showing the nature and quality of the services rendered by each vendor. There will be a record of his financial standing, the capacity of his plant, his relations with his employees, his shipping points, and his transportation facilities. Every new vendor whose offers are seriously considered will be similarly investigated and recorded. These records will determine the selection of vendors who will be asked to submit bids. When the various bids are tabu- lated they may be again consulted. This study will enable the purchasing agent to go beyond the mere quotation. By a careful weighing of the quality of each product, by considering the quality of the service that each vendor has rendered in the past and may be expected to furnish in the future, and by taking into account the resources, the reliability, and the general character of each, the purchasing agent is in a position to make his selection with intelligence. 4. Determining the Price The chief function of the purchasing agent is not to beat down prices but to render service. His obligation to obtain his materials at the lowest possible cost cannot be disregarded, but the outcome of his effort in this directoin does not necessarily reflect the success or failure of his department as readily as do two other factors : selecting the right articles, and securing THE PURCHASING DEPARTMENT 269 prompt delivery. Purchase price is nevertheless of great im- portance. Every cent added to the cost price is a cent deducted from the net profits and is likely, sooner or later, to be reflected either in the quality of the product put out, or in its selling price. In determining what is the best price, the purchasing agent will have considered the selling terms, cash discounts, f.o.b. point, and other similar factors. The purchase cost of a single article, unless very large, is frequently lost sight of in the total cost of a project. Questions of general policy and the inter- relation of many factors all have their bearing in determining the selection of a commodity and tend to minimize the impor- tance of always giving the order to the lowest bidder. The purchasing agent should be recognized always as the sole authority in the matter of price. The tendency of salesmen to quote prices to department heads should be ruthlessly sup- pressed. While the purchasing agent is no longer selected solely because of his ability to "dicker," he may still find a fertile field for this kind of action in dealing with competitive prices. He will seldom place an order without comparing recent prices or obtaining bids from two or more reputable concerns, each of which is able to fill such orders as may be obtained. While such quotations should be standardized as far as possible by the specifications of the contract desired, they should neverthe- less be subject to the closest scrutiny, especially if they vary widely, in order to ascertain that the bidders are figuring on a similar basis of costs. A particularly low bid should always call for considerable scrutiny, not only to determine the basis on which it was made^ but to ascertain the standing of the firm and its ability to fulfil a contract. There is an increasing tendency on the part of manufactur- ers to present a single price, and that the lowest which it can afford to accept. Since costs are more accurately figured than formerly, the vendor knows what he can do and how far he can 270 PROCUREMENT BY PURCHASE go. He is less willing than formerly to do business at cost for the sake of prestige, or to risk a loss by bidding too low. The buyer, on the other hand, has his tabulated informa- tion as to sources of supply, his records and prices which he has carefully prepared and on which he will largely rely. The trader's instinct is being gradually subordinated to exact knowl- edge as the old-fashioned persuasive drummer, who talked in generalities, is giving place to the scientific salesman who knows his goods. Nevertheless there is a danger of becoming too mechanical and automatic. There are moments when intuition and insight are worth more than classified information and pre- conceived rules of procedure. The modern buyer cannot afford entirely to disregard his native shrewdness and common sense. 5. Making the Contract The detailed discussion of the rules and methods to be fol- lowed in making the contract may be postponed until a later chapter. It is sufficient to state here that the mutual contrac- tual obligations should be stated in a manner that is clear, exact, and comprehensive. Every oral contract should be confirmed in writing and the purchase order form with its accompanying conditions and rules of procedure, when acted upon by the vendor, will constitute a contract that will be sufficiently bind- ing. Changes in the original order that has been confirmed by the formal acceptance of the vendor, should be provided for by a similar form to be similarly accepted. With these qualifi- cations the original written order and its acceptance may be considered as a contract irrevocable except by mutual consent. Where the time element is of particular importance, the buyer should provide for the privilege of cancellation of his order in case of failure to deliver promptly, and sometimes it may even be necessary to include a penalty clause providing for the forfeiture of a part of the purchase price if the delivery is not on time. On the other hand, the buyer always has the THE PURCHASING DEPARTMENT 271 right to refuse to accept material at a premature date and such a refusal does not exempt the seller from making his delivery on the date agreed upon, 6. Effecting Delivery Having placed its order, the purchasing department must see that the materials are on hand when desired and are de- livered as contracted for. To this end it must maintain a watch both on the producer and on the transportation agencies, by means of an efficient follow-up system. Here its ability to command service, through the standing of the organization as a desirable customer and the personal good-will which the department has assiduously cultivated in its dealings with the vendors and their representatives, becomes a factor of impor- tance. By means of it, sometimes, the seemingly impossible may be accomplished. On the other hand, the natural desire of the vendor to accommodate his customer may be dissipated by a tactless pur- chasing department. The petty annoyance occasioned by a con- tinual and too vigorous following up of the vendor before he has had a reasonable time to effect his delivery should be avoided. Both the buyer and the seller are seeking all the profit possible. Each should understand the other's difficulties and recognize that their mutual advantage lies in friendly co-operation. 7. Completing the Contract In making his contract with the vendor, the purchaser has implied that he will give, in addition to the money considera- tion, a certain amount of service in return for the material and service rendered by the vendor. The vendor completes his part of the contract when he delivers the goods. The pur- chaser has yet to complete his part. Before the bill can be paid the goods must be checked, the invoice sent through a 272 PROCUREMENT BY PURCHASE certain routine, and finally certified and sent on for payment. In the prompt and faithful performance of this service the purchasing department expedites payment, upholds the credit standing of the organization, and wins the good-will of the vendor. Its ability to do this depends largely on a definite plan of procedure. The Purchasing Department and the Organization The purchasing department, like the stores department, is a functionalized service organization which is in direct relation with every department of the organization. In Form 2 (page 20) is shown its place in the organization. Its head, while responsible to the works manager as the director of production, is on a level in authority with each of the general functional managers. With these officials and with heads of depart- ments in both ofiice and factory, the purchasing agent must be in close co-operation, familiarizing himself with their needs and their problems. The efficient purchasing department must be eternally vigi- lant, it must avoid ruts and the rule-of-thumb, it must be conscious of every trade wind that blows and alive to every op- portunity that offers. It must function smoothly and promptly. To a greater extent than any other department it must "carry the message to Garcia." When it cannot find a way, it must make one. Its improvement over the old system of random buying, in its savings, in its range of interests, in its exact knowledge, and in its smooth operation, is so evident that its existence is abundantly justified. ; CHAPTER XXI THE ARTICLE The Selection of the Right Article Before any business can begin its work, and as long as it continues in operation, it must be provided with materials and supplies. The selection of the right article then becomes the first subject of our consideration, not only in point of time but in its degree of importance. The determining factor in the selection of the article must always be its precise suitability for the purpose for which it is purchased. If its grade is either inferior or superior to the needs of the case, the finished product will suffer. In the one case the quality will be impaired; in the other the cost will be too great. At times the success of the production program is absolutely dependent on obtaining precisely what has been ordered, and any failure of the purchasing department to obtain it or any attempt to substitute may result in confusion, delay, and perhaps the complete demoralization of the production program. Quality versus Price Quality — the exact grade, size, or weight required — must always be placed before price in selecting the article. Price is important, but the unfortunate results of a deviation from the standard requirements may soon offset any saving in cost. The substitution of an article of slightly different size may result in the necessity of the manufacturing department having to reshape the purchased article before using it. Or again, in machining a part from, say, a 2-inch piece of steel, the cut i8 273 274 PROCUREMENT BY PURCHASE may be just sufficient to allow simply for proper finishing. Although the saving in cost be considerable on a job lot 1/16 inch larger in diameter, the time consumed in more machining to secure the desired size and finish may offset the saving in cost or result in an actual loss. The habitual refusal of pro- ducing department heads to sacrifice quality and suitability for price considerations in those organizations which allow the department heads to purchase what is used in their own depart- ments is one reason why decentralized purchasing so often appears to be the better method. While the quality can never be safely sacrificed, price can be sacrificed often with an ultimate advantage. When the right article has been selected the result is perhaps that a frequent cause of delay in production is removed, the chance of produc- ing an unsatisfactory and possibly unmarketable article is re- duced, and the cost of production is cut. Thus, what originally may have seemed extravagance in the price paid for materials becomes an economy. The selection of the article best suited for the purpose is the first consideration, and the price that is paid for it must always be of secondary importance. Essential Knowledge If a purchasing agent is to make an intelligent selection of the required commodity, he needs to know : ( i ) the use to which the article is to be put, and (2) what the market offers. The extent of his knowledge is the measure of his qualification for his particular task. As a rule the head of a centralized purchasing department is better qualified in the commercial aspects of his work than in its technical require- ments, but if he is awake to the demands and the opportunities of his position he will neglect no chance to educate himself and to eliminate his shortcomings. Contact with the department heads, visits to consuming or THE ARTICLE 275 manufacturing departments and shops, the study of manu- facturing operations by following the processing of individual materials — all will better enable him to appreciate shop prob- lems and material requirements. His dealings with salesmen and his study of catalogues and technical books and journals will be prolific sources of market information which will sup- plement and confirm his personal observation and first-hand study and research. The Use of the Article If materials control is well organized along the lines that have been suggested, the standard material best suited to any given purpose will have been determined. (See Chapter XII.) In these determinations, the purchasing and often the engineer- ing department should be freely consulted and allowed to play a leading part. The resulting specifications which the purchas- ing agent receives will describe what is at least theoretically the best article. Even then, various contingencies may arise which make it desirable for the purchasing department to have an exact knowledge of the use to which the article is to be put. If the article has not been previously purchased, the specifications may be incomplete and it will be necessary for the purchasing agent to continue his study of the market until he finds what best suits the needs of his company. Material will often be suggested as a substitute for a previously determined standard. Then his knowledge of his requirements will enable him to determine at once whether the new product or new quality is worthy of consideration. Such knowledge will save time in dealing with salesmen who offer material of whose utility to the plant they are uncertain. It will enable him to show unsuccessful bidders the unsuita- bility of their offerings for the use of the business, and to convince them of the fairness of the award should such a post-mortem be considered expedient. 276 PROCUREMENT BY PURCHASE When materials control is not well organized, it becomes increasingly important for the purchasing agent, who must then often personally choose the article best suited to the par- ticular requirements, to be well posted as to the manufacturing processes of his own plant, and to be in close touch with the heads of his production departments. He cannot be omniscient, of course. He will realize that to a great extent he must fall back upon the technical departments of his organization for advice. He may, however, become increasingly self-reliant by familiarizing himself with every process and mastering every scrap of information that may be conceivably of future value to him. One chief object in functional organization is to avoid the too close drawing of departmental lines which limit too narrowly the executive responsibility. It is the duty of the purchasing agent to know whatever will assist him to deter- mine the article which best meets his need. To this end it is his further duty to consult those who can throw light on his problem. Questionable Requisitions It will often happen that the purchasing department re- ceives requisitions that are obviously in error in the quantity or quality of the material requested. Theoretically the pur- chasing agent is justified in filling the request as he received it. Perhaps his relations with the requisitioner are such that he does not care to question his requisition. Perhaps he is secretly not unwilling that an unamiable department head should suffer from his own carelessness. If the purchasing agent yields to such inclinations he proclaims his own limita- tions. He himself should be held responsible for a large share of the blame if he allows any questionable item to be filled without the confirmation of the requisitioner. He should go even further. If he still questions the accuracy or judgment of the department head after the requisition is confirmed, he I THE ARTICLE 277 should carry his appeal to a higher authority. Only then has he absolved himself from any further responsibility for the data furnished him. Technical Knowledge The buyer should know all of the variations of each kind of material. He should know their physical properties or chemical analysis. He should be familiar with the processes of their manufacture and with the factors on which their costs and deliveries depend, li he is to buy steel he should know the properties and the processes of manufacture of all kinds of steel and iron as well as of the particular grades of steel that he is to buy. He should know the costs of production, on what factors quantity production depends, the source of raw materials, and whatever might affect the supply in the immediate future. All of this information is a part of the expert buyer's stock-in-trade and gives him his right to his title. Strip the buyer of his technical knowledge, and he becomes merely the commercial agent whose function is to collect data, to close the best bargain he can in the light of those facts, to effect the delivery of his purchases, and to complete the contract by verifying the vendor's invoice. To the extent to which the purchasing agent can bring to his duties a store of technical knowledge and a scientific grasp of his problem, to that extent he adds to the importance and dignity of his calling and to the intelligence with which he performs his task. This technical information is put into practice whenever the purchasing department goes into the market or prepares its purchase order. Unless the buyer specifically defines the materials sought in terms which cannot be mistaken and which cannot be taken to describe any other article, the vendor will have the opportunity and the right to ship anything which falls within the limits of the general trade term by which 278 PROCUREMENT BY PURCHASE goods are ordered. It is necessary, therefore, in ordering, to prepare a specification which will clearly define the limits with- in which the goods must fall to be acceptable. Specifications The following abstract from the annual report of the Director of the Bureau of Standards aptly summarizes the situation : A standard of quality for a given material may sometimes take the form of a sample of that material with which other materials of the same kind can be compared, but this is gener- ally a makeshift of the poorest sort. It is only resorted to in the absence of definite and reliable specifications in terms of measurable properties ; that is to say, a standard of quality of a material usually takes the form of a specification or defini- tion of its properties, involving, of course, the measurement of these properties by means of the usual standard of measure- ment. The questions then arise : Why is it good or poor ? What are the physical or chemical properties or the particular com- bination of elements which make it of good or poor quality? How are its properties to be measured or its constituents de- termined ? These are questions for the laboratory to answer and involve physical and chemical investigations of the most diffi- cult sort. A standard of quality for a given material necessarily takes into account the purpose for which the material is to be used. To set the standard too low results in losses, poor efficiency, and even loss of life; to make it too high may result in pre- cisely the same thing; that is to say, the material must be suitable for the purposes intended, and the United States Bureau of Standards' investigations in connection with the properties of materials are to enable the user of these materials, first, to select intelligently the material best suited for the purpose; second, to specify it in terms which the producer cannot mis- take; and, third, to make the necessary tests to ascertain whether or not the material supplied is in accordance with the specifications. THE ARTICLE 279 The subject of correct specifications has been called the most important element in purchasing. Some material is recognized by the use of ordinary commercial terms, and detailed specifications and drawings are hardly necessary. However, the more frequent the purchases of a given com- modity, the more essential specifications become. With important purchase contracts covering important materials and special machinery or equipment, however, the procedure must be completed. Such material must be fully described in de- tailed technical terms carefully prepared in advance by the technical experts of the plant, and upon its receipt it must be subjected to the special tests of the technical inspectors before it is accepted. In view of all that is involved, such specifica- tions cannot be too precise in their wording or too detailed in their scope. On the other hand, they need not, of course, be made up individually for every article needed. If a con- cern uses fifty different sizes of one grade of steel, a single technical specification will cover all of the fifty require- ments. When a purchasing order is sent to a vendor the specifica- tion should either be written in the body of the order, or a clause should appear in the contract to the effect that the ma- terial is to be "in accordance with specification number which is attached and which forms a part of this contract." Typical formal specifications as used by the United States Government are shown on pages 1 51-153. Classes of Specifications The writing of formal specifications has already been covered in Chapter XII, "Standards and Specifications." It remains now to inquire as to the characteristics of contracts with which specifications are used. Specifications may be divided into two classes, the second of which may be subdivided : 28o PROCUREMENT BY PURCHASE I. Those used with purchase order contracts for standard materials and current requirements of materials regularly purchased. These specifications are not usually required to be formal, but may be trade descriptions, etc., em- bodied in the body of the contract. 2a. Includes those used with future requirement contracts or contracts of broad scope for these same or for similar materials but which require formal specifications based on technical or engineering data to save confusion at some distant time of delivery. 2b. Includes those used with purchase order contracts for mechanical equipment, unusual materials, plant betterments, and extensions, special equipment or apparatus requir- ing specifications of a very exact engineering or tech- nical character. It will be understood that there can be no final division of the commodities purchased into these two main classes, in- asmuch as general business conditions, conditions within the industry itself, or conditions in one or more outside industries, may or may not make it desirable to make a large number of future requirement contracts. For example, a purchasing agent who had made a future requirement contract for pig iron, or as a matter of fact almost any other commodity, during 1915 or 1916 and 191 7. was in an extremely fortunate position providing he could get delivery, because of the fact that during those years com- modity prices advanced steadily. On the other hand, a future requirement contract for pig iron for delivery during 1918 was of little advantage during a part of the year, owing to government price fixing and allotment. No matter how legal his contract or how pressing his requirements, he could not get the iron without authority from the proper bureau in Wash- ington. While during 1914 to 191 8, the far-sighted purchasing agent made as many future requirement contracts as he could, consistent with his need, at the time of the signing of the Armistice the wise ones would make no future requirement THE ARTICLE 28l contracts, except to take advantage of quantity prices, and then they endeavored to insert a clause in the contract protect- ing themselves against a decline in prices. Today most of our contracts fall within class i, that is, they are in the form of purchase orders for material required for current use. Materials from Vendor's Stock All material under i does not require the use of detailed specifications. Bolts, for example, can be easily defined by terms which are known to the trade. By using trade terms it is possible to buy any kind of bolts desired. They have been manufactured in exactly the same way for years by a number of different companies. The qualities and the sizes have become standardized. It is the purchasing agent's busi- ness to know qualities and sizes ; the knowledge belongs to the elementary part of his equipment. Oil, on the other hand, is usually sold under brand terms and without standards of quality. Having determined the use to which it is to be put and the properties it must have to fill adequately the need and knowing the properties of various kinds of oils, the buyer can specify the brand of oil which chemically and mechanically will meet the requirement. The value of coal depends entirely upon its heating possibilities. Hence it may be purchased on a b.t.u. basis with a specified limit as to the percentage of waste. In the purchase of materials of this nature, whose quality does not appear on the surface, the danger from competition enters. Each dealer may safely assert that his product is superior to any other and better meets the requirement — statements which are not to be taken as fact until proved by the consumer's analytical tests. Here one must proceed by specifying coal according to the limits of volatile matter, ash, sulphur, etc., and testing each carload by the analysis of samples. The use of ambiguous terms such as pea, nut, or stove in specifying size of coal is 282 PROCUREMENT BY PURCHASE taking a chance, for what is pea to one vendor has been another size to a second vendor. Materials Record Since every executive finds himself more and more de- pendent on his purchasing agent for technical knowledge along certain lines, the keeping of a detailed record of each important class of material is a matter of great importance. The sudden loss of a purchasing agent may become a very serious matter unless he has had his accumulation of knowledge tabulated. On the other hand, such a record will make the purchasing agent increasingly independent of his expert advisers in the organization. It will strengthen his own hand by making him sure of doubtful technical details, and will strengthen his strategic position as an expert buyer whose stock-in-trade is his knowledge of what the market offers. While no one expects him to be an expert in all lines, the materials record will go a long way towards making him one. It will also be found very useful in answering inquiries from other parts of the organization, such as the engineering department, regard- ing what the market offers in the way of standards and their relative costs. When requisitions for special materials are received, he has a fund of information at hand showing at a glance the possibility of finding the materials in the market. All the technical information that comes to the purchasing department, especially that which deals with the different var- iations of material that can be secured and the relative varia- tions in cost, will find their proper place in the materials record. On account of its varied nature and the fact that the data on no two commodities will be the same, the record can- not be maintained on a form. Instead of the use of a standard method of compiling the data, a narrative of the matter will be found useful. The possible quantity of data on any phase THE ARTICLE 283 of one commodity will differ from every other, hence the discussion affords sufficient possibilities of inclusion to suit any statistician. The original record will probably be a dic- tated and typed statement of fact. This can be placed in a standard-sized letter file folder, with additional data as it comes to hand from time to time, and copies of all subsequent specifications applying to the particular material. After a while the original story of the commodity can be revised, corrected, and rewritten to incorporate the facts discovered later. An Illustrative Record The nature of this record is partly specific and partly gen- eral. The use and character of the record can probably best be shown by one specific record pertaining to paper : Trade Names: Book, writing, kraft, manila, news, bond, ledger, laid, etc. If sizing is added to book paper when in process it becomes writing paper. When a different kind of sizing is added and it is given a special finish, it becomes cheap bond paper, etc. All kinds are usable for printing purposes. The grade to be used depends upon the use to which the printed matter is to be put. Finishes: Book paper with a special water-marked finish is laid paper. Linen paper is bond paper specially finished; etc. Composition : The cheapest papers are made from wood pulp ; the best from new rags. There are many intermedi- ate mixtures. Grades of "all-rag" papers vary according to the grade of rag used, and some mixed papers are better than low-grade "all- rag" paper. Substitution : Kraft and other coarse papers when well finished, although not so attractive, can be used as sub- stitutes for more expensive bonds in practically any case with a great increase in strength. 284 PROCUREMENT BY PURCHASE Sizes ; 17 X 22 and 22 X 34 are the most common and easiest sizes of bonds to secure on the market; the other grades have different best-known sizes. Special sizes increase the price over that for standard sizes, but they usually can be secured at no additional cost when ordered in lots of four Quantity Prices : Special Water- marks: Controlling Production Factors : If ordered in case lots, about 500 pounds, the cost is approximately i cent less per pound than in less than case lots, largely due to saving in pack- ing, etc. Special water-marks with a high advertising value can be secured with no additional cost if a suffi- cient quantity is ordered. The scarcity of water in the seasons of draught which often visit New England may tie up pro- duction and deliveries because of the large amount of water required in paper manufactur- ing. A scarcity of wood pulp, most of which is imported, raises prices and effects delivery. In an advancing market, the cheaper the paper, the greater the rate of price increase. This and much similar data is information which a sales- man does not readily give, especially if he is attempting to sell a product which can be replaced by another vendor's prod- uct to the advantage of the purchaser. It becomes a difficult proposition to get from the salesman information of this character for inclusion in the record or in making an actual purchase, but the data can be obtained somewhere in every case. With an adequate record of this kind a new purchaser could buy with more ease and without showing his real ignorance of the subject. The record would supply many of his deficiencies. This information should be recorded in concise form, for every kind of material which the purchasing agent may be called upon to supply. The record should include all available THE ARTICLE 285 newspaper, trade and technical paper clippings, salesmen's hints and the buyer's experience. Such information will make it possible for the purchasing agent to delegate his functions to a subordinate with the assurance that without special knowl- edge and training he will have at his disposal the leading facts concerning the desired commodity and can proceed with in- telligence. Origin of Purchase Order Requisitions It may be well to diverge at this point to obtain a brief picture of the procedure of the purchasing department in handling an order which is governed by standard specifications previously determined. There are two general theories in regard to who should be allowed to write purchase order requisitions. Some con- tend that any member of the organization should be allowed to write requisitions for materials which are not stocked. Others say that only the materials control department should write requisitions. Under the first plan anyone desiring material must first determine if the material is stocked or not, and if not, whether it would be purchased or manufactured, what is considered the organization's standard for that kind of material, and the proper quantity to order. The second plan considers it a waste of time to bother the one desiring material with details in which he is not interested. If for the sole sake of easing him of the detail, let him write a stores requisition for the material, stating what he wants and when he wants it, and let him send the requisition for the material to this service department of specialists who write most purchase order requisitions and who know how to handle those matters and to carry them through to completion. In a large concern, he is more likely to get better service. By the first plan, the contract with the purchasing depart- 286 PROCUREMENT BY PURCHASE ment is more direct, only one paper transaction takes place, and the accounting is somewhat simplified. This plan is the one illustrated in the routine in this text. Checking On receipt of the purchase order requisition (Form 57) calling for material already standardized by definition and specifications in the records of the purchasing department, it will be reviewed by a clerk. The requisition clerk will see that it is signed by the proper authority, that it is correctly dated, and that it carries all of the required information. Most important of all, it is essential that the material be clearly defined and identified with any specifications which may have been placed on file or are attached to the requisition. If the requisition fails to meet these require- ments, it should be returned to the originator for correction. If the material requested does not conform to the standard requirements in every particular, it must be made to do so. To this end a conference with the head of the ordering depart- ment may be expedient, because usually such head will not be permitted to depart from the standard specifications in framing his requisition without the authority of a competent superior. But on occasion the purchasing agent must not hesitate to fill a requisition of this kind even without confirmation by a superior, unless he is willing to take the responsibility of caus- ing delay and inconvenience to the ordering department. Use of Data Having checked the requisition, the clerk must next com- pare it with his materials record and other records and review the available data bearing on the commodity in question. With the additional data of the requisition he should be prepared to proceed intelligently in selecting the proper article. When and where to get it most advantageously will be discussed later. THE ARTICLE 287 i I i i 3 < TO PURCHASING DEPARTMENT PURCHA5E ORDER REQUISITION NO. 25003 DATF WRITTFN PLEASE SECURE THE FOLLOWING MATERIAL BY . . QUANTITV UNIT STORES SYMBOL AND LOCATION SPfcincATioNHa to be used for TITLE AND DESCRIPTION OF MATERIAL REQUISITIONED BY. OR ORDERINfi C QUANTITY f WRITTEN BY APPROVED BY )R0ERINO >OINT i a Q J u I < BIDDER SeORCE OF gUOIATlON LIST PRICE TRADE DJiCOONTi NET ppice F.O.O. POINT TERMS DELIVERY PROMISED BEL. NOTES -AixouoTATioNa must be BEceiveo 6Y REOUISmONeQ.WAS HOTIFIED THAT HATrntAL CANNOT BE DELIVERED UNTIt. 5HIPPE SHIP VI f""'^ SHIpnu .irMFnillFAOJllfiTFnB ' 5CHCD. Div. QUOTATION RECOBD POSTED BY ( .<^inNFr> QUOTATION OIV, OUOTATIOM Dl^ PunCH. 0&^, 1 Form 57. Purchase Order Requisition. (Size 8j^ x 11.) The upper part of this form carbons with Form 10. It is similar to Form 17. 288 PROCUREMENT BY PURCHASE Orders Applying on Blanket Contracts Requisitions for material which is already covered by a standing contract are also subject to checking for the purpose of reconciling them with the contract terms. The material record in these classes will still be useful, especially in those types of contracts which do not specify any one grade or size of the commodity but allow the buyer to order over a range of grades or sizes. The Quantity The quantity of an order is an important consideration. The proper quantity of a commodity not carried regularly in stock is determined by the size of the order in the completion of which it is to be used, as discussed in Part II. If the article is carried in the regular stores permanently, the quantity will be determined by the requirements of the business, the season of the year, the facility with which it can be obtained, and similar factors, as discussed in Chapter XI on "Control of Inventory." Thus the quantity desired to be purchased will be clearly indicated on the requisition. While it is not incumbent on the purchasing agent to determine the quantity to be purchased, it is quite within his province to question the possibility of an error in what may appear to be an inadequate or an excessive amount, and to consult the originator of the order, if there seems an oppor- tunity of saving money in the purchase price by increasing or decreasing the quantity called for by the requisition. For instance, a requisition may call for 450 pounds of paper when a 500-pound case would secure a 5% or 10% saving. Again, when deliveries are tightening and prices rising, an increase of the quantity may be expedient; or when the market is dropping, a decrease may be advisable, etc. In periods of retrenchment or of expansion, suggestions of this kind from the purchasing agent are particularly valuable. THE ARTICLE 289 Control of Requisitions Requisitions vary in their importance and urgency. In a large concern only the most important need pass through the hands of the purchasing agent himself. Those covered by contract need never be reviewed by him, but may be written up at once, if the checking has shown them to be in proper order. The vigilant buyer will so closely supervise the work of his department as to prevent it from becoming too auto- matic, lest items which he should review be ordered without his knowledge. He will insist on seeing personally every order which is new or unusual, or which is over a certain limit in value. Frequently it will be the chief clerk or assistant purchasing agent of the department who will review all requisitions, determining which ones should receive the attention of his chief. This method usually provides a sufficient control. Similarly, the relative order in which requisitions are to be handled may be determined at the outset by someone whose knowledge and judgment will prevent the side-tracking of orders on which prompt delivery is doubtful or for which the need of the plant is urgent. Fixing the Price The last step of the essential procedure before the placing of the order is to fix the price. If the requisition calls for material which has already been contracted for at a definite price, all that is required is to insert the contract price, to indicate the time and point of delivery, and to note that the order is to be filled under the terms of the contract. If the material is a new commodity or in a changing mar- ket, it may be necessary to request competitive bids of a num- ber of reputable firms. This phase of the subject will be discussed in a subsequent chapter (XXIV). CHAPTER XXII THE MARKET The Background We have already indicated how essential it is that, the article which is required having been determined, the purchaser should know the market in which it is to be procured. Like all other factors of purchasing, the market presents a large background with which the purchasing agent must be per- fectly familiar before he can expect to place his contracts to the best advantage. This background consists for the most part of a mass of information and more or less scientific knowledge. Much of it is general and of a nature to defy tabulation, but most of it is concrete, specific, and immediate. Reduced to record form and incorporated in the files of the purchasing department, it becomes part of the stock-in-trade of the purchasing agent. Knowledge of materials in general is even more important than the knowledge of the use to which they are to be put. Here is a line of research which the purchasing agent must pursue for himself alone. In this field he should make himself a specialist. He should not depend for his knowledge upon the department heads, and the extent of his specialized and exclusive knowledge of this subject and of market conditions may well be the measure of his value to his employer and his standing in his organization. Knowing what he wants, the buyer must know what the market offers and how it is offered. He should know what he can get and where he can get it. Sometimes the sources of supply will be numerous and sometimes they will be few and 290 THE MARKET 29 1 difficult to Stimulate to prompt deliveries. The sources of supply are not to be determined or even located in a hurry. The data bearing on this phase of the purchasing agent's prob- lem must be built up slowly and carefully. In this chapter we are chiefly concerned with the general consideration of the market rather than the study of the individual vendors, which is treated in a subsequent chapter. Forecasting the Market — General Information The old proverb — coming events cast their shadows before them — is particularly true of economic conditions. The pur- chasing agent may have anticipated his needs with contracts for a certain commodity for a long period in advance and may feel safe. In such a case, unless something unusual should occur, he might not feel the need of consulting any statistics for that commodity for some time. Nevertheless the periodic study of all data enables him to forecast the situation for a still longer period in advance, in which case the time so spent will have paid him well. The buyer must know the general condition of the market in which he is to make his purchases. He must be a close student of current prices and of the daily news that has a bearing on them. He must be able to anticipate any tendency towards an advance or a decline either in the general market or in the particular commodities that interest him. If he has the authority to originate blanket contracts on his own re- sponsibility, he will find here a broad field for personal initia- tive. Here he has the opportunity to make a record for himself by applying his knowledge of market conditions with a view to making substantial savings by timely purchases. Even if he has no such authority, he should not neglect any opportunity to make suggestions bearing on the making or even cancellation of contracts, emphasizing thereby the economic importance of his office. 292 PROCUREMENT BY PURCHASE A knowledge of the general conditions prevailing in the market enables the purchasing agent to lay down a general policy which can govern all his transactions and provide a deciding factor in questions of detail. Spending half his time in reading financial and trade papers may be justifiable at times. Thus news of threatened transportation congestion, owing to lack of fuel and threatened strikes or embargoes, may suggest the purchase of supplies in anticipation of the season's needs and the stipulation of a delivery date somewhat in advance of the time requested by a purchase requisition as the date on which the goods will be needed. To illustrate, a certain concern used a very large quantity of standard reamers, taps, and other small tools of one manu- facturer whose product had been adopted as standard quality. It absolutely depended upon that one brand. The purchasing agent in his daily reading of the papers noticed that that manufacturer's city was threatened with a machinists' strike. Accordingly the market was gleaned and orders were rushed through to fill his requirements for several months. The tools were secured and in his storesrooms when the strike went into effect. While other manufacturers had to worry along with- out their favorite tools, he was supplied throughout the critical period. In periods of general prosperity prices are high and un- stable and conditions demand that only the most pressing orders should be placed to cover the period before prices begin to drop. Then comes a period of declining prices in which the purchasing agent may continue to buy lightly until his observa- tions tell him that the bottom has been reached and the period of improvement has set in. Then he may inaugurate a general policy of purchasing for future requirements, contracting as far ahead as his resources will permit, but all the time watch- ing the market narrowly for sudden changes and advantages that may demand a modification of his general policy. THE MARKET 293 It may be that this data bearing on market conditions will be compiled by a central statistical department under the super- vision of some other executive. But even if none of this work is done in the purchasing department, these records must be constantly available to the purchasing agent. They should be referred to him as a matter of routine as rapidly as they are compiled rather than await the time when he calls for them. Business conditions are constantly changing. The pur- .chasing agent may not recognize his immediate need for cer- tain data until brought to his attention, but it is fairly certain that such material is of greater value to the purchasing agent than to anyone else in the organization. Statistical Agencies Many purchasing agents seek the aid of outside agencies in gathering the general information that will determine their broad policies. While no buyer can rely entirely on the opinions of others in regard to what the market is about to do, such agencies provide a means of comparing the opinions of others with his own. This gives the buyer confidence in himself if the opinions agree, or causes him to review again and perhaps change his opinions should they disagree about the general trend or about any commodity. There are several good professional statistical agencies which at small cost furnish such information to their clients. Many banks and commercial houses furnish such information to their customers as a part of their regular service. They issue periodic reports concerning the market situation both in its general trend and in regard to its leading commodities, as illustrated by Form 58. Both phases are essential. The mar- ket situation in a single commodity may be entirely different from the general market conditions, though in general com- modities somewhat follow the general trend of the entire market. 294 PROCUREMENT BY PURCHASE Babson Opinion on "Coal Outlook" A successful solution of the present labor controversy in the coal fields is not visible. Still the situation from a price standpoint is not serious. There is no scarcity of coal and there is no indication of any shortage for some time to come. The effect of the strike has estab- lished a rate of output even lower than the curtailed volume during the dispute in late 1919. Production last year of 407,000,000 tons, ruled materially under the previous ten-year average — fully 23%. Note production and price chart below (Form 62). Consumption, however, reflecting the period of depression and the status of industry, was fully 27,000,000 tons less last year than the restricted output. As a re- sult, stocks on hand at the turn of the year were above the normal com- plement and during the first quarter of 1922 the available supply increased substantially. The present rate of output by non-union mines, together with total stocks, will adequately cover the potential demand for some months to come. Incidentally, fuel oil competition is bound to increase. . . . Babson Commodity Outlook (A small section of the Babson opinion on certain commodities is shown here.) Cocoanut Oil — Supplies ade- Leather — Sole — Protect seasonal quate. Yet, prices are conducive needs. Moreover, be prepared to moderate purchases for several to buy more heavily if attractive months ahead. purchasing levels materialize. Coffee — Continue to take advan- Upper — Purchase as with sole, tage of all substantial set-backs. Lemons — We still feel that sea- Irregularity should continue. sonal purchases on weak spots Coke — Foundry — Clients by this will later react to advantage, time should have on hand ade- Lime — Cover adequately for 1922 quate quantities for a month or needs, postponing extensive in- so ahead. This also applies to ventories. furnace coke. Linseed Oil — We approve of pro- Copper — Refined — Prospects favor tecting seasonal needs. This is higher rather than lower market. not the time, however, to get Accumulate stocks for future bullish. Seasonal reaction is due account. some months hence. Sheet — We consider sheet and Lumber — General — Relationship of wire a favorable buy for some supply and demand suggests months ahead. higher price level. Form 58. Extract from Report to Buyers (Babson) THE MARKET 295 While the reports of these agencies are of value, they should not be accepted uncritically. One agency may be an excellent authority or a very good guesser where copper is concerned and yet rarely anticipate correctly the changes in the grain market. The opinions of the various reports con- cerning specific commodities should be tabulated in a form similar to that illustrated in Form 59. After a few months, by comparing such a record with the actual trend of the mar- ket, data will be supplied for the criticism of the opinions of SUMMARY OF STATISTICAL AGENCY REPORTS FOR COMMODITY | MONTHLY REP>ORT JONES AGENCY OPINION NATIONAL BANK OPINION MISCELLAMEOUS OPINIONS JAIMUARY FEBROAPV NOVEMBER OeCEMBER Form 59. Summary of Statistical Agency Reports. (Size II x 8J^.) the different sources of such information without which they may conceivably be a handicap rather than a help. After a period of time it will be evident how much reliance can be placed on each opinion. Each will ordinarily be found to have its elements of strength and weakness. Probably none will be found entirely sufficient. The buyer's knowledge of general business conditions can- not be restricted to his own commodities. He should know the trend of business in the principal commodities of every country and of each section. Depression in such commodities, even though he has no direct interest in them, will have an inevitable 296 PROCUREMENT BY PURCHASE effect on economic conditions in the country that produces them. On the success of the cotton crops in the South will depend largely the prosperity of that entire region, and by its prosperity, both buying and selling conditions are determined. The most widely unrelated factors contribute important evidence as to the trend of business-export statistics, bank clearings, building permits, warehouse reports, railroad earn- ings, and similar data, must all be considered in determining the general condition of the market, and their cumulative evidence will usually determine important questions as to the time to buy and the extent of the purchase. Graphic Presentation General data of the kind that we have described are best presented by means of charts and diagrams. When we are sure that we have obtained the right figures, it is well worth the effort to present them in graphic form. Such presentations carry conviction where arguments and tabulated statistics fail. Here the data is predigested. It carries its message on its face and the detailed tabulation of figures becomes merely the evi- dence that the graph tells the truth. Graphic presentation is peculiarly effective in showing a general tendency or a trend of events extending over a period of time. There are men who can glance down a column of figures and note the variations and the high points and low points with reasonable accuracy. But when it comes to a similar comparison of three or four columns simultaneously, only the highly trained few can accomplish the feat. Yet a graph can show precisely the same data in such a manner that everyone can grasp the essential facts almost without effort. Graphic presentation is particularly useful in indicating the trend of prices. In Form 60 is shown the rise in the price of pig iron during a period of years and its effect on a THE MARKET 297 commodity of which pig iron is a component part. This is the simplest kind of chart and shows at a glance the entire relationship between all factors concerned. — "■" ~ h / to <0 ' t^ At ff ^r 'n k_ \ K 1« ti- ^ 1 1 tl I X , / "V i_i ^» r -I, ^ B. ■"■■^'^ / 1 ~T " a as i . J / < _ -/ S i^t / ' / H 30 / s ■\ / *> / V ""s / _7 \' s. \ ^^ C) r-, s / "^Z / / s^ rC/ va c I'l a pL < , 15 - -,s-^: ^, ^, 'N / ^v, _ 7 ■V ^ N,, r 1 ISSe IMS 1900 1901 190!. I«0} 1304 f90» 1906 190/ 1303 1903 1910 1911 I9IZ 1913 1914 1915 /9ie 1317 I9ia 1919 Taken from /ron Age, January I, 1920 Form 60. Graph Showing Price in Dollars per Gross Ton of Basic Pig, Valley, and Steel Bars, Pittsburgh This illustrates how the price of a manufactured product follows the price of the basic raw material. How to Make a Graph Graphic charts are constructed on specially prepared paper. The paper is ruled b}^ heavy lines into squares for convenience in drawing and then in reading the curve. The heavy vertical lines indicate the limits of the time intervals, while the heavy horizontal lines represent the prices. The chart is read from left to right and from bottom to top, the lower left-hand corner representing the starting point of the relationships to be shown. 298 PROCUREMENT BY PURCHASE In this chart the left-hand border represents January i, 1898, the next vertical heavily ruled line January i, 1899 ^^^ so on. The distance above the bottom line represents the price, the base line representing $0 and each heavily ruled horizontal line the limits of each $10 per ton increase. In the construction of any similar chart, the first step is to determine the unit value of each vertical and horizontal space which will best express the relationship desired. For instance, if a chart has 50 such spaces, each space must represent 20 if 1,000 is the maximum quantity to be expressed. The values are written along the sides of the chart at the proper intervals. They serve as scales for the locating and subsequent reading of the figures graphed. These figures are then laid off the proper distance to the right and upward. At the intersection of two imaginary perpendiculars erected on the base lines at these points, a dot is placed. This is continued so long as figures remain to be plotted. The dots are then joined by a curve and the chart is complete. In Form 61 we have a graph taken from the United States Government Crop Reporter, which endeavors to give its readers such information relative to the price records of previous years as will enable them to sell at the time that prices are highest. Here we must read from the line representing 100%. The chart would be made much clearer were this line differentiated by being heavily ruled. A graph of this nature should have O as a base line. If space forbids this, two wavy lines near the base should indicate its remoteness from O. In the chart illustrated in Form 62 showing several rela- tionships, the purpose is to show the changes in variations between them. This necessitates the use of a heavy line indicating the basal commodity, and of thin and dotted lines for the other relationships, or we may use several colors of ink. That this information is brought out much more point- edly in chart form than is possible by a long column of figures, THE MARKET 299 is apparent. Who would have the patience to follow the sta- tistics for many years, tracing the many changes in price? Every peak and depression is suggestive, giving glimpses of 1909 1910 1911 1912 — a 6(j 1 1 1 1 1 M J-LJ _ ^vf UNITED STATES GOVERNMENT CROP REPORTER Form 61. Graph Showing Fluctuations in Price of Eggs in United States as Compared with Average of Monthly Figures for Four Years fat and lean years reflecting the various developments and various influences and the constantly changing demand for the product. In some charts we may wish to show several relationships on a single graph, such as the supply of a commodity on hand as expressed in quantity and in value, for the purpose of determining to which relationship is due the increased or decreased values, as is shown in Form 63. In such cases the starting points might be the same point but the unit value of the vertical spaces will be different and the three curves will diverge from the one starting point. In order to avoid con- 300 PROCUREMENT BY PURCHASE z a. c « a ► f «i II ■< «■ » 5il II T o o o c ^ rt el - : 1 / - ■^v.^ 1 ««' / ^^B 1 {-- .--J ■xs-. -s»— ' «*« ■«*w ^ ^Si^M ^ 1 ^^s ■^^^ ;g§^ ^^^^^ E^^^^K ^ ) U ti. < > h-' X O 1 a 1- o y^^-.-" ^^< ^^pu»^^^ 5 HI Q.Z 3 > /I u a CD 1- H ^^: ^(5 ^ r8 UE KB ^Z^^^w \ 5{'"'o8woo \ 8 ^^y I ^ J c u: <^ ^ ^' 11 2 CO "SJ "^ i H s ^^^ 1— 1 z 2 5 cc 1 5 5> 1 ? 1- ^ ^M 2 of-. ( > < > < > h < » • 1 < r t t 1 ANNUAL PROD IN MILLION —.600 — 4.00 — 300 200 100 £ o THE MARKET 301 fusion we may note the second value beside the first in the same colored ink as we use in drawing the curve. The purchasing agent who keeps a few charts over a period long enough to be of value for comparative purposes will develop an outlook on the future that will surprise himself. He will find himself able to forcast conditions and tendencies, often with uncanny accuracy. For instance, he will be able to determine that period of the year in certain trades in which producers drastically cut their prices to encourage sales in order to operate their plants at maximum capacity throughout the ♦ ♦ ♦ ib ISO «■ 170 10 sogiso a «, ,« (0 0. h'zS ^I30 2 13 -a iniio 5 JO 100 8.J^ z le 3 i a I*; Q/O ) 340 " — - — " - ~ — - " " - - - — P r p p p n 317 1 i 1 ■ \ ' a V \ 1 \ ■ Jue \ \ I'l-rti \ s \ s i^TK , w e f^ A c ii 11 ;^ n *^ / .\ r , il >< K >i lA 1^ 3 ^ ^ ]v - 0|53 y . 1^ s k 3 I / 0( i H k* iC „ , 1 - N 1 s- ^ _ >o »c S • k oije ■& 31.3 \ N / \ __ ' S 'v < s ■■ > ^ / S lOZ 2 ■-. ^ V S| V / "=■ 74 -T (L p... > •^ V ^ ' ^. u R ^1 ^•r „_ _ _ _ _ _ _ _ _ ^ _ >»ai I90Z 1905 1904 1505 I90e 1907 isce 1905 ISfO /S/l ISIZ I9I3 19)4 1913 (916 1917 I9IS 1919 Form 63. Graph Showing How the Value of Three Relations Diverge from a Common Point as the Relationships Change It illustrates how in periods of high prices the value of an inventory skyrockets out of pro- portion to the increase in stock necessary to conduct a business over the period of prosperity, and how in the period of declining prices the replacement value can drop faster than the stock on hand. Hence the great necessity to watch inventories and contracts in order to conform with market conditions and finances. year. In determining the details incident to the renewing of a contract that extends over any considerable period of time, 302 PROCUREMENT BY PURCHASE the only scientific procedure is to consult such charts as an indispensable preliminary to judging what is best to do. The fact that the purchasing agent has made a contract covering a number of years does not mean that he is no longer obligated to keep a faithful record of prices. He must always be able to present evidence that the contract was a wise one, and the best evidence is a history of prices of the commodity since the contract was made. Even if such evidence proves the contract to have been unwise, the record will be useful not only in demonstrating to him the weakness of his judgment, but in helping him to avoid such a mistake in the future and possibly even pointing the way to the making of a supple- mentary contract which may overcome a part of this con- tractual loss. Charts need not be restricted to recording prices. They may be equally effective in showing stock on hand, consump- tion, deliveries, and a mass of similar data. Some charts to be of value must be adjusted in detail every day, while others in periods of comparatively little activity need be plotted only once or twice each month. Then when the chart covering less active data shows a critical period, the intervals can be de- creased to one day instead of one week or one month. This gives the maximum benefit with the minimum of clerical work. Specific Information Besides the general information discussed above, there is a mass of specific and immediate data that must be maintained and applied to each transaction While all of this is directly applicable to the market, the compilation and maintenance of such data is discussed under those phases of the purchasing cycle in which it is even more applicable. First of all, the buyer must know what the market offers, and to whom to turn for whatever he may want. He will know and have recorded all the essential data on every source THE MARKET 303 of supply which is a part of the logical market for the com- modity in question. If he is foresighted he will also know as well to whom he may go in case of emergencies when strikes, embargoes, and similar influences have eliminated his logical market. Under this head will also come the specific technical in- formation discussed in the preceding chapter, and which quali- fies the purchaser to gauge the market with intelligence and understanding. Perhaps his grasp of market conditions is best shown by his familiarity with the details which bear on supply and demand as reflected in the current price. Supply and Demand This factor, of course, has its bearing on the general as well as the specific problem. An analysis of supply and demand will give the data which determine the trend of the market and the prices of the future. A marked fluctuation in price should call for an investigation. Prices are only the surface indication and the buyer will look behind them and investigate until he can connect their movements with their causes. The buyer who has informed himself of the available quantities of a given commodity and of the current market conditions will have no difficulty in recognizing a manipulated price when he sees it. In such circumstances there is little he can do but to avail himself of his knowledge of substitutes or to cover himself for short periods and wait for the market to subside. In a free and open competitive market, price changes fur- nish the key to the conditions governing supply and demand. For instance, in the copper market at a given time the demand sets the price; buyers come into the market and bid against each other for the available supply. If the supply is greater than the demand and there is little buying, the vendors may depress the price in order to bring more buyers into the mar- ket. A lowered price is likely to make it impossible for some 304 PROCUREMENT BY PURCHASE producers to continue to produce at a profit. They eventually drop out of the market, diminishing the supply by the amount of their production When the total quantity wanted by the buyers is greater than the supply offered by the remaining producers, the buyers must raise their bids until more producers return to the field, increasing the available supply by the pro- duction of those who could not afford to produce at the previous price but who can produce and make a profit at the increased rate. This movement of adjustment goes on continually in every market open to free competition. If the market is manipulated, however, and there is a com- bination or agreement beween either the buyers or sellers seek- ing to hold up the price or hold down production, or to corner a commodity or create a monopoly, the market is no longer open and free and it becomes necessary for the buyers or the sellers carefully to guard against being caught without being covered in their requirements or in their supply. The Personal Side Surrounded as he is by his accumulation of facts covering every phase of his work, the material, the prices, and the vendors, the purchasing agent may feel himself independent of any of the strategic tactics that his predecessors felt to be their chief stock-in-trade. Such an attitude, however, may soon lead to a mechanical routine that is neither interesting nor intelligent. Even with tabulated competitive bids before him, there is still room for the display of considerable acu- men, if he is to get the best that the market affords, not only in material and service but in price as well. The purchasing agent still has a place for all his tact and skill and his knowledge of human nature in determining the most advantageous method of payment — lump sum, unit price, cost plus percentage or cost plus a fee, as described in Chap- ter XXIV. He may also exert himself in securing every THE MARKET 305 possible concession in discounts, service, and delivery and in making his business and his personal good-will something that the salesman will desire to cultivate and preserve. He will avoid a too rigid adherence to fixed methods and he will cul- tivate a diplomatic procedure and a winning personality. He will study his vendors until he knows them and their policies as well as they know themselves. Not until he knows his vendors as individuals as well as firms can he be said to know his market. Correlation of Requirements and the Market The buyer must continually endeavor to correlate the re- quirements of the factory with the condition of the market. He must know at any time the amount of the most important staple materials that the factory has on hand and how long that balance will last. He must know what quantities of that staple are on order, are contracted for, and in transit, and when they may be expected to arrive. To this end the ma- terials control department should send him each week a report of the present status of all leading commodities, and his own clerks will complete the report by a record of orders unfilled and in transit. Such a report is shown in Form 64. In addi- tion he should receive an estimate of the requirements for a considerable period in the future. This report is illustrated by Form 65. With these two reports, the buyer has complete informa- tion before him and he knows when to hurry more material toward delivery, when to take advantage of a sudden market opportunity for mailing contracts, and what amount he can safely purchase. Kinds of Prices The buyer who knows his market, who knows current prices, market tendencies, and the character of the vendors 306 PROCUREMENT BY PURCHASE ( 1 BALANCE ON UNFILLED CONTRACTS a c z a z < X o (X z o y t (0 z < a »- z 3i: lU So \ UI Ul X ti 1 J > z UJ J < CQ Si 2 5§ 11 > < 3C a 3 UJ - D E i o J |2S a u o w o a Z LAST WEEK'S BALANCE ON HAND < a. UJ 2 -1 < a u 2 kl X 1 s i w Si > z o i < o < > z o < u :! z o i tti a < i u i iti z 10 Kl J s i IS i g o < z i 3 5 o a o o i o < o in X a THE MARKET 307 PRTIMATF OF rONSlJMPTrON AND BALANCES OF OATF rOMPlI FD ret? THIS FRTIMATF Ul rST RP RFVIPWFn WOT 1. ATFO THAN lOi FOR WEEK ENDINQ EXPECTED DELIVERIES ESTIMATED REQUIREMENTS ESTIMATED BALANCE IN STORES in 1 £ lU E !2 I U I i v> 111 i i Ul 13 5 2 S % 1 1 1 DURING WEEK CUMULATIVE DURINQ WEEK CUMULATIVE $ I a a 1 H si IJ i ESTIMATED BY ESTIMATED BY fiXTENOEO BY PURCHASinS SEPT. DetT. P.O. --J, Form 65. Estimate of Consumption and Balances. (Size 8^ x ii.) 308 PROCUREMENT BY PURCHASE with whom he deals, will know the nature of the prices that are quoted him. Here he should be recognized as a specialist, so that his authority and judgment will not be questioned. He will be the best qualified member of the organization to detect a manipulated price and to differentiate it from a com- petitive price. He will know when the price is excessive and when it is dangerously low and in either case whether or not it merits investigation before rejection. Information on Vendors The specific information dealing with particular markets in which the purchasing agent is actively interested will ulti- mately be contained in the files which he will maintain as a repository for his information on particular vendors, prices, and materials. ' This information regarding vendors is of both a general and specific nature. In general he will desire to know both from whom he may secure certain materials and the business methods and practices of the various supply houses, their re- liability, and the extent to which they are willing to co-operate with the buyer's efforts to secure materials. The vendor main- tains a like record of the buyer and it is important that each should know the other as both are equally responsible for the contract. Delivery Conditions ; the Terms of Sale The reliability of the house and similar data nmst all form a part of such information accumulated and confirmed through the study of facts obtained from many different sources, among which will be the following ' 1. Catalogues and advertisements 2. Classified directories 3. Salesmen 4. Experience from trial orders THE MARKET 309 5. Personal visits to factories 6. Inquiries among firms in similar lines 7. Membership in trade associations, etc. As a part of the material record described in the previous chapter, some information may be recorded regarding sources of supply, and the quality and peculiarities of certain vendors' products as separate from their reliability. Different vendors specialize on various sizes and classes of materials, and it is foolish to ask them to supply the material which they manu- facture only from necessity or not at all. One buyer solicited a jobber of wrapping papers so often for material that he could not supply and never had supplied that the seller wrote to the concern, respectfully asking them to take his name from their list of sources of material. The first files for such information would be the record of sources. Such information is sometimes recorded on a card similar to that shown in Form 66, in a form to be in- nFSCRlPTION MATERIAl SPFCIFIfATION NO NAME or DEALER PLANT USUAL TIME OF SHIPMENT VIA LOCATION DISTANCE CAPACITY FRtiqHT EXPRESS Form 66. Record of Sources of Supply. (Size 6 x 4.) Showing where purchases can be made to best advantage. Any special remarks will be written on the back. 310 PROCUREMENT BY PURCHASE stantly available although it may be combined with other rec- ords. Here should be noted the seller's sources of supply if he is a jobber; if a manufacturer, the capacity of his plant, the amount of material which he carries in stock, the location of the supply, and the best transportation ser^/ice between that point and the buyer's location. A record of the capacity of the plant will obviate the possibility of giving an order that cannot be filled within the specified time. The location of the plant may sometimes be a most important factor in saving time and transportation charges. Such information will enable the buyer to make no mistakes in going into the market eithei' in emergency or in a case when he has plenty of time to get the material. Information as to possible sources of supply is compara- tively easy to secure when seeking materials even in a here- tofore unknown field — from trade directories, for instance, from jobbers in related lines, and from trade papers. Sales- men are ample reservoirs of information relative to possible vendors. In addition to this information, the purchaser should assure himself that there is or can be satisfactory competition and that the vendor is independent of any combination that may have been formed to control prices. No vendor should be accepted as reliable until after he has been carefully investigated and determined to be a suitable party to deal with, financially responsible, and equipped to perform any obligations assumed. Generally speaking, the purchasing agent will have little difficulty in finding a suitable vendor; his problem is to select the best one. It is this phase of his work that forms the subject of the next chapter. CHAPTER XXIII SELLER AND BUYER Interrelation of Seller and Buyer The seller and the buyer are alike in business to make a profit. It goes without saying that neither can make his whole profit in a single transaction. From the point of view of both of them a permanent relation is desirable. Once a satisfactory connection is established, an increased return on a smaller expenditure may be expected. Mutual confidence, understand- ing, and respect may be regarded as lubricants of the wheels of business, simplifying relations^ obviating inquiries and mis- understandings, and resulting in an exchange of favors and help. Under such conditions, service becomes an element not considered as due only when called for in the contract. It comes to be tendered gladly out of good-will and a desire to help. This will to serve extends often to the point where sellers are ready to inconvenience themselves and their organi- zations to meet an emergency need of a desirable customer. Thus, at the request of a purchasing agent the proprietor of a certain printing establishment was known to work personally and in addition to hold several employees for over forty-eight hours to fill a rush order of one of his customers. In the previous chapter reference was made to some of the necessities resting upon the purchasing agent in quest of material. It was pointed out that close familiarity with the vendor's resources, with the quality of his previous service, and with his reputation, are essential to successful buying. In this chapter we will consider another essential — one having to do with the more intimate personal relations between buyer and 311 312 PROCUREMENT BY PURCHASE seller. This relationship, though less susceptible to standardized policy, is no less important in its possibilities for good or ill. The doing of business in a spirit of co-operation, repre- sented by the printer mentioned above, is the kind to be devel- oped and fostered. That spirit does not ordinarily appear spontaneously. It is rather the result of conscious effort. It is the purpose of this chapter to indicate concretely the factors that must be present in business relations, if such good-will is to be assured. In the first place it is well to remember that every purchase and sale agreement involves mutual obligations. The buyer agrees to give money and certain services in exchange for the material and service supplied by the seller. The contract price is not the complete cost of the material to the purchaser. In a broad sense, this cost is the price plus the value of the time and effort which the buyer must spend to secure the completion of the contract on the part of the seller. To reduce this additional expenditure by every means at his disposal is one of the duties of the purchasing agent. On his part, the vendor delivers to the purchaser material which has cost him a certain sum of money. To this first cost he adds a certain amount to cover selling expenses; and finally, a profit is added, before the selling price can be determined. The less the expense he is obliged to incur in bringing about the completion of the contract on the part of the purchaser, the higher he will rate the purchaser and the more willing he will be to consider the possibility of a price reduction to him. It is frequently true of small concerns, particularly propri- etary firms or partnerships, that strenuous methods are neces- sary to secure payment. There are cases in which proprietary concerns have never made a payment over a very small amount except just prior to a formal legal action. Large concerns are not infrequently as great offenders in unnecessarily increasing SELLER AND BUYER 313 selling costs. Many of them habitually allow their due date to come and go without payment, on the theory that the vendor should be glad to receive their business regardless of when they pay their bills. While in such cases it is rarely necessary to take legal action, the strain on the vendor's good-will is as serious as it is unfair. Buyers whose firms are careless in the matter of payment have no just ground of complaint upon discovering that they have failed to secure the lowest price possible. But in the cases of those buyers who are punctual in meeting their obligations, this is one of the points at which the existence of mutually cordial relations may result in decided advantage to the purchaser. Personal Contact with Vendors As touching the relations between buyers and sellers, it is also well to remember that the purchasing department has two points of contact with vendors : through circular matter, and through the personal medium. The daily mail brings the vendor to the buyer's desk. His circular letters, catalogues, and selling propaganda, generally contain interesting possibilities. Aside from the general information as to the scope, policy, and character of the vendor's business of interest to the pur- chasing agent, they contain suggestions for the sales and advertising departments. The vendor, on his part, judges the purchasing concern by every bit of pertinent information that comes into his posses- sion. Such data as he obtains through the usual commercial channels is ultimately rounded out by the reports returned by his representatives, usually the salesmen, who come in personal touch with the purchaser. Before the salesman pays his first call, he is usually pro- vided with all the information available about the buyer and his firm. How detailed this information may be is shown in Form 67, which is used by a hardware jobber for every buyer 314 PROCUREMENT BY PURCHASE to be interviewed by his salesmen. This record gives the details of the information that help the salesmen to make an intelligent and effective first call and to avoid blunders. Name : Bryant, Frank V. Firm: Chicago Machine Tool Co. Business: Machine Tool Manufacturer Personal Address: 94 South 58th St. Family : Wife, son 8, daughter 6 Religion : Prot. Politics : Republican Favorite sports : Billiards; racing Likes to talk about : Theater; Englishmen Special friends: Cameron, P. A. for Union Railways Influential relations : Brown, City Councilor Smokes : Cigarettes Drinks : None Customer's peculiarities : Erratic, hard to approach Form 6y. Vendor's Record of Buyer's Personality In addition to this personal data is the general information relative to the firm's credit standing, general policies, reliability, business methods, and anything else that may have a bearing in determining the method of approach and the buying capacity and credit limits of the prospect. To this data with which he starts out, the salesman adds whatever of present or future value he is able to accumulate. A report similar to that indi- cated in Form 68 is made in duplicate, one copy of which the salesman forwards to the home office, the other being placed in his personal file. In the case of a proprietary concern, such investigations may extend even to the proprietor's family, their thrift or apparent disregard of expense — in fact to any- thing that may bear on his credit standing. Attitude of the Purchasing Agent In view of what has been said above, the attitude of the purchasing agent towards visiting salesmen is of obvious im- SELLER AND BUYER 315 REPORT ON CUSTOMER DATE FIRM NAME. PROPRIETORSHIP PARTNERSHIP . CORPORATION PRESENT COMMERCIAL . RATING PERSONAL CHARACTERISTICS OF MANAGERS OR PROPRIETORS: TO SALESMAN- USE A SEPARATE SHEET FOR EACH MAN .REPORTED NAME OF MAN. AGE ABOUT_ ESTIMATEO NET WORTH EXCLU- . SIVE OF FIRM INTEREST. MARRIED SINGLE . INSURANCE . OPINIONS OF TWO MERCANTILE HOUSES OR MEN IN DIFFERENT LINE OF BUSINESS AS FOLLOWS: CHARACTER . EVIDENCE OF OVERDUE HOME DEBTS FIRM DATA: LINE OF BUSINESS. AGE OF BUSINESS. ESTIMATED . NET WORTH . INSUR- .ANCE_ STORE APPEARANCE . APPOINTMENTS AND SITUATION . OWN . RENT. HOW OBLIQATIONS ARE MET LOCALLY— EVER .FAILED. ANY SUITS OR JUDGMENTS. PROMPT FAIR CONSIDERED SLOW PAY . GETTING AHEAD HOLDING OWN . FALLING BEHIND. REMARKS IN DETAIL CONDITION OF STOCK AS TO QUANTITY AND ASSORTMENT, BUSINESS POSSIBLE TO SECURE, tlC REFERENCES OF AT LEAST FIVE HOUSES: Form 68. Report on Customer. (Size 5^ x 83^.) 31 6 PROCUREMENT BY PURCHASE portance. The wise purchasing agent will not assume to know it all. The salesman can usually tell him something new about his product. Though such information is not to be accepted uncritically, every salesman should be encouraged to tell what he knows. It is the easiest, most accessible, and sometimes the most practicable source of information open to the buyer. The greatest favor that the salesman can confer on the pur- chasing agent is to give him the benefit of such inside infor- mation as he may have relative to market conditions. It is usually the salesman who knows first of all when a commodity is to advance or decline, and when his factory is in a favorable condition for prompt delivery. There is no one to whom such information is so valuable as to the purchasing agent. Here the man who has kept the salesman at arm's length and has made no effort to obtain his good-will, is at a disadvantage. It is the frank, human purchaser who has made the salesman his friend, who gets from him the inside information that is best worth having. When the salesman calls, welcome him, make him glad he came. If at all possible, have a reception room at the main entrance to the office. Have a rug on the floor and a comfort- able chair for him to sit on. Do not let the office boy be the official welcoming agent of the company. An older man who appreciates the responsibility and who is friendly, is the ideal representative. A salesman likes to be remembered. Greet him by name, and above all do not keep him waiting. He is paid for what he accomplishes. Lost time is lost money for him — and for the purchaser as well. A salesman's salary or com- mission must be enough to live on, and in reckoning the basis of either, an allowance is made for a certain amount of lost or unproductive time, the cost of which is shifted to the buyer. In the salesman's case are credit reports, other reports, and confidential data authorizing him to quote any prices and terms within certain limits. It is to his employer's present advan- SELLER AND BUYER 317 tage to get all he can for his product. The purchasing agent must influence the salesman to open to him those price and bargain lists if he is to get his supplies as cheaply and on terms as favorable as his competitors. If he is frank and above board, if he does not try to make the salesman believe he is in the market when he is not but that the time is being produc- tively spent, he will be likely to win out. Furthermore the purchasing agent should see to it that orders sent direct are credited to the salesman. He should make clear the advantage of having him as a customer, that his business can be secured in fair competition, that his credit is good, and that no long waits in securing payment will be necessary. In short, the purchasing agent should cultivate the salesman in every honorable way, chiefly by square dealing. If the purchasing agent shows the salesman that while his business may be small in the dollars-and-cents value of pur- chases made, it is awarded at less cost in selling expense to the vendor than is that of a larger customer, and that his business is steady, he has gone a long way toward establishing an effec- tive working relation. The Legal and the Personal Ties The relations of the purchasing department with outsiders usually result either in contracts for the delivery of material or the laying of the foundation for the placing of such con- tracts in the future. Each contract will be bound by two ties : one legal, the other personal. It is the latter that makes purchasing pleasant and profitable. The purchasing depart- ment wants service from the supplier. Whatever service is secured over that required by the terms of the contract is determined by the extent to which the supplier considers it expedient to exert himself. He should ship only first-class goods, at the time wanted, and in first-class condition. The invoice, correct to the cent, and the shipping papers should be 3l8 PROCUREMENT BV PURCHASE iorwarded promptly. All requests on the marking of packages and papers to conform with the buyer's system of handling purchases should be observed. These are all small matters in themselves but let ten single failures to comply with them occur in one day and the program of the purchasing department is seriously interrupted. Such failures to co-operate may well be remembered when future orders are in contemplation. The supplier may have kept entirely within his legal right, without apparent loss to himself, or he may not. However that may be, it is one of the duties of the purchasing department to make the personal tie such that there will be no occasion to consider the legal tie. The ability of the purchasing department to bring about the close co-operation of the suppliers with which it has to deal is a most important element in determining its successful operation. Such help comes to the purchasing agent either because he is valued as a customer or as a personal favor. As an example of what may be done by buyers and sellers in co-operation, to ease a difficult situation, reference may be made to typical market conditions. Every market has two distinct and ever recurring phases — the "buyers' market" and the "sellers' market." The buyers' market is a time of falling prices when the seller is looking for buyers and not finding them. The sellers' market is a period of abnormal demand and rising prices, when the buyer must exert himself in order to secure the desired material at a reasonable price. The diffi- culties of both periods may be lessened and sometimes elimi- nated if the proper relationship exists between the purchaser and vendor. In the buyers' market it may sometimes bs worth the purchaser's while to oblige a vendor by placing his orders for material which he will ultimately need somewhat in advance. Whether or not such sacrifice is warranted depends upon the value of the vendor's good-will. Such good-will has proved SELLER AND BUYER 319 invaluable to many purchasing agents during the war period. They were in many instances almost wholly dependent on the willingness of the vendors to furnish the material which was well-nigh unobtainable in the open market. It is by his ability to induce the vendor to give service when the market is "tight," ihat the success of the purchasing agent is in part measured. The means available at such times are more often his powers of persuasion than any more strenuous methods. At such times the purchasing agent may well regret any brusque treat- ment of too zealous salesmen and feel the need of a spirit of co-operation that he has perhaps done little to further. To a certain extent both buyer and seller choose the firms with which they deal. While a vendor will not ordinarily refuse to do business with anyone who will pay for what he receives, there is much that he wants to know about every firm with which he enters into a contract. He wants to know the reliability of his customers, their credit standing, their methods of payment, the amount of business it is possible to secure from them, and the extent to which they are willing to co-operate to the end that their part of the contract may be fulfilled promptly. The standing of the purchaser is always the subject of care- ful inquiry, on the result of which will depend largely the attitude of the vendor towards his customer. Sources of Data Data for the vendor is derived from many sources, the principal of which are : 1. The purchaser — voluntary statements furnished by the cus- tomer himself. 2. The salesman — personal reports conveying his general im- pressions of the character of the purchaser, his local reputation, and the state of his business. 3. Record of previous experiences as it appears on his books — perhaps the most important source and certainly the one on which the vendor places most reliance. 320 PROCUREMENT BY PURCHASE 4. Credit leagues and trade associations — organizations for the mutual exchange of information. 5. Other firms selling to the same customer — usually a fair guide within the limit of the business done by each. 6. Professional credit reporting agencies. Dun, Bradstreet, etc. — of variable accuracy but usually reliable in their main outlines. 7. Bank references — these are usually of a general nature and are to be so considered. 8. Newspaper items and general rumors — meager, general, and of doubtful value until investigated but never to be overlooked. The purchasing agent will realize that he, like the sales manager, is one v^indow through which outsiders look upon his concern. He will make sure that his representation is worthy. What impression he makes will filter through various channels to the benefit or misfortune of every activity of his concern. Credit Information Forms Form 68 shows a typical form used in seeking information relative to the purchaser's standing by a jobber selling largely to the retail trade. It indicates the scope of such an inquiry and the factors that have a bearing on the ultimate standing of the purchaser in the vendor's credit department. On this standing the purchasing agent's ability to command prices and service will largely depend. If circumstances prevent a favor- able report, the purchasing agent must accept the handicap and endeavor to overcome it as best he can by the force of his own personality and the personal relations which he is able to maintain with the vendor through his selling representatives. When the report is received from the salesman or other repre- sentative, the data are carefully reviewed and a judgment made regarding the desirability of nurturing the possible customer. For permanent purposes the data are recorded in a card file of appropriate form for future reference. This information, I SELLER AND BUYER 32 1 together with the data showing how the purchaser performs his part of subsequent contracts, becomes the index to the buyer's character. The buyer who resorts to questionable tactics need not expect to receive all that is to be desired. That man buys here today and there tomorrow, based upon his personal advan- tages and tricks. No permanent relation exists or can be — and the seller loses all the respect he ever had for this buyer who is a detriment to his profession. Gratuities and Bribery A buyer who accepts gratuities belongs to this class. Gratuities in the form of gifts are too often given to a buyer with the intention — perhaps unexpressed but nevertheless real ■ — of influencing his decisions in favor of the vendor's offers. In fact the practice has reached such a stage that the Federal Trade Commission has asked Congress to enact a law as an aid to the preservation of fair and free competition and striking at bribery. Quoting from the communication to Congress : These bribes take the form of commissions for alleged services, of money and gratuities and entertainments of various sorts, and of loans — all intended to influence such employes in the choice of materials. It is evident that this inexcusable added cost is finally passed on to the consumers. Bribery is criminal per se. The Federal Trade Commission has no criminal jurisdiction. It treats the practice as an unfair method of competition. In dealing with commercial bribery, as an unfair method of competition, the Commission is entirely limited to dealing with one side, to wit, the giving side, and has no power to reach the receiver, who is also guilty. The practice is one which has been condemned alike by business men, legislatures and courts, including among the business men, those who have finally resorted to it in self-de- fense in competing with less scrupulous rivals or in selling to concerns whose employes have extorted commissions under threats to destroy or disapprove goods submitted to them for test. 322 PROCUREMENT BY PURCHASE How prevalent the practice is now and how great the need of legislation seems to be illustrated by the statement of one man of prominence in an industry who welcomed the proceed- ings of the Commission destined to destroy the practice, with this statement : "From an experience of thirty years in the industry I don't believe that there is a single house in it that has not had to pay bribes to hold old business or to obtain new business. Bribery is inherently dishonest and tends to dis- honesty and is unfair to competitors and customers, and I don't believe it ever will be stopped until made a crime by the United States Government." Corrupt employes having the power to spoil and disapprove materials have been able to bid one salesman against another until in many cases they have extorted secret commission, so- called, as large as 20 per cent of the value of the goods sold. The Commission feels that the stamping out of the com- mercial bribery is one necessary step to the preservation of free, open and fair competition, and to that end respectfully urges that such legislation should prohibit not only the giving and offering, but the acceptance and solicitation of any gift or other consideration by an employe as an inducement or re- ward for doing any act in relation to his employer's affairs or business, or for showing, or forbearing to show favor or dis- favor to any person in relation to his principals' or employers' affairs or business. In order to prevent a resort to a common method of corrup- tion it is recommended that the law should also prohibit the giving of any such gifts or other considerations to members of the agent's or employe's family, or to any other person for his use or benefit, direct or indirect. It is useless to discuss the origin of the practice. It is sufficient to know that it exists generally and appears to be spreading. The mere suggestion shows that it must engulf even those honestly inclined if they desire to maintain their com- mercial life in any industry where such practices prevail. Acceptance of Favors and Courtesy From this report it is apparent that the purchasing agent must be fortified to resist the very suggestion of unfair dealing. I SELLER AND BUYER 323 The pressure upon him to sell his control over the purchasing function for a price may be insistent and powerful. Every man must be largely his own judge as to how far he can safely go in his personal relations with salesmen who are seeking his good- will and his orders. The man who would refuse a cigar or an invitation to luncheon might well be considered as leaning backwards and exhibiting a narrow-mindedness that borders on discourtesy. At the same time, whenever a sense of obligation begins to restrict this freedom of judgment, the purchaser may well draw back even at the risk of appearing eccentric. The wise purchasing agent will extend every courtesy to every salesman with whom he comes in contact. He will meet friendship with friendship and he will know how to win a respect and esteem that will prevent the possibility of his being considered as a subject for any proposal that he cannot entertain with honor. Vendor Expects Correct Purchase Orders The vendor also has a right to expect that every purchase order which he receives shall contain exact information cover- ing all points relative to the material which the buyer desires to purchase. All the information relative to quality, quantity, and delivery should be determined and clearly defined at the outset, to the end that further inquiries may be avoided. Con- tinued inquiries to obtain facts which the purchaser should have supplied at the outset cost both time and money and make it more difficult for the seller to complete his part of the con- tract. Sometimes it is even necessary for the seller to send a representative to clear up an essential point. These unnecessary expenditures decrease the possibility of the purchaser obtaining a more favorable price on his future orders, depreciate the value of his firm as a customer, and strain severely the friendly relations between the two organizations. 324 PROCUREMENT BY PURCHASE The Purchaser's Requirements As the business-giving party to the purchase contract, the purchaser's requirements of the vendor are even more numer- ous and he is in excellent tactical position to enforce them. They may be briefly summarized as follows : The Lowest Price, This is an important object of all purchasing agents. Having determined on the right article and arranged satisfactory conditions of purchase, the buyer wants to feel that he has been quoted the lowest figure at which the vendor supplies his product under such conditions- As we have just pointed out, the purchaser's inability to obtain it may be due to several reasons. It may be the purchaser's indiffer- ence to his obligations to give service, coupled perhaps with a demand for unreasonable service from the vendor. Perhaps the purchaser's attitude has so increased the selling cost as to make it necessary for the vendor to protect himself by a higher price. He may have taken an unfair advantage of the standing and strength of his firm, with the result that he has so lessened its desirability as a customer as to place himself at an unneces- sary disadvantage. Or the vendor may be quoting a high price with the intention of forcing the purchaser to accept another's bid. This is one way of tactfully losing a purchaser's business, without antagonizing him — a consummation sometimes de- voutedly to be wished. Reliability. The purchaser has a right to demand that the vendor keep his promises. A firm may have the highest credit rating and yet be chronically unreliable. The constant failure to make performances equal promises will offset finan- cial standing, excellent workmanship, and advantageous prices. Fortunately, the purchasing agent's information on the ven- dor's accomplishments will provide a safeguard against a blind repetition of an unfortunate experience with an unreliable vendor. Honest Statements. Closely allied with the above is SELLER AND BUYER 325 the purchaser's demand that the vendor confine himself to accurate statements as to the quaHty of his materials, what they will do, and when delivery can be made. Extravagant statements as to quality are less frequent since the universal adoption of qualitative tests. Irresponsible statements by sales- men as to the capacity of their plants and the date on which they can effect delivery are more frequent. The purchasing agent is justified in holding the vendor to such promises and in refusing to do further business with him if he fails to make good. It is conceivable that the purchasing agent may be indirectly responsible for promises that cannot be kept. The salesman, overzealous to conclude his sale, should not be tempted and even forced, as he sometimes is, to promise the impossible. On the other hand he is entitled to the truth. He should be given to understand at the outset that the buyer will insist on the terms of the contract. He should know that the delivery date is bona fide and will be insisted upon, and that on the contracted delivery date he cannot request and confidently expect an extension of time. Service Record The buyer should maintain a record of the character of service that the vendor usually gives, and something of his reputation and financial standing. The buyer is entitled to safeguard himself against having his order delayed by the vendor's financial inability to carry on his operations and against the never-ending inconvenience and demoralization incident to doing business with a firm that habitually promises more than it can perform. Whether promise has equaled performance in a given case can be made a matter of record by the use of Form 69, which is self-explanatory. Many purchasing departments do not feel the need for this information, particularly if they defer payment for ma- 326 PROCUREMENT BY PURCHASE terial until the material has been delivered and inspected and if the actual financial loss as represented in the amount paid to the vendor is small. This point of view is unsound. The receipt of defective material may disorganize an entire pro- DEALER MATERIAL SOLD US ADDRESS FINANCIAL CATALOGUE FILE STANDING PREVIOUS SERVICE AND REPyTATION KEEPINO PROMISE SMIPPIN6 PROMPT QUALITY BUSINESS METHOD CO-OPtRATlON PURCH. ORDER NO. FILLED IN BY PU«eM»»lNO OePT. RECORD OF OtALERS - ADDITIONAL REMARKS OM REVERSE SIDE | Form 69. Purchasing Department Record of Dealers. (Size 6x4.) Additional remarks on reverse side. duction program, increase production costs, prevent prompt deliveries of sales, necessitate the breaking of sales contracts and the loss of good-will. The harmful results very often cannot be measured in money alone. The chance of such accidents are greatly minimized if the purchaser knows his market individually and maintains in his vendors' record the information which enables him to gauge the strength of future promises by the record of past performances. Confidence This brings us back to that element of co-operation between the purchasers and the vendor. The complete performance in SELLER AND BUYER 327 accordance with the preliminary understanding and with a spirit of fairness and mutual co-operation of all the varied details incident to a sales transaction, generates a feeling of conjfidence and good-will which becomes to both vendor and purchaser a business asset of incalculable value. It may be the deciding factor in future transactions, reducing the service cost to both parties and leading to their more successful con- clusion. Without the spirit of a square deal there cannot be a complete understanding between buyer and seller; dis- putes will arise; and the purchaser will always find it hard to obtain the price and the service to which he feels he is entitled. CHAPTER XXIV THE PRICE Preparing to Issue a Purchase Order The purchase order should contain the terms on which the buyer does business with the vendor. In its preparation every care should be taken to insure accuracy. Chapter XXI de- scribes how the purchase order requisition (Form 57, page 287) originated, as described in Part II, and how it is carefully reviewed upon receipt in the purchasing department to see that it specifies exactly what is required, that the quantity wanted and the date on which the material is required are clearly indicated, and that all other details conform to regulations. Then if all the requirements have been met and the requisition is in perfect order the purchasing procedure may be se^ in motion. The second task is to compare the requisition with the contract record file. Is there a blanket contract covering the material requested? If so and if it is a quantitative contract, what is the balance purchasable and is it sufficient to meet the present demand? The make-up of the contract record is shown in Form 70. If a contract exists, the purchase order applying on the contract may be written and forwarded at once as all details are already arranged. If no contract exists the routine procedure of arranging the price and the details of an individual order must be set in motion. Quotation File To this end the requisition is next matched with the quota- tion and past purchase order file, as illustrated in Form 71. 328 THE PRICE 329 The record for the material to be ordered is temporarily re- moved from the file and attached to the requisition until the order is placed, so that ready reference to past negotiations may be possible. From the previously tried sources of supply CONTRACT FOR WITH DELIVERIES RECEIPTS BALANCE OUTSTANDING RECEIPTS BALANCE OUTSTANOINQ purchase! ORDER Ma DATE QUANTITY PURCHASE ORDER NO. DATE GtUANTlTY Form 70. Contract Record. (Size 6 x 4.) the purchasing agent determines where to purchase the re- quired article, and from the trend of the quotations about what price he may be obliged to pay. If quotations on file are of recent date and satisfactory, the purchase order may be written at once. If not, bids should be solicited from reliable sources. If the sources as shown here seem insufficient, reference may be made to the record of sources of material (Form 66, page 309). In this connection, a further reference to the vendor's reliability file (Form 69, page 326) may be expedient, in order to review the record of the service rendered by the prospective vendor in previous transactions. If these files fail to furnish several sources of satisfactory supply, it will be necessary to search for other vendors, and to solicit bids from those of 330 PROCUREMENT BY PURCHASE _ < a ILI H U. O z o \- 0. i 6 z z o y u. o s: lU «n o -1 i u § § 5 1 in" X a 1 r \ \ \ z o 1 \ \ 1 \ ^ J 1 j 8| ' Is \ Q fcS pi o \ \ 1 P \ a J < kJ O h < z 1 / THE PRICE 331 good Standing who are equipped to handle the order. Such bids are conveniently requested in the form letter illustrated in Form 72. Request for Bids The request for bids is made out in the purchasing depart- ment in duplicate, both copies being sent to the vendor. The request should indicate clearly and in detail the delivery date, the quantity and unit of material desired, and the conditions which the purchasing department expects to include in the purchase contract. Whether such conditions will be looked upon as so much red tape which the vendor can disregard at his pleasure, or a part of the contractional obligation to which he will be held and from which it will be dangerous for him to depart, depends upon the future policy and attitude of the purchasing agent. The request is keyed with the same number as the purchase requisition for purpose of cross-reference. After note has been made on the requisition of each vendor solicited, the record is filed until the tenders arrive. Tabulation of Bids When the vendors have filled out and returned to the pur- chaser the second copy of the "request for bids" with its accompanying conditions, all preliminaries to the drawing up of the contract may be considered as concluded. As rapidly as received, the vendor's price, terms, shipping point, etc., are recorded on the table provided for this purpose on the purchase order requisition shown in Form 57 (page 287). It is assumed that every vendor who has been asked to quote prices is a reputable dealer with whom it is safe to contract because he is able to fill the order or has sufficient financial resources to execute it. If, however, this is not the case, and the name of a doubtful vendor appears upon that tabulation, a note to that effect should be written in the proper space on the requisition form. 332 PROCUREMENT BY PURCHASE THE BUYING COMPANY NEW YORK, N.Y. PURCHASING DEPARTMENT THIS IS NOT AN ORDER Please quote us your lowest price for shipment to arrive New York, NY. by described below, using the attached duplicate for your reply. Your reply should be in our office by RCOUEST FOR QUOTATION .192- -for articles QUANTITY AND KIND REQUIRED UNIT AND DCSCBIPTION - - TRADE NET* KL'riNMVS PRICE OIS- PRICE FROl" Rtt'T PER UNIT COUNTS PER UNIT OF OROCR TO RECEIVE CONSIDERATION, YOUR BID MUST STATE WHEN Dl LIVERS' CAN UE MACE Shipping Point Suggested Route. F.O.B. New York, N.Y * Subject to terms If you are unable to furnish same in accordance with our specifications, quantities, etc., or wish to offer substitutes, please give full details, sending samples of sub- stitutes, if possible. A purchase order accepting your quotation will be covered by the following conditions: 1. All packages must be marked with our purchase order number and contain an itemized list of contents. 2. Invoices and shipping receipts must bear the order number and must be mailed on the day of shipment. 3. Each shipment must be covered by a separate invoice. Articles on one order must not be billed with those on other orders. 4. The right is reserved to cancel any order if not filled within the contract time. 5. The conditions of order shall not be modified by any verbal understanding or agreement. 6. Charges for boxing and carting will not be allowed unless previously arranged. 7. The acceptance of our order includes all terms, prices, delivery, specifications and conditions stated therein. THE BUYING COMPANY Please reply on and return copy 2 of +his form as soon as possible. Form 72 (a). Purchasing Agent's Request for Quotation (copy i). (Size 8J^ XII.) THE PRICE 333 TO PURCHASING DEPARTMENT THE BUYING COMPANY NEW YORK, N.Y. FROM REQUEST FOR QUOTATION J92 In accordance with your request, we offer you the articles described below at our loweet price for delivery to arrive New York, N.Y. by Our quotation is subject to the conditions stated on copy 1 of this form. Our reply should be in your office by spec QUANTITY UNIT AND DESCRIPTION LIST TRADE NET* Oa'r IN DAYS PRICE OS- PRICE FROMRECt. PEH UNIT COUNTS PER UNIT OP ORDER WE CAN MAKE OELIVCRV AS ABOVE STATED. Shipping Point F. 0. B. New York, N.Y Suggested Route *3ubject to terms We are unable to furnish the above as described and offer substitutes as followsi. . Shipper ttate. Reply on and forward this copy to The Buying Co. as soon as possible. Form 72 (b). Purchasing Agent's Request for Quotation (copy 2). 334 PROCUREMENT BY PURCHASE The Price With the bids before him the purchasing agent is ready to consider the price. The purchase contract is to be the agreement entered into by the purchaser and the vendor, under which the vendor agrees to furnish a certain amount of mate- rial for a certain consideration. This consideration must cover the sum of two values — the cost and profit values of the material to the vendor plus the cost of other factors known as service. The good buyer is always trying to decrease the cost of his purchases. He has no control over the production cost of the material but he can reduce the margin which the vendor reserves for service and his profit. It is first necessary, however, for him to consider the various factors that enter into the deter- mination of the price. As previously stated, the selection of the right article is the first consideration of the purchasing agent, and relatively price is always to be considered of secondary importance. Only when two offers are received from firms of equal responsibility which give the same service and submit identical articles, does price become the determining factor. The service offered in the bids should be considered as part of the value to be received, and, as stated before, the purchaser must consider the possibilities and consequences of transportar tion or other difficulties, and in the case of the unreliable biddei^, the possibilities and consequences of poor service are increased. i Competitive Prices j The advantage of obtaining bids from two or more seller$ before placing any order for a considerable quantity of ma^ terial has been previously indicated. Whatever may be th^ purchaser's knowledge of prices in the market at large, he should at least take advantage of such opportunities as com- petition between vendors offers him. It is, however, only a THE PRICE 335 waste of time to solicit or consider bids from vendors either unable or unwilling to supply goods of the quality desired or to finance and complete the order on time if they receive it. The custom of obtaining low bids from such vendors for the purpose of forcing down the bids of desirable vendors cannot be justified on any grounds. The reputable purchasing agent will not ordinarily depart from the logical market in seeking his sources of supply and from that market he will eliminate all except those whom he is sure are able to carry out the provisions of a satisfactory transaction. There are various discounts to be taken advantage of. Many producers maintain a sliding scale of prices theoretic- ally based on the size of orders, but practically constituting a margin which can be yielded according to the exigencies of the situation. Large buyers and many small ones, whose trade is desired, are granted a rebating discount based upon the amount of competitive business received during a period. A -stationery and printing firm grants a 15% rebate on the total business received during the month. A hardware concern offers a discount on a sHding scale based on the business of a year. The buyer is of course justified in getting as much of a rebate as he can. Most manufacturers usually sell to jobbers at a lower price than to the ultimate consumer, but an excep- tion to this rule is occasionally made by giving certain buyers the benefit of the resale price. Price Maintenance In a sense there is no such thing as a standard price even for articles whose price is said to be fixed. One supplier may agree to deliver f.o.b. destination while another quotes f.o.b. shipping point only. Discounts are offered for prompt pay- ment and rebates are offered on total business. Yet producers have long attempted to maintain a standard resale price for trade-marked articles whose reputation and good-will have 336 PROCUREMENT BY PURCHASE been developed by great effort, often by the expenditure of large sums for advertising. It has been claimed that the same article without its familiar label has occasionally been sold at a lower price than is demanded for the product under its trade-name. In buying an advertised article there is a certain protection for the purchaser, notwithstanding a possible higher price, one advantage being that the producer does not as a rule demur to the return of damaged or defective goods. On the other hand, the prices of highly advertised articles must bear the burden of their exploitation and usually a higher percentage of profit. The producer of such a commodity, especially if it is patented, is in a position to maintain his price. He may refuse to sell in bulk and he usually is reluctant to make price concessions. Price maintenance constitutes an in- creasingly important factor in the marketing of advertised goods to which the purchasing agent must give due con- sideration. It is an open question as to whether or not the benefits of purchasing a trade-marked article of known reliability offsets price considerations. The decision must be based on the claims for the merits of the substitute offered for the advertised article and the purchaser's facilities for technical inspection and test of those claims. Kinds of Price If price is a very important consideration, every purchase contract should explicitly state it. Probably more disputes and hard feelings between buyers and sellers arise because of dis- putes about this important matter than from all other causes. This must be guarded against. There are four bases on which prices may be fixed, as follows : 1. A definite price based on a lot or unit. 2. Price based on performance. THE PRICE 337 3. Current price at time of delivery with or without definite limits. 4. Price composed of the cost plus a percentage or amount as profit. The Definite Price The contract which contains a stated and definite price is the most usual and the most satisfactory because it is the simplest in form. It leaves no room for misunderstanding, each party knowing exactly what he will receive or give under the contract. It is necessary, however, to distinguish clearly between two kinds of stated prices; one for a stated lot of material, the other for a particular unit. A price consisting of a lump sum for a given lot deprives the purchaser of his right of selection; he must pay the entire amount even if he accepts only part of the lot, while if the price be a unit price, the purchaser pays only for such units as he accepts after in- specting the material. Usually a lump sum is specified for a quantity of specific material and for material which cannot be sold on a unit price basis, as for example, when the exact quantity is not known. Price Based on Performance Certain materials are sometimes bought and paid for on the basis of their performance in actual use. Fuel and oil are well-known commodities- frequently purchased on this basis. For instance, coal that generates a stipulated number of British thermal units or calories of heat per ton may be paid for at a certain rate, the price being scaled proportionately if it fails to meet these tests. Automobile tires with their guaranteed adjustments for mileage are another example. There is no good reason why this method cannot be applied to all commodi- ties, the merits of which cannot be easily judged in any other way. 338 PROCUREMENT BY PURCHASE Current Prices In the purchase of staple commodities with a fairly settled and known market it is customary to contract for them on the basis of the current price at the time of the delivery. Such an arrangement is advantageous to both buyer and seller, as it guarantees the delivery and sale of certain material, allowing both parties to make plans for the future with assurance. In the case of materials the price of which can be easily deter- mined by the m.arket quotations, this plan is very popular. A common method is to use the average daily price quotations for the month as the basis of payment for all material delivered during that month. Such arrangements may be extended over a long time, the parties to the contract sometimes protecting themselves by fixing the limits above and below which the price shall not go. Thus in the purchase of cotton a maximum and minimum limit of 20 and 16 cents may be fixed. Both buyer and seller assume some risk, but both enjoy the benefit of knowing the future price on which they can finance their businesses during the period covered. Under this plan, the possibility and the effect of loss due to price fluctuations still exist but the entire loss possible does not fall on one party, being divided between them. A knowledge of the general market conditions and the extent of fluctuations which may be expected during the specified period will determine the wisdom of accepting a current price with or without maximum limits. The Cost-Plus Contract Occasionally in an unsettled market, or under unknown conditions of manufacture in which the seller is reluctant to carry the full risk of a contract of an unusual nature, an arrangement is entered into, known as a "cost-plus" or "agency" contract. Under this contract the seller agrees to do a certain piece of special work for the buyer in return for the THE PRICE 339 reimbursement of the actual cost plus a certain per cent thereof or a certain amount as his commission or profit for doing the work. Under this plan many variations are possible. A clause may be inserted in the contract setting the maximum cost and the latest delivery date. If market conditions keep the actual cost below the stipulated maximum, the seller may receive a part of the difference between the actual and the estimated costs. If, on the other hand, cost exceeds the maximum, the profit to the seller may be cut. The possible variations in the price stipulations of such a contract are unlimited. Many of the large contracts placed by the government during the war for ships, cantonments, arms, clothing, and munitions, were "cost plus io%" as profit to the supplier. Contracts for small items such as tools, patterns, and experimental work are frequently made on the basis of a certain rate per hour for all work on the contract. The cost-plus type of contract is obviously an accelerating measure, demanding that the buyer assume most of the risks, but it results in a saving of time at the expense of dollars. At times the condition of the labor and material market may make this the only method of getting work done. Yet the plan may conceivably defeat its own object. The more waste of time and materials in doing the work, the more it costs and the larger the amount represented by the profit. Such a contract is subject to easy manipulation and must be carefully audited. It is at best a dangerous arrangement and should be avoided whenever possible. List and Net Prices Quoted prices are either list or net. List prices are subject to trade discounts and the remainder is the net price. Net prices are subject to cash discounts or to special terms of pay- ments. List prices and trade discounts exist for the conven- 340 PROCUREMENT BY PURCHASE ience of the seller. By adjusting his discounts he can avoid making changes in the prices printed in his catalogue each time market prices fluctuate, or he can conceal the variable net prices he quotes to different buyers by differences in the trade discount offered to them. Thus the list or catalogue price remains the same and only the discount is varied. Large buyers usually receive a larger discount than smaller buyers. As a rule trade discounts are built up by classes, all buyers in each class receiving a certain trade discount. Thus there may be a group of class B buyers who receive a small discount, a class C receiving a larger discount, and so on to the extent that the classification is established by the seller. Whenever a seller decides to change his price after he has issued a cata- logue, it is only necessary for him to send out a price list, using the number or symbol of the particular article or class to designate the new discount on that particular class of goods. For instance, a certain line of hardware may carry a discount of 25% but due to a rising cost of production the vendor may cut the class A discount from 25% to 15%. In such a case it is only necessary for him to advise the trade of the change of discount by forwarding a notice to this effect. A purchasing agent should try to discover such cases of varying discounts. They are generally used in quoting cata- logued articles. When a seller quotes but one discount, as above, a varying discount is much harder to recognize than when a series of discounts are offered, as 40% and 10%. This series generally indicates that the seller quotes varying discounts to different customers. Transportation Charges There has been considerable discussion as to whether a transportation charge is a part of a material's cost or a general item of expense. The former opinion is to be preferred. To see how this works out the discussion of price maintenance THE PRICE 341 shows how a supplier selHng trade-marked material at a cer- tain fixed price is at liberty to vary the price by allowing the buyer the freight charges from shipping point to destination, where as his competitor does not offer that inducement. F.o.b. Destination In arranging for the delivery of material, the purchasing agent should, whenever possible, stipulate that it be made f.o.b. destination, first, to decrease the cost of the material; secondly, that the vendor may be responsible for all negotia- tions with the transportation company, including any claim for damage in transit or for overcharge; and thirdly, that formal delivery will not be made until the day the material is received at destination, thus allowing ample opportunity for inspection before payment is due. If impossible to secure quotations f.o.b. destination, the buyer should always endeavor to have the material shipped freight prepaid, thereby relieving himself of the clerical details in connection with the charges and adjusting any matters with the carrier. It has been held that the party who pays the transportation charge is responsible for the recovery from the transportation company of any claim for overcharge or damage; therefore, if freight is pre- paid, all responsibility rests with the seller. As a rule the purchasing agent experiences little difficulty in obtaining an f.o.b. destination shipment and few concerns refuse their customers this accommodation. The "request for quotation" illustrated in Form 72 shows the f.o.b. delivery point to be New York which is the location of the buyer. In one instance this method of having the delivery point printed on the request for quotations resulted in over 90% of the bids received being on the basis of f.o.b. destination, practically without any increases in the prices asked f.o.b. shipping point and practically without any increases above the transportation cost. 342 PROCUREMENT BY PURCHASE Discounts for Prompt Payments The method of payment is an important feature of a price and one which often permits the careful purchasing agent to save his concern considerable money. As a general rule it is possible to secure a reduction of the net price in the form of a discount for cash within a certain length of time from the delivery time. In this he must co-operate with the finance department, for it is sometimes possible to juggle trade and net discounts quoted to suit the finances of the business. Con- trary to general belief and practice, the credit period allowed for payments begins upon the day of delivery, wherever and whenever that may be. If material is quoted f.o.b. shipping point, 30 days net, the bill is due 30 days from the day of ship- ment; if quoted f.o.b. destination, the bill is due 30 days from arrival. Purchasing agents are more and more demanding that sellers observe this rule before requesting payment. Cash discounts have been the subject of attack from many quarters and movements have been introduced for their elimi- nation Though there is much difference of opinion as to the value of their use, it is often contended that it would be best for all parties concerned if they were abolished. Then the price quoted would be the net price, and the price of an article with a supposedly fixed value would be more truly fixed. To effect the abolition of cash discounts, however, would require the standardizing of the time of payment for all buyers and all orders would have to be either cash payable on delivery or within 30 days or on some agreed basis. In practically every line of trade there is an established custom relative to the time and terms of payment. However, these accepted terms are varied according to the wish of the vendor and are subject to negotiation between buyer and seller. For instance, a buyer making a contract covering a long period of time which totals a considerable amount, may reasonably request a substantial discount for cash on delivery THE PRICE 343 and lesser discounts on time payments — the discount varying with the credit period. In such cases he may obtain either a 5% discount for cash, or 2% for 10 days, or 1% for 30 days. The saving made by taking advantage of the cash discount varies with the rate of the discount and the period of time during which it runs. In some instances it may be more profitable to disregard it. Assume, for instance, two trans- actions offering 1% discount for payment in 10 days from delivery, but one at 30 days net and the other at 90 days net. Assume also that the ruling price of money is 6%. It would pay a buyer to accept the discount on the 30-day net period but not that of the 90-day period. Accepting a discount on the first he would be gaining 18% per annum on the money in- volved, against only 4^^% on the second. The second should be paid at the end of the 90 days even though the firm's custom is to discount all bills. Whether discounts are taken or not usually depends on the financial condition of the business. Every large contract should be made with an understanding of the probable supply of ready cash at the time the purchase is to be paid. If the immediate resources of a concern are low, the purchasing agent tries to secure longer credit period in return for waiving the discount. If the bill remains unpaid at the end of the net credit period, and the seller draws on the buyer for the amount of the bill, the draft should be promptly met. On the other hand, a vendor may be willing to increase the cash discount if the net period is shortened. If his concern has plenty of ready cash, the purchasing agent, as a matter of policy, asks for discount concessions and expects them. Trade Acceptances An old method of payment, but little used up to recent years, is the trade acceptance which in the last few years has been coming into more general use in the American market. A 344 PROCUREMENT BY PURCHASE trade acceptance may be defined as a bill of exchange drawn upon the buyer by the seller and accepted by the buyer upon the delivery of the goods. It is similar in tenor to a draft but differs from it in that a draft is not usually drawn until after No.. STo; _192 I Thirk/) I Sixt:«. Vdays after^ pay to the order of OURSELVES H. Ninegjt |sight I [l Dollars . Idate |sight The obligation ot-^he aoeeptor hex«of arlaefl out of the poTCblM of goodj from the dnwer. No. 192 _after_ _pay to the order of -Dollars. 'The obii^tion of^ t^e loceptor hereof tilBes out of tnc porchaie of coodi from the dnvcr. 5To: Form 73. Trade Acceptance Forms Prepared by Federal Reserve Bank of Cleveland, Ohio the transaction has been carried out and usually after the credit period has passed; a draft, furthermore, may be given in return for other considerations than in payment for goods. The trade acceptance, as illustrated in Form 73, is usually filled in and sent by the vendor with the invoice. The purchaser is expected to sign it (technically known as accepting it), and THE PRICE 345 return it to the vendor as soon as the delivery has been ap- proved. The acceptance constitutes an agreement on the part of the buyer to make payment on a stated date for the material. He gives up the option under his former method of a time period for deciding whether to take a discount for prompt payment or a net payment at the end of the credit period. In case he fails to pay the acceptance on the date on which due, as the document is sent through his bank for collec- tion, it becomes a tangible record before the commercial world that he has failed to meet an acknowledged obligation. Under the old method, if he failed to pay his account on the due date, such failure would ordinarily constitute nothing more than a private issue between himself and the seller. His credit rating in the general commercial world would not thereby suffer greatly. The advantages derived by the buyer from the use of the trade acceptance are thus described in a bulletin issued by the Irving National Bank of New York City: (a) It develops careful buying. (b) It enables him to keep better track of his outstanding obli- gations, thereby avoiding the evils of overextension. (c) It strengthens his credit and puts him in the position of a preferred buyer. (d) It develops in him the habit of prompt payment and furnishes him w^ith an excellent excuse for requiring prompt payment from his customers. (e) It enables him to realize that credit is as tangible as cash and should be guarded and used accordingly, (f) It eliminates wastage and lost motion attending the open book account method. (g) It is good business because it releases business capital for new transactions. (h) It improves the chances of the buyer of small means to operate in successful competition with the large buyer. (i) It helps the buyer by making him deal always in current transactions rather than in long-drawn-out book ac- counts. 346 PROCUREMENT BY PURCHASE (j) As the buyer often becomes a seller, the same advantages that apply to the seller apply to him. (k) It serves as a tonic to the business organizations con- cerned. (1) It prevents the accumulation of overdue accounts. (m) It develops a sounder and more serious attitude toward the buyer's own obligations. The advantages to the seller of goods are thus enumerated : (a) It relieves him from the burden of financing his customers and the consequent burdening of his own capital. (b) It enables him to conduct business on a more systematic basis, with a more regular income schedule. (c) It puts the burden of providing correctness of the details of the merchandise transaction where it belongs — upon the buyer. Until trade acceptances come into more general use in American business, sellers must continue to offer special induce- ments and discounts to encourage buyers to use this method of payment. A signed trade acceptance is in effect a note payable, by which an account payable is turned into a negotiable instru- ment and a more easily proven and collectible liability. CHAPTER XXV THE WRITTEN CONTRACT Kinds of Contracts The purchase contract agreement should always be in writ- ing if the almost inevitable misunderstandings and dissatisfac- tion are to be avoided that are the inevitable results of a verbal arrangement. Verbal agreements and orders are too easily forgotten to be risked. The legal phases of contracts are discussed in Chapter XXVIII. There are two generally recognized forms of purchase contracts : 1. A special, single purchase order contract covering a par- ticular purchase usually for a small quantity and originat- ing from a purchase requisition. 2. A blanket contract which covers a large quantity usually of raw materials or supplies with the delivery date indefinite. Single-order contracts are generally left to the discretion of the purchasing agent, his decision as to price, vendor, and so on being final and based on his independent judgment. A blanket contract is invariably placed only after a most careful survey of all the data available has resulted in its approval by the management. In either form of contract, however, the same principles operate in the matter of price and the same needs must be kept in mind. Blanket Contracts Every purchasing agent has ample opportunity to show his good business judgment in developing blanket contracts, for 347 348 PROCUREMENT BY PURCHASE the success of many businesses depends upon the wisdom with which such contracts are made. Although in some Hues of business and types of manufacture blanket contracts cover from 50% to 90% of the total purchase requirements, very few businesses have exhausted the possibilities for saving through these contracts which practically always bring many advantages in price and delivery impossible to obtain by using the casual inquiry for price and delivery as the particular need for a material arises. In placing such contracts the state of the market must be carefully gauged and studied by the pur- chasing agent acting as the expert appraiser of raw material values. The terms of blanket contracts practically always are very definite as to price but seldom include more definite stipu- lations regarding shipments and delivery dates than a clause to the effect that "shipments are to be approximately so many units per month," or that "the total contracted quantity is to be taken within so many months or years," or some similar statement of quantity and deliveries. Frequently they cover a variety of materials instead of one. Their possibilities are so varied that the purchasing agent's cleverness will be tested in arranging stipulations exactly in accordance with his needs and in seeing that the wording of the contract clearly defines what he intends. The Individual Purchase Order After a blanket contract has been placed, the directions regarding deliveries are usually given by means of individual purchase orders (Form 74). The terms and conditions are those previously determined, with directions to ship a certain quantity and the stipulation of a definite delivery date. This form is also used for placing a single contract following the receipt of a purchase requisition and the securing of bids. These orders are alike except that the first class will refer to the blanket contract to which it applies. THE WRITTEN CONTRACT 349 Every purchase order should include the following : 1. Name of the vendor to whom the order is given. 2. The description of the goods desired. 3. The quantity and units of goods wanted. 4. The price to be paid, including terms, etc. 5. When delivery is to be made. 6. Shipping directions. 7. Any special identification marks for packages, such as the purchase order number. 8. Any special conditions or references not written out in de- tail in the order. 9. The signature of the purchaser. The matters enumerated above have been discussed in detail in the preceding chapters with the exception of one important consideration — the time of delivery. Fixing the Date of Delivery The importance of a definite delivery date, especially in the purchase of materials required for manufacturing, cannot be overestimated, and the careful purchasing agent will specify in his order the date wanted. The purchase requisition from which his negotiations originate, should state — and he must insist that it does state — a definite date when the material is required. Any requisition which lacks that information should be returned for completion. The setting of the delivery date is of great importance. A too early delivery means needless expense; a delayed delivery may mean disaster. Raw material in storage, while waiting to be used, represents so much increased burden for the idle time before actual work upon it begins and it may be subject to deterioration. The buyer will, therefore, approximate as closely as he dares to the latest possible date for delivery but he will always err on the side of safety, and regardless of other considerations he will see that delivery is on time. 350 PROCUREMENT BY PURCHASE Difficulty of Effecting Prompt Delivery If the mere placing of the purchase order insured the receipt of the article desired, buying would be so simplified as to become almost automatic. With every precaution, however, delays are likely to arise, many of them beyond the buyer's control. It is his task to reduce such contingencies to the minimum by taking certain routine precautions. The purchasing agent who buys only on a price basis may lose all the advantages of price economy and greatly increase the final purchase figure by placing his order with unreliable concerns. He soon learns that concerns which offer the most attractive prices are, as a general rule, unable to offer equally attractive service. Though the most reliable supplier may fail occasionally to deliver on the date promised, such failure is accidental; whereas poor delivery service is frequent with the supplier whose quotations have been accepted on the basis of price alone. As previously stated, a supplier's record as to delivery serv- ice should be noted on the vendor's reliability record (Form 69, page 326) for future reference in estimating the relative value of the service to be expected. Advance Information of Factory Requirements As the efficiency of the purchasing department depends largely upon fulfilling the needs of the factory, it should keep in close touch with the production departments' requirements. It is not its province to question the accuracy of the date on which the material is required as stated in the purchase order requisition, and this date must be accepted in good faith. Though it is assumed that the purchasing department will be reasonably efficient, that it will place the order without delay and that it will expedite delivery, the requisitioner should make a reasonable allowance for the purchase routine and for possible accidents and delays, and he should not expect the perform- THE WRITTEN CONTRACT 35 1 ance of the impossible. It is sometimes not the least difficult of the purchasing agent's tasks to obtain such co-operation, but obtain it he must. It is incumbent on the buyer to keep the department heads posted on all changes that affect deliveries of the major ma- terials they use. It is their part to anticipate their needs and to give him a tentative estimate of their most important require- ments before filing their requisitions. Haste in purchasing is disastrous to all parties concerned. Only by close co-operation can it be avoided. The far-seeing purchasing agent, however, gauges the situation in advance. If he is uninformed he takes measures to inform himself. In the last analysis, when delays occur, however legitimate may be his excuses, he will be called upon to bear more than his share of the blame. When the purchasing agent has obtained an authentic date on which the materials are required, this date appears on the purchase order itself and the vendor should be closely held to his bargain to meet it. If the consuming departments are habitually honest and careful in estimating their future require- ments, if the time allowed for delivery has been reasonably determined, and if the vendor has discovered from his past experiences with the purchasing department that its demands are sincere and will be insisted upon, delivery on time is rea- sonably certain. Conversely, laxity or insincerity in time stipulations inevitably means delays. Allowance for Time in Transit If the vendor is to deliver the goods ready for use at a point other than destination, the time required to complete shipment must be taken into consideration, and in setting the delivery date, allowance must be made for the period the goods are in transit. The purchase order illustrated in Form 74 states that the vendor is to "ship to arrive New York on " This 352 PROCUREMENT BY PURCHASE Statement throws on the vendor the responsibiUty of shipping early enough to allow for transportation difficulties or delays that can be foreseen. The arrival date may be and sometimes preferably is stated, not as a single date, but as a period defined as "to arrive between and " The vendor has the privilege of shipping at any time he chooses so long as the material arrives within the stated limits. The law states that if payment is to be made on delivery, the delivery should be made before sunset in order to give the buyer a chance to examine the goods. If an article contracted for is lost or destroyed in transit, it is considered — unless otherwise provided for — that delivery occurred with its dis- patch and the loss is the buyer's. The parties are considered to have realized that such a thing may happen and are supposed to act accordingly. On the dispatch of the goods the contract is legally discharged. Time for Completion If no time for performance is stated, every contract is supposed to be performed within a reasonable time. The exact delivery time should be stated in the contract, otherwise it will be considered as of no effect if a long period goes by without anything being done by either party. Many contracts have a clause providing that the contract must be completed before a certain date. Should this date pass before completion, the contract invalidates itself. When a performance becomes impossible by what is known as an "act of God," such as a tornado, a hurricane, a flood, a conflagration, or some other unforeseeable accident, the contract is considered as discharged. War discharges all unperformed contracts between citizens of enemy countries. If any of the terms of the contract have already been fulfilled by either party, the contract will merely be suspended until the war is over, when it must be carried out in accordance with its terms. THE WRITTEN CONTRACT 353 A contract may provide for its own discharge on the hap- pening of a certain event. It is common to insert provision against strikes and similar happenings, but such clauses must be in the body of the contract if it is to hold. A notice at the top of the firm letterhead that all sales are subject to strikes or accidents, would not form part of a contract, written on the letterhead. The Copies of the Purchase Order Having selected an article, provided for its delivery, deter- mined the price, and arranged satisfactory terms of payment, the formal purchase order (Form 74) is sent to the vendor for his acceptance. As many as six copies of this order may be made out to serve different purposes and functions distinguished by their colors, as follows : ^0. Color Destination I White To vendor — the contract proper. 2 Pink For purchasing department serial file. 3 Gray To receiving division for identify- ing shipments. 4 Yellow To accounting division, thence to auditor. S Brown To originator of request for the material. 6 White To purchasing department follow-up (cardboard) file. As a rule the purchase forms are numbered serially in ad- vance, to prevent their loss and for purposes of identification. The body and outline of all copies are alike — various changes and additions being made to permit the copies to serve different purposes. A small concern does not need so many copies, requiring only copies numbered i, 3, 5, and 6. The data to be typed on the order are all taken from the requisition, the handling of which has been described previously. The purposes 354 PROCUREMENT BY PURCHASE ORIGINATOR OF REQUEST FOR MATERIAL REQUfSITION NO. THE BUYING COMPANY (copy 1) NEW YORK, N.Y. This number must appear on all invoices and packages N9 35353 PLEASE FURNISH US WITH THE FOLLOWING MATERIAL IN ACCORDANCE WITH YOUR QUOTATION OF UNIT AND DESCRIPTION OF MATERIAL WANTED Return Acceptance Card Promptly, giving Complete Shipping Information. TO ARRIVE NEW YORK, f 1. All packages must be marked with the order number given above. 2. Invoices and shipping receipts must bear this onder number. Mail them on day of shipment. 3. Each shipment must be covered by a separate invoice. Articles on this order must not be billed with those on other orders. 4. The right is reserved to cancel this order if not Tilled yyithin the contract time. 5. The conditions stated in this order shall not be modified t7 any verbal understanding or agreement. 6. Charges for boxing and carting «!ll not be allowed unless previously arranged. 7. If price is not stated on this order, the material must not be billed at a higher price than last paid without notifying us in advance. 8. The acceptance of this order includes all terms, prices, delivery, specifications, and conditions stated herein. THE BUYING COMPANY Form 74 (a). Purchase Order (copy i). (Size 83^ x ii. (See page 357 for description of copies) THE WRITTEN CONTRACT 355 ORI6INATOR Of REOUE&T FOR MATERIAL (COPY 2) PURCHASE ORDER COPY FOR PURCHASING DEPT'S MASTER SERIAL FILE N9 35353 TERMS SHIP VIA TO ARRIVE NEW YORK, I ORIOINATOR OP REQUEST FOR MATERIAL (copy 3) purchase order copy for RECEIVING DIVISION N9 35353 TERMS SHIP VIA TO ARRIVE NEW YORK, N.Y., ON DE&CRIPTION OF ARtlCLE ORIGINATOR OF REQUEST FOR MATERIAL (copy 4) purchase order copy for ACCOUNTING DEPT. AND AUDITING DEPT. N? 35353 TO ARRIVE NEW YORK, Form 74 (b). Purchase Order (copies 2 to 4) In copy 3, column "List Price and Trade Discounts" is eliminated. 356 PROCUREMENT BY PURCHASE THIS COPY FOR ORIGINATOR Cr REQUEST FOR MATERIAL (COPY 5) PURCHASE ORDER COPY FOR ORIGINATOR TO ,92 N9 35353 I 1 1 — ■ ■ '^^^ZIZ^ — ■ — 1 TERMS FO.O. SHIP VIA TO ARRIVE HEW YORK, HT. ON DATE aoAVTmr RECEIVED BALANCE DUE DATE QUANTITY RECEIVED BALANCE DUE To Originator: Should you desire information about this order, please call the Purchasing Oept. as followit About Specifications, change of order-Call Planning Division Quotations Preparation " Dealer Production " Delivery date Scheduling " Inspection, Claims, Invoices Inspection " ^ Form 74 (c) Purchase Order (copy 5) 1 2 3 4 5 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 M PURCHASING DEPARTMCHT'3 f COPY 6) FOLLOW-UP FILE ^ N9 35353 ■^~~— ^' ■ 1 ■ " - 1 ^ TERMS F.O.B. SHIP VI A TO ARRIVE NEW VORK. N.V., ON ITEM ITEM Acknowledged Pronnised Kll of lading}'"'* Invoice Number Acknowledged promised Hotic« of Shipment: B^iltffuxi.njl*''*' Invoice Number Urged Promised s;;su°^^- Invoice Amount Uryed Promised Pert of )o^,r Invoice Amount Urged Promised Date Mat! Rec'd. Copy of Material litcci^vd ^cet Urg-ed Promised Date Mat! Rtc'd Cow of Materral RcuivBl Sheet Urped Promised Mat'l. Accepted Balance Due On Order Urged Promised Mat'l. Accepted Balance Due On Order Form 74 (d). Purchase Order (copy 6) Copy 6 is on card stock. Reverse side of this copy is a continuation of the items shown below on this form ; also at tap of reverse side numbers are given in reverse order, reading from right to left- THE WRITTEN CONTRACT 357 served by the various copies of the purchase order are as follows : Copy I — the original — is perforated along the left margin in order that the requisitioner's name and any other data not pertinent information for the supplier may be entered on the margin and separated from the order proper before it is mailed. The order must include all conditions governing the perform- ance of the order. Conditions of delivery, packing, and ship- ment which are imperative may be printed, for emphasis' sake, in red ink. The other conditions on which the purchaser may insist if occasion arises, and to which the vendor subscribes as well as to the typewritten terms, prices, delivery rules, and specifications, appear in black ink. The original, when signed by the purchasing agent or his authorized representative and when checked for completeness and accuracy, is sent to the vendor together with the acceptance card shown in Form 76. Copies 2 and 4 contain the same data as the original, except that the conditions involved in the transaction do not appear. On copy 3, the column showing the price and trade discount is obliterated in order that such confidential data may not be divulged to the receiving department which is not concerned with it. At the foot of copy 3 appear columns in which the receipt of the material may be indicated. At the foot of copy 5 provision is made for the notation of any balance due. On copy 6, placed in the follow-up file, provision is made for re- cording the receipt of material on partial shipments, to the end that the follow-up clerk may know the status of any given order at any time. Inspection of Purchase Order As an error or omission may alter the character of the entire contract and result in a disastrous transaction, before the purchase order leaves the purchasing department it should receive a rigid inspection with a view to determining that it is 358 PROCUREMENT BY PURCHASE correct in every essential. No purchase order may be con- sidered as complete until it carries the correct date, the exact name and address of the vendor, the proper quantity of material required, the definition and specification which coincide with that standardization by the firm, the time and place of delivery, the price — either a lump sum price or a price per unit — the time of payment, and the method of payment. If a printed specification of the materials be attached to the purchase order, only a definite reference to it will make it a part of the contract. Since the purchase order is the authorization to disburse money, the importance of each of these items is self-evident. Should any changes be made in the original order, such as its cancellation or the revision of its terms, a form (Form 75) similar to the original purchase order is made out and the various copies are sent to the parties concerned with the change. The vendor's copy is accompanied by a new acceptance card. When other departments are advised regarding a change in an order and no copy need be sent to the vendor, the original copy should be destroyed. Vendor's Acceptance of the Order An acceptance card, illustrated in Form 76, should be sent to the vendor with each purchase order, the return of which is an acknowledgment of its receipt and a definite acceptance of the contract. As will be explained in detail in Chapter XXVIII, "Some Legal Aspects of Purchasing," any minor deviation from the terms of the contract in the purchase order will in- validate all previous arrangements and no contract can be formed by merely placing an order. The acceptance card binds the vendor to the bargain and completes the contract. Another function of this card is to supply the purchaser with the shipping data which he will require in his follow-up work. It is not always expedient or possible to allow the buyer to specify the shipping route. While the buyer is probably THE WRITTEN CONTRACT 359 THE BUYING COMPANY New York, N.Y. THIS PURCHASE ORDER NUMBER MUST APPEAR ON ALL INVOICES AW PACKAGES NO. ORIGINATOR OF DEOUEST FOR MATERIAL REQUISITION NO. PLEASE MAKE THE FOLLOWING CHANGE IN OUR PURCHASE OCDER NUMBERED AS ABOVE. SUBJECT TO ALL THE CONOITIONS GOVERNING THE ORIGINAL ORDER. PLEASE ACKNOWLEDGE PROMPTLY ON THE ENCLOSEP CARD. YOUR ACCEPTANCE OF THE CHANGE OF THIS ORDER. THE BUYING COMPANY PORCMASINO AGENT Form 75. Supplementary Purchase Order. (Size Sj/^x 11.) Six copies. Five copies similar to first, except that recipient of copy is stated at top as in Fonii 74. Sixth copy is identical with first copy, but in addition contains numbers at top and data at bottom as on Form 74 (d)- 360 PROCUREMENT BY PURCHASE more familiar with traffic conditions and possibilities near the point of destination the shipper may know them better at the point of shipment. Furthermore, the shipper has the privilege of routing the article to the delivery point as he pleases, so Date THE BUYING COMPANY. NEW YORK. N.Y. This ACKNOWLEDGES RECEIPT OF YOUR PURCHASE ORDER NO. DATED POP Wl- IICH WE ACCEPT. SHIPMENT WILL BE MADE ON VIA PPl» Form 76. Vendor's Acceptance of Order (Private post-card forms, self-addressed to Purchasing Department) long as he meets the delivery time. Again, since information was last available to the buyer, conditions may have changed, making it desirable to use a different routing. Hence the routing data on the purchase order can be only considered as suggestive. The purchase order is designed to include thorough routing directions, but this routine is only suggestive and the vendor may modify it to meet current traffic conditions. As a matter of business policy, however, the vendor may be expected to follow it if it is at all possible, not only for the sake of meeting his customer's wishes, but because he realizes that the buyer is usually in an equally good position to choose the best routing- CHAPTER XXVI EFFECTING THE DELIVERY Vendor Naturally Remiss The purchasing agent has the right to assume that prompt shipment and the effort to keep a promise of dehvery are part of the vendor's service for which he has contracted. Never- theless, he must realize that the performance of vendors, like that of other mortals, does not always live up to their promises. Therefore, he must combat their tendency to lethargy by con- stant reminders that he is expecting the goods by a certain date. This tendency is most aggravating when a seller's mar- ket prevails and a sales department accepts orders in excess of the factory's capacity to supply the goods — a policy en- couraged by the knowledge that the buyer is unlikely to do better elsewhere. The purchaser is then justified in ruthlessly following up the vendor until his contract is fulfilled. What- ever the cause of delay, he has the right to insist on delivery and he should spare no effort to impress the seller with the importance of prompt service and the disastrous effects of fail- ure to deliver. To adhere to a delivery date once fixed is very important. An investigation of 50 orders placed with one supplier showed that 80% were scheduled for delivery far in advance of requirements. Hence when the vendor failed to ship them on scheduled time, the lax follow-up man was not asked about the delay and he in turn failed to jog the vendor. The investigation showed that not one delivery was made on time and in most cases deliveries lagged, until at length the need for the materials became imperative. It was discovered that 361 362 PROCUREMENT BY PURCHASE not until the scheduled date for delivery had passed did the vendor begin his preparation for the manufacture of some of the articles to be supplied. This incident illustrates what not infrequently happens when the purchasing department fails habitually to insist on delivery by the promised date whether the goods are needed or not. Follow-Up Work To hold the vendor to his promises is one of the most important duties of the purchasing department. The clerk to whom is assigned the task of following him up must be tact- ful as well as persistent. Necessary as the work is, it involves the possibility of so antagonizing the vendor as to make him indifferent to the service he gives. It is reasonable to assume that the seller is just as interested in securing and holding customers as is the purchasing department in obtaining the goods ordered. It is easy for the follow-up clerk to effect his purpose by means of form letters devised and standardized to cover practically all orders. The use of such forms obviates the personal note that may cause irritation, thereby producing an effect opposite to the one desired. When and how frequently this routine follow-up work should be undertaken is a matter to be determined by circum- stances. Ordinarily the majority of orders placed are for stock material ready for shipment almost immediately upon receipt of an order. For such purchase orders a follow-up is prac- tically unnecessary, unless the time for delivery is short, the matter important, or the vendor unreliable. Orders for special material are in a class by themselves and need more individual attention. Anything from a week to several months may be required for their production and accordingly they need a systematic follow-up. The follow-up work is clearly indicated by the forms employed. Form ']'j is a return postcard on which the supplier EFFECTING THE DELIVERY 363 Our Purchase. Order No. Your Order No. Acknowledged Delivery Promised- The above purchase order calls for. Please advise us at once on reply portion of this CARD, AS TO whether DELIVERY WILL BE MADE AS PROMISED: IF NOT, WHY NOT AND ON WHAT DATE WILL YOU DELIVER? Date. THE BUYING COMPANY Purchasing Division POST CARD THE BUYING COMPANY, NEW YORK, N.Y. PURCHASING DEPARTMENT SCHEDULING DIVISION Place 1-cent stamp here Form 77 (a). Post-Card for Routine Follow- Up of Delivery (Private post-card together with return card — Form 77 (b).) 364 PROCUREMENT BY PURCHASE REPLY ON AND RETURN THIS PART OF CARD To THE BUYING COMPANY, NEW YORK, N.Y. Your Purchase Order No.. CALLING FOR. ,WILL BE SHIPPED ABOUT- -FOR DELIVERY ON. Date. Per. -Shipper POST CARD Place 1-cent stamp here Form 77 (b). Post-Card for Routine Follow-Up of Delivery (continued) COMPLETION OF THE PURCHASE CONTRACT 381 flag is then detached and forwarded to the accounting depart- ment, where it is filed first in a tickler file, according to dis- Na 775971 NO. 77597 DISCOUNT DATE . . PASSED Ra. DISCOUNT DATE . INVOICE DATE TERMS- F.O.B. PURCHASING DEPT.. VENDOR DUALITY APPROVED FOB PAVMENT- AMOUNT OF INVOICE RuacM. aob^t" TRANSPORTATION . DEDUCTIONS: CASH DISCOUNT S. TRANSPOOTATION CHARGES S- REJECTEO MATERIA! 4_ REJECTED MATERIAL . VOUCHER NO. BALANCE BV CASH. VOUCHER NO. ___ .CHECK NO. . Form 81 (a). Invoice Flag for Entry of Checking count date, and later, when paid, according to serial number, thus serving as an invoice register. INVOICE •..1 .M«SO RECEIVIMC DATE PUBCHASE QUAKJTITY A TERMS OF 1 APPROVED FOR ( DISTRIBUTION H FRFIGHT4 FTC. ENTERED ENTERED Form 81 (b). Invoice Rubber- Stamp to Replace Flag As the invoice is checked the fact should be entered on the stub of the flag, which provides ample space for checking data 382 PROCUREMENT BY PURCHASE and for the notation by the purchasing and accounting depart- ments of all deductions to be made before payment. More- over, as it remains attached to the invoice after payment, there is always available a complete record of the amount deducted and the net amount paid. Sometimes these data are recorded by rubber-stamping either the face of the invoice if space permits or else the back, with a form illustrated in Form 8 lb. When the number of invoices is large, the entry of data on the back makes them difficult to handle for ready reference. The flag is the better device. After an invoice has been flagged it should be compared with the purchase order in the follow-up file and the invoice recorded on the order in the space reserved for the purpose. The object of this entry is to furnish the follow-up clerk with the information he requires and to avoid paying an invoice a second time. While such a duplicate payment at first seems unlikely to happen where the clerical work is done systematic- ally, it is of comparatively frequent occurrence in every organization that fails specifically to provide against it. Many vendors regularly present their bills in duplicate as a con- venience to the buyer, for checking purposes, or the material contracted for may be shipped in two lots, and an invoice be rendered for the entire quantity with each shipment. Whatever the cause of duplicate payments, there is always a possibility of their occurrence, especially when an invoice is handled in several departments before final payment. The purpose of noting the invoice number upon its corresponding purchase order is to draw attention to the fact that the invoice covering that order has been received and thus a duplication is im- mediately noticed. Checking the Invoice In all properly organized procedures the checking of in- voices follows a definite and standard route, so planned as to COMPLETION OF THE PURCHASE CONTRACT 383 avoid all unnecessary work and effort but flexible enough to obviate the complete stopping of the checking because of a discrepancy or on account of any other circumstance. Further- more, it must be very carefully performed. Even in most concerns considered as being efficient, this procedure is one affording opportunities for stopping very heavy losses of money. As each step of the checking is verified, the proper spaces on the flag should be initialed. As soon as the follow-up entry is made, the invoice and the purchase order copy should be given to the clerk responsi- ble for checking price and quantity shipped. When completed, the purchase order will be returned to be refiled in its proper place to prevent its being held too long for checking because of delay in receiving the material. The work of checking the price, f.o.b. point, terms, etc., as stated on the invoice, consists of comparing each entry on the invoice with the corresponding entry on the purchase order and making certain that they agree. Each item that does agree should be proved correct by the checker before initialing the flag. Invoices covering emergency orders placed before a price was determined must be checked more carefully than those on which the price is quoted. They usually will require considera- ble time and investigation. For these, the checker should have available current price lists and records of past prices for the material from which he should be able to determine whether or not the price quoted is reasonable. Many prices will be higher than those previously paid, but if he knows the trend of the market for that class of material, he will have little dif- ficulty in deciding whether or not to approve the price billed. Trade discounts and the terms on which the payment is to be made should be very carefully noted. Trade acceptances received with invoices should remain attached until they reach the accounting department, with which rests the decision as to when and how the account is to be paid. The purchasing 384 PROCUREMENT BY PURCHASE department need feel no further responsibility. The next step is to check the invoice extensions with calculating machines. This clerk must be familiar with the proper interpretations of trade discounts. Checking the Transportation Charges The f.o.b. point of the shipment should be checked next. This part of the contract obligation can be hidden in so many ways that it requires most careful checking. The vendor may prepay the charges and then add them to the invoice. The buyer may be expected to pay them and to deduct them from the invoice amount. A careful examination of all transporta- tion bills should be made to ascertain which charges, if any, apply thereto. As transportation bills must be paid within twenty-four hours after delivery, practically always they are on hand by the time the clerk is ready to check the invoice. When submitting bills, the transportation agency presents a statement summarizing the individual items making up the total. Each amount is supported by a detailed slip showing source of shipment, weight, rate, etc., and how the amount is made up. These bills should be checked by the traffic depart- ment as carefully as the vendor's invoice, making certain that the classification of the material, the rate, and the extension are correct. Discrepancies should of course be adjusted with the transportation agency. The bills and statements, after checking, are forwarded to the purchasing department. Here they are entered on the appropriate purchase order copy in the follow-up file so as to have all data relating to the invoice assembled in the same place and ready for checking. Each bill is also rubber-stamped, noting thereon the stores ledger account to be charged with its amount — the same account as for the material transported. If any of the bills are to be paid by the vendor, they are marked to be charged to a "Freight to be Deducted" account. COMPLETION OP THE PURCHASE CONTRACT 385 The bills are then forwarded to the accounting department for vouchering in the same way as described later for vendors' in- voices. The checker is now ready to check the transportation charges. If transportation was prepaid and is included in the invoice, it should be counted as part of the charge if the shipment should be f.o.b. shipping point. When f.o.b. destination, the charge should be crossed off. If the buyer paid the charge and the shipment was to be f.o.b. destination, the amount should be entered on the flag as a deduction to be credited to the "Freight to be Deducted" account. If the buyer stands the charge, the amount should be entered on the flag as an additional cost of the material. If the vendor's invoice includes the freight charges, their amount should be checked as if an original bill rendered by the transportation concern. When a vendor has delayed shipment on his own responsibility, he may ship them by express, C.O.D. If the goods are bought f.o.b. shipping point the purchaser is responsible only for a freight charge and is entitled to deduct from the invoice the difference between the express and the freight charges. Receiving and Checking the Goods As discussed in previous chapters the receiving department is usually responsible for the inspection of incoming shipments as well as their receipt. The larger the concern, the more im- portant its work. The volume of business of a small concern may not justify the employment of a special receiving and in- spection clerk, in which case the work devolves upon the storeskeeper. Although the receipt given to the transportation agency indicates that the shipment has been received in apparently good condition, this acknowledgment does not waive any claim for damages if, after unpacking, goods are found to be broken 2S 386 PROCUREMENT BY PURCHASE 2 t z 7fi > 1 K 30 a o UJ § i^ z O J. Of > UJ y Ul a i P8 i o zS UIQ Ui & ? Id :^ S Ul UJu a Ik ^5 t" UJ o ?Tf '^^^ a Q UJ S 38 it a Ul ^o 3 Z < 3 < 1 «0 z (X P z ii U a au 11 ^ ^ 5 z ug 2 5 a a a 5 5a O s X o bl ZI -y UJ < s s s u X ft u r o a a Ul z «/ il ? J ^ J i 1 ^ a u u u UJ < bo 5 2 X ^ 5 u r s a > II 3 > ^ 3J > 3 iS COMPLETION OF THE PURCHASE CONTRACT 387 N 1 d z a ID z t- i 1 88 > tt. 8 . z IS »- 1 I ■ - Ul u £ 1 s > iu UK lU IU > a. u a 1 PI «0 4 CL is ^ 1 UJ Q ^ P8 g - > Qv lu a 58 a IU lU ^ m a a QC u S D - - f > UJ > I lU IU i\ u 1 u < a lU UJ 1 (X a a Ul «0 IS (/) h iu 5r S a u. 58 ? Q. u IU oc 3 > iu i UIUI 5teS z 5 J 2 § 5 ^— u 3 uiuct g 3 i a 388 PROCUREMENT BY PURCHASE or short due to pilfering or the loss of a package. To insure the accuracy of the inspection and count and to guard against the possibility of the clerk shirking his task, it is customary not to furnish him with any information relative to the quantity called for by the original order. He makes his count inde- pendently and enters his figures on a purchased materials received report (Form 82) made out in triplicate. Spaces are provided on these reports for the vendor's name, the order number, and the quantity received and the quantity rejected, if any. The copies are signed by the inspection clerk and distributed, one to the purchasing department for checking the quantity of the invoice, another to the stores records after the material has been sent to the storeskeeper, while the third copy is signed by the stores clerk and filed by the receiving clerk for his own protection. In a small concern, the receiving depart- ment's copy of the original purchase order serves as an adequate receiving report. Spaces are provided for recording the receiv- ing data after which it is routed via the materials control de- partment to the purchasing department. The inspection of the quality of purchased goods is a technical problem that every concern solves in its own way. But if the quality is finally decided to be unsatisfactory as a result of careful tests, the quantity to be rejected is noted on the materials received report, and in addition a rejection report (Form 83) is made out, to furnish more detailed information than can be shown on the materials received report. The general information on the rejection report is similar to that on the materials received report, but the former describes the tests made and why the material fails to meet the requirements. This information enables the purchasing department to prepare its claim against the vendor. When a discrepancy appears between the quantity shipped and the quantity received, the purchasing department should instruct the receiving clerk to inspect the packages again and COMPLETION OF THE PURCHASE CONTRACT 389 I h Z II z HI J I i H £1 2 a < i ;J a III S Ul UJ I 2 ., 2 K- _l M 9^ a £ 2 > i lu a < < 2 < z y a a d p -J lu UJ ^ 3 > a Q. Z (0 z 5 10 < u. iL z g UJ UJ 01 < a «0 < r Q -] I (0 Ci < ^ -J £ Q o a UJ Ul ex «0 2 H lA 2 P < 2 u P w 1 :^ UJ tu 5 2 H X Z 5 S VI ^ 1 5 3 LU < Q U- a F a z z < c 2 I < lU to > 8 UI Of u> lU a 35 V X Q u. < Ui u < 8 lU < Ul < U4 a Ul Q a S D X lU lU -4 (X H a 3: a t I P 9 Z 2 t- S 1 00 f^ a s . P^ u , — 1 n! to ■c <« Q O o 03 390 PROCUREMENT BY PURCHASE count the items in an effort to locate the missing articles. If the material billed on the invoice is of the same quantity and quality as that reported as received, the invoice checker makes a notation to this effect on the invoice flag, attaches the ma- terials received report and the transportation bill, if any, to the invoice, and forwards the documents to the clerk in charge of the follow-up file of purchase orders for entry of the neces- sary data on his records, as next to the last step in the approval routine. Adjustment of Discrepancies Before being considered as finally approved for payment, the invoice should be reviewed by some departmental authority — usually the purchasing agent. A convenient method of bringing to his notice any discrepancy is illustrated in the "memorandum of discrepancy in invoice" (Form 84). With the necessary papers in front of him, the purchasing agent or other executive is in a position to decide whether the matter is of sufficient importance to justify negotiations with the vendor. The adjustment of small discrepancies may not be worth the time and effort involved. There is no necessity, however, to await the completion of the checking of the invoice before bringing discrepancies to the attention of the purchasing agent. If a discrepancy memorandum is made out when the error is first noticed, the checking can proceed, as the memorandum furnishes adequate data for action in securing an adjustment, while the absence of an approving signature in the appropriate space on the invoice flag signifies that the approval is incom- plete. The adjustment of claims requires careful attention, tact, and patience. Whether the claims are settled or not before the checking is completed, no invoice should remain unpaid when payment is due pending negotiation with the vendor. Instead, the purchasing agent should decide whether to deduct the COMPLETION OF THE PURCHASE CONTRACT 39I OATt CLAIM NUMBER MEMORANDUM OF DISCREPANCY IN INVOICE 1 ORDER NO. ORDER SHIPPED BY DATE OF ORDER ORDER RECEIVED INVOICE DATE SERIAL NUMBER (PM.KA4 INVOICE NO. (OUiq VENDOR TO SUPEPVISOB OF INVOICE DIVISION PUPCHASINO DEPAQTMENT THE FOLLOWING DISCREPANCY APPEARS N THE ABOVE ORDER :- PRICE QUOTED BILLED TERMS OFFERED BILLED FREIGHT OFFERED F.O.B. BILLED F.O.a. QUANTITY ORDERED BILLED QUANTITY RECEIVED ACCEPTED QUALITY ORDERED RECEIVED REMARKS: MATERIAL BILLED, ETfe SI6NEO DISPOSITION OF 0I5CREPANCV SIONEO SuKBvisaa or Invoice Division PuoouAiNa Depaktmeut Form 84. Memorandum of Discrepancy in Invoice. (Size Sj^x 11.) To be filed with the invoice, unless claim is made against vendor; then to be replaced by Form 8s and filed with the correspondence. 392 PROCUREMENT BY PURCHASE disputed amount or to pay the invoices in full, and consider the amount in dispute as a claim receivable or an advance payment. Strictly speaking, it is more advantageous to the buyer to hold back all or part of the disputed amount, especially in dealing with an unknown or unreliable firm. The accounting is thereby also simplified because the deductions entered on the flag will be considered in making the entries in the general books of account. On the other hand, when the vendor is reliable it may be better business practice to pay the invoice in full and trust to the vendor to make the proper adjustment. Discrepancies in favor of the vendor are, of course, easily adjusted by crediting him with the amount. But if for any reason the purchasing department cannot approve an invoice, a memorandum of discrepancy should be retained pending settlement and the invoice passed for payment and entered in the general books. If later the adjustment is decided in favor of the buyer and the invoice meanwhile has been paid in full, the vendor may either send a replacement shipment or the buyer may charge him by means of a countercharge memoran- dum (Form 85). If the decision is in favor of the vendor and his invoice has not been settled in full, the buyer requests the accounting department, by the use of a "credit to vendor memorandum" (Form 86), to include the deducted amount in the next payment to the vendor, or by using a "requisition for check" (Form 87), requests that the vendor be paid at once. Payment of Invoice It is the duty of the purchasing department to forward the invoice with any other papers to the accounting department via the materials control department, in sufficient time to take advantage of the earliest discount date. In Chapter V, "Pric- ing the Stores Record," and in Chapter X, "Costing of Orders," the handling of the values of manufactured mate- COMPLETION OE THE PURCHASE CONTRACT 393 COUNTERCHARGE MEMORANDUM CONTRA VOUCHER NUMBeR TO ACCOUNTING DEPARTMENT: PLEASE CHARGE Aocwess. TWE SUM OF. ON ACCOUNT OF ADJUSTMENT ON rNVOICE NO. DECIDED IN OUR FAVOR. CREDIT TO Acer. NO. AMOUNT 1 PURCHASIMO OCPARTMCNT OATC PA id Form 85. Countercharge Memorandum. (Size 8j^x5J^.) CREDIT TO VENDOR MEMORANDUM TO ACCOUNTING DEPARTMENT: PtEASE CREDIT ^ VOUCHER NUMBED ADDRESS . ON ACCOUNT OF ADJUSTMENT ON INVOICE NO DECIDED IN FAVOR OF THE ABOVE NAMED PARTY. CHARGE TO ACCT. NO. AMOUNT 1 PURCHAftINO DCPAftTMEMT ENTERCO IN VtXICHCas PAfAOLE Fonn 86. Credit to Vendor Memorandum (red ink). (Size 8>^x 5^-) 394 PROCUREMENT BY PURCHASE REQUISITION FOR CHECK VOUCHER NUMBER TO ACCOUNTINO OePAPTMENT: riATF noi 1 AD.1 IN PAYMENT OF ADJUSTMENT ON INVOICE NO. DECIDED IN FAVOR OF THE CHARGE TO ACCT. NO. AMOUNT APPROVED -„«:m*.,^o c,.«»»-r—T PAID BY CHECK Na WRITTEN BY ENTERED CASMrOIS- BURSCMEMT PIOI»TEe CHAROEO Form 87. Requisition for Check. (Size 83^x53^.) rials, crediting the amount to work in process and charging it to stores control accounts, and the entering of the total and unit values on the stores record, was discussed. As mentioned in those chapters, a similar procedure is followed for purchased materials. The purchasing department forwards approved invoices to the stores records for pricing the record with the invoice cost less, of course, any deduction such as shortages, trade discounts, etc. Any transportation charges shown are included as a part of the total cost. This latter amount is already charged to the proper stores control in vouchering and paying transportation agency's bill. The receipt of the material has been entered previously from the materials received report. The work of the accounting department is properly to ac- count for the purchase, to pay the debt, and to make the proper records of the transaction as soon as an examination of the invoice shows the approval to be satisfactory and that the invoice has been entered on the stores records. The invoice COMPLETION OF THE PURCHASE CONTRACT 395 is then ready for vouchering and registering in the vouchers payable register (Form 88), A voucher can be considered as any properly approved re- quest for payment of a payable. Of course, not all are pre- ceded by the purchase routine. Some requests for payment originate in other ways as a "requisition for check" (Form 87), for pay-rolls or notes payable, or for bills covering service not purchased through the purchasing department. However, _ every payment must be preceded by some formal and approved 'authorization of payment. The voucher register is divided into two sections showing the accounts to be debited and credited in addition to the de- scriptive section at the left. In the columns headed, "Name of Payee" and "Description" are entered the name of the creditor and a reference as to service rendered, whether material, labor, etc. The credit side is made up of columns headed, "Vouchers Payable," "Freight to be Deducted," and "Miscellaneous." In the first column is entered the gross amount of the invoice before any cash discounts are deducted and after any miscellan- eous amounts are deducted. In the "Freight to be Deducted" column is entered the amount, if any, to be deducted from the invoice, which amount, as previously explained, was charged to this account when the transportation bill was paid. In the "Miscellaneous" column are entered any miscellaneous deductions with the account symbol to be credited. On the debit side are the various distribution columns headed with the class names of the accounts to which invoices are charged, such as "Stores," "Expense Ledger," "Capital Assets," and "Mis- cellaneous," in accordance with the distribution entered on the voucher. Each distribution column as illustrated in Form 88 should have a detail account symbol column for each amount column whenever debits to more than one control account are entered in the one column. During the month the individual is > t- i?" 1 i < t > 1- 3 cn -) Kly < 1 nr — u r. "J h lil^ a Hg I l! f h- -1 2. ^ 2 J o c l^S d ex. LU ^i i 1- n o 1 1 liJ cc o Id a -J nr (Q u < lu > u < a to tt lU u r > u < D ti O ^ > UJ 2 < Z rv I - £ 3 > ^ IL r H z o a h- in o LiJ a lij _j < < a UJ I u D O > f^ 396 COMPLETION OF THE PURCHASE CONTRACT 397 amounts may be posted to the proper accounts, or at the end of the month a recap may be made and entered at the foot of the column. Each entry in the Expense Ledger column is supported by an expense ledger slip (Form 26, page 127). As the pages of the register are filled with entries, the columns are totaled and the amounts carried forward to the top line of the next page. The total of the debit columns must equal the total of the credit columns, thus proving the correctness of each entry and the footings. At the end of the month, the columnar totals or such recaps as have been made thereof, are posted to the proper ledger control accounts to which they belong. Following registration in the voucher register, all approved invoices are filed by vendor pending payment. The tentative date of payment is indexed by a tickler card or the stub of the invoice flag (Form 81). Each day the ticklers for payables due that day are matched with the invoices which are then sorted by payee and by discount rate, so that each little stack contains all invoices from one vendor and having a common discount rate. Each day the treasurer signifies the total amount which can be paid. The accounting department then keeps the pay- ables being prepared within that amount, giving preference to those items which are most urgent. These invoices are then listed on the remittance letter (Form 89). The form is in triplicate and includes the bank check. The invoices grouped by discount rate should be listed, entering invoice date, number, invoice amount, deductions, if any, cash discount and the net amount. The discount for individual invoices need not be entered if the discount for a group having a common rate can be reckoned as one amount. The net amount column is then totaled, any further deduc- tions such as charge-backs are entered, and the total net amount to be paid is reckoned. Then the upper part of the form, which is the bank check, is written out for this total net amount. The 398 PROCUREMENT BY PURCHASE three copies of the form with the invoices should be forwarded to the auditor who, after checking the correctness of the vari- THE BUYING COMPANY NO. 12967 NEW VORK^ PAV TO THE ORDER OF_ TO THE NEW YORK BANK, NEIiy VOBK, N.y. THE BUYING COMPANY TRCASURCO THE BUYING COMPANY, new YORK. N.Y. check no. 12987 AMOUNT DISCOUNT OTHER NET DCDUCTPOHS AMOUNT Form 89. Remittance Letter (in triplicate). (Size S^^x 83^.) ous entries, will approve the check as regards the correctness and approvals of the bills. The papers are then separated — the original and duplicate of the remittance letter are forwarded to the treasurer, and the triplicate with the invoices, etc., attached, to the account- ing department where the payment of each voucher is noted in the voucher register, after which the papers are bound to- gether and filed by vendor. COMPLETION OF THE PURCHASE CONTRACT 399 lmjllu I MmjLimj T -?- "■ r— 1 — *" r— 1 -- z •< h 0> 7 3 < t 5* z i? , m V . 7 J fe 4 (0 5i 2 a Is Uu O t h. 1 z § > 1 < Z 8 5 lU ^ Z 8 u < . - T a is o" , , ,..,. 10 ^ 3 O »- z 1 DC Ui 2 < 6 UJ 1- u ^ \ lU o <0 H /> u ii O u o 1 'i h H ^J z ^s UJ z = bJ W) u Qd > D ^ ID ll. ^ .,*'^ .•i'^-. •'. V ..V,i'. ''o. '"' "*" -■ ^^-^^^ V .^^.. ;* *►' ♦^-v ^ "' <# sP-?!, <-/^"'*!f.^ ..-«-^ *