Application of ABC Analysis for the Procurement of Goods and Services of Local Self- Governments in Kerala
Application
of ABC Analysis for the Procurement of Goods and Services of Local Self-
Governments in Kerala
Dr. Biju S K Vinod
G, Suresh Kumar K
Assistant
Professor, Assistant Professor Assistant Professor
Govt. Arts College Govt. College for Women Govt. College for Women
Trivandrum
Trivandrum Trivandrum
Abstract
ABC analysis is
successfully used as a selective inventory control system in manufacturing
concerns where materials are being frequently bought and consumed. It is also
applicable in service organisations where materials are frequently purchased
for rendering services. The LSGIs, as service rendering organisations, ABC
analysis can be applied in their purchase and use of the materials. As the
procurement of LSGIs shall be based on the principles of efficiency, economy
effectiveness, transparency and accountability, it is essential to decide the
mode of procurement. The decisions in connection with mode of purchase shall be
scientific. Here an attempt is made to analyse the procurement of LSGIs with
the ABC analysis of inventory management, and proposes suggestions for fixing
mode of purchase.
1.
Introduction
The
procurement procedures of Local self Government Institutions (LSGIs) shall
confirm to the non-negotiate commitment to principles of efficiency, economy, effectiveness, transparency, and
accountability in the procurement process. (Government of Kerala, 2010)
In view of these, all procurements shall be made by considering following key
principles. In this juncture, a due
process and participatory procedures in all kind of Procurement shall be
followed to ensure an efficient procurement mechanism ensuring economy,
transparency and accountability. Hence the fixing of mode of purchase should be
based on scientific study and analysis. This attempts to apply the ABC analysis
of inventory method in fixing the mode of procurement of LSGIs in Kerala.
2. ABC Analysis: Conceptual
Frame
ABC
analysis is a selective inventory control system (Jain,S.P and Narang.K.L,
2001). It is based on the management principle of ‘Management by Exception’. In ABC analysis, materials are divided into
three groups, viz; A-group items, B-Group items and C-group items. This is done for the purpose of exercising
control over purchasing, storing and using of materials. It is successfully
being used in manufacturing and trading concerns for material Management.
This
analysis is done based on the consumption value of materials during a
particular period, normally a year. An
analysis of the annual consumption of materials of any organisation would indicate
that a handful of top high value items (less than 10 per cent of the total
number) will account for a substantial portion of about 70 per cent of total
consumption value. (Tulsian, P C., 2003). It necessitates the need for applying
varying degree of control over the different material groups. The degree of
control on Materials is decided on the basis of annual consumption value. For this purpose, materials are grouped into three
categories, first group having more consumption value, second group having
average consumption value, and the third group having least consumption value.
Pareto rule, popularly
known as the "80/20" rule is the base of ABC analysis in inventory
management (Chandra Bose,D, 2006). This rule
says that about 80% of consumption value of inventory representing about 20% of
the items. AB-C analysis provides immense benefits, in terms of cost reduction
as well as maintaining a smooth availability of stock, by giving exceptional
control to selected items.
3.
Material Classification
under ABC analysis
As stated in paragraph on conceptual frame,
materials are classified in three categories;
Ø
A - Outstandingly importance;
Ø
B - Of average importance;
Ø
C - Relatively unimportant
as a basis for a control scheme.
Each category should be handled in a different way, with more attention
being devoted to category A, less to B, and still less to C. The basis of classification is given in table
1.
Table 1: Basis of classification
|
#
|
Quantity
|
Category
|
Consumption Value
|
|
1
|
10%-20% of the items
|
'A'
|
70-80%
|
|
2
|
next 15%-25%
|
'B'
|
10-20%
|
|
3
|
balance 65%-75%
|
'C'
|
5-10%
|
Table 1 clearly depicts that in the case of category
A materials, the quantity may be in between 10% to 20% and the consumption
value may be near to 80%. It is vital
important in an organization, so that tight control and constant attention should
be given for purchasing, storing and using of such materials. In the case of category
B, the consumption value may be 10% to 20% and the quantity may be 15% to
25% of the total consumption. Hence it requires a formalized inventory system
and periodic attention. The last category i.e. C may be of up to
75% of the total quantity of consumption but value is below 10% of the total
value. Therefore much relaxed inventory procedures are advisable to materials
of this category (Ravi M Kishore, 2001).
ABC Analysis is the basis
for material management decisions and helps to understand how well the stock is
managed. It can form the basis for various managerial decision making including-
leading plans on alternative stocking arrangements, re-order calculations
and helps in determining at what
intervals inventory checks are carried out. For example A category items may be required
to be checked more frequently than C category items.
In addition to other
management procedures, ABC classifications can be used to decide the frequency
of purchase. For example, A items may be bought 3 times per year, B items 1 to 2
times, and C items only once.
4.
Suggested policy guidelines for A, B & C classes of items
The
following table describes the guidelines for the different materials purchase
and storing on the basis of AB&C categorisation.
Table
2: Policy Guidelines for AB&C Classes of items
|
Basis
|
A items
(High
consumption
value)
|
B items
(Moderate
consumption value)
|
C item
(Low
consumption
value)
|
|
Control on consumption
|
Very strict
|
Moderate
|
Low
|
|
Safety Stock requirement
|
No or very low
|
Low
|
High
|
|
Frequency of Purchase
|
Weekly to monthly
|
Once in three months
|
Once in 6 months
|
|
Control reports
|
Weekly
|
Monthly
|
Quarterly
|
|
Follow up
|
Maximum
|
Periodic
|
Exceptional
|
|
No. of Suppliers
|
As many as possible
|
Two or more reliable
|
Two reliable
|
|
Requirement estimation
|
Accurate forecasts
|
Estimates based on past
data
|
Rough estimate
|
|
Centralisation of purchase
|
Central purchasing /storage
|
Combination
|
Decentralized
|
|
Lead Time
|
Maximum efforts to
control
|
Moderate
|
Minimum efforts
|
|
Official in charge
|
Senior officers
|
Middle level
|
Can be delegated
|
5. ABC Analysis in Local Self
Government Institutions (LSGIs)
ABC analysis is successfully used as a
selective inventory control system in manufacturing concerns where materials
are being frequently bought and consumed. It is also applicable in service
organisations where materials are frequently purchased for rendering services.
The LSGIs, as service rendering organisations, ABC analysis can be applied in
their purchase and use of the materials. By keeping this fact in mind, it is
desirable to apply ABC analysis in LSGIs.
5.1.
Objectives
This
is an attempt to identify the frequency of procurement in LSGIs and to suggest appropriate
mode of procurement for different types of LSGIs in Kerala
5.2.
Methodology
For this analysis a sample of two
Municipal Corporations, five Municipalities, two District Panchayats, five
Block Panchayats and 20 Grama Panchayats were selected on judgemental basis
from different parts of Kerala. The purchases
of materials during the financial year 2013-2014, were collected from ‘Sulekha’
(Plan Software in LSGIs) for conducting ABC analysis in LSGIs.
6. Analysis
The
analysis has been made by taking the average consumption value. The purchased
items are categorised in to 21 heads based on the Code List given in Project
Forms for Plan purchase. The analysis is
done separately for different tiers of LSGIs.
6.1 ABC Analysis in Municipal Corporations
|
Table:3 ABC Categorisation of items in Municipal
Corporations
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Source: Sulekha (Plan
monitoring software for LSGs)
On the basis of the annual consumption value
the items fall under Animal Husbandry, Nutrition food, Medicine, Agriculture,
Furniture and Computer and accessories are grouped as A category. Items come under Vehicles, Equipments to Physically
challenged, Fisheris, Assets for self
employment units, Equipments for office and institutions and
Equipments/materials to Anganwadis are grouped as B Category. And items fall under Land, Energy
Production, Energy Conservation, Pump Sets, Equipments and Materials to Govt.
Hospitals, Education, Art, Sports Development, Street Light, Waste Processing,
Sanitation, Pipe, Tank, Tap, Valve, Sanitary Fittings are grouped as C Category (Table.3).
6.2 ABC Analysis in Municipalities
Table:4
ABC Categorisation of items in Municipalities
|
No.
|
ITEMS
|
Average
Amount of Purchase
|
Total Consumption (%)
|
Cumulative
Percentage
|
Category
|
|
1
|
Nutrition, Food
|
42,06,613
|
25.65
|
25.65
|
A
|
|
2
|
Waste Processing, Sanitation
|
41,46,860
|
25.29
|
50.94
|
A
|
|
3
|
Animal Husbandry
|
16,28,220
|
9.93
|
60.87
|
A
|
|
4
|
Agriculture
|
9,48,691
|
5.79
|
66.66
|
A
|
|
5
|
Computer and Accessories
|
8,43,800
|
5.15
|
71.80
|
A
|
|
6
|
Medicine to Govt. Hospitals
|
6,98,025
|
4.26
|
76.06
|
B
|
|
7
|
Vehicle
|
6,64,000
|
4.05
|
80.11
|
B
|
|
8
|
Land
|
6,63,818
|
4.05
|
84.16
|
B
|
|
9
|
Furniture
|
5,99,403
|
3.66
|
87.81
|
B
|
|
10
|
Equipments/ materials to Anganvadies
|
3,36,527
|
2.05
|
89.87
|
B
|
|
11
|
Street Light
|
3,35,623
|
2.05
|
91.91
|
B
|
|
12
|
Equipments for office and institutions
|
2,91,200
|
1.78
|
93.69
|
C
|
|
13
|
Education,
Art, Sports Development
|
2,68,679
|
1.64
|
95.33
|
C
|
|
14
|
Pump Sets
|
2,60,000
|
1.59
|
96.91
|
C
|
|
15
|
Equipments to Physically Challenged Persons
|
1,85,030
|
1.13
|
98.04
|
C
|
|
16
|
Fisheries
|
1,20,000
|
0.73
|
98.77
|
C
|
|
17
|
Assets for Self employment Units
|
1,01,247
|
0.62
|
99.39
|
C
|
|
18
|
Equipments and Materials to Govt. Hospitals
|
98,036
|
0.60
|
99.99
|
C
|
|
19
|
Pipe, Tank, Tap, Valve, Sanitary Fittings
|
2,000
|
0.01
|
100.00
|
C
|
|
Total
|
1,63,97,772
|
100.00
|
|
|
|
Source:
Sulekha (Plan monitoring software for LSGs)
On the basis of the annual consumption
value the items fall under Nutrition food, waste processing, sanitation, Animal
Husbandry, Agriculture, and Computer and accessories are grouped as A category. Items come under Medicine
to hospitals, vehicle, land, furniture; equipments/materials to anganwadies and
street light are grouped as B Category.
And items fall under equipments for office, education, art, sports development,
pump sets, equipments to physically challenged, fisheries, assets for self
employment units, equipments and materials for hospitals and pipe, tank, tap,
valve and sanitary fittings are grouped as C Category (Table.4).
6.3 ABC Analysis in
District Panchayats
Table:5 ABC
Categorisation of items in District Panchayats
|
No.
|
ITEMS
|
Average
Amount of Purchase
|
Total Consumption (%)
|
Cumulative
Percentage
|
Category
|
|
1
|
Equipments to Physically Challenged Persons
|
1,24,25,000
|
38.06
|
38.06
|
A
|
|
2
|
Animal Husbandry
|
66,48,819
|
20.37
|
58.43
|
A
|
|
3
|
Furniture
|
65,25,230
|
19.99
|
78.42
|
A
|
|
4
|
Computer and Accessories
|
20,25,000
|
6.20
|
84.62
|
B
|
|
5
|
Agriculture
|
18,12,281
|
5.55
|
90.17
|
B
|
|
6
|
Waste Processing, Sanitation
|
13,29,000
|
4.07
|
94.24
|
B
|
|
7
|
Vehicle
|
8,25,000
|
2.53
|
96.77
|
C
|
|
8
|
Medicine to Govt. Hospitals
|
3,50,000
|
1.07
|
97.84
|
C
|
|
9
|
Fisheries
|
2,44,900
|
0.75
|
98.59
|
C
|
|
10
|
Pump Sets
|
1,50,000
|
0.46
|
99.05
|
C
|
|
11
|
Equipments for office and institutions
|
1,34,859
|
0.41
|
99.46
|
C
|
|
12
|
Pipe, Tank, Tap, Valve, Sanitary Fittings
|
1,25,000
|
0.38
|
99.85
|
C
|
|
13
|
Energy Production, Energy Conservation
|
50,002
|
0.15
|
100.00
|
C
|
|
Total
|
3,26,45,090
|
100.00
|
|
|
|
Source: Sulekha (Plan
monitoring software for LSGs)
On
the basis of the annual consumption value the items fall under equipments to
physically challenged, Animal Husbandry and furniture are grouped as A category. Items come under Computer
and accessories, Agriculture and waste processing, sanitation are grouped as B Category. And items fall under
vehicle, Medicine to hospitals, Fisheries, pump sets, equipments for office and
institutions, pipe, tank, tap, valve and sanitary fittings and energy
production, energy conservation are grouped as C Category (Table.5).
6.4
ABC Analysis in Block Panchayats
Table:6
ABC Categorisation of items in Block Panchayats
|
No.
|
ITEMS
|
Average
Amount of Purchase
|
Total
Consumption
(%)
|
Cumulative
Percentage
|
Category
|
|
1
|
Animal Husbandry
|
8,64,450
|
26.88
|
26.88
|
A
|
|
2
|
Equipments to Physically Challenged Persons
|
4,89,230
|
15.21
|
42.10
|
A
|
|
3
|
Furniture
|
3,67,573
|
11.43
|
53.53
|
A
|
|
4
|
Agriculture
|
3,35,900
|
10.45
|
63.97
|
A
|
|
5
|
Medicine to Govt. Hospitals
|
3,05,000
|
9.48
|
73.46
|
A
|
|
6
|
Computer and Accessories
|
2,16,540
|
6.73
|
80.19
|
B
|
|
7
|
Equipments for office and institutions
|
1,88,826
|
5.87
|
86.06
|
B
|
|
8
|
Land
|
1,50,000
|
4.66
|
90.73
|
B
|
|
9
|
Equipments and Materials to Govt. Hospitals
|
1,08,188
|
3.36
|
94.09
|
B
|
|
10
|
Education, Art, Sports Development
|
90,441
|
2.81
|
96.90
|
C
|
|
11
|
Pipe, Tank, Tap, Valve, Sanitary Fittings
|
76,300
|
2.37
|
99.28
|
C
|
|
12
|
Pump Sets
|
12,000
|
0.37
|
99.65
|
C
|
|
13
|
Equipments/ materials to Anganvadies
|
11,300
|
0.35
|
100.00
|
C
|
|
Total
|
32,15,748
|
100.00
|
|
|
|
Source: Sulekha (Plan
monitoring software for LSGs)
On
the basis of the annual consumption value the items fall under Animal
Husbandry, equipments to physically challenged, furniture, Agriculture,
medicine to hospitals are grouped as A
category. Items come under Computer and accessories, equipments for office
and institutions, land, and equipments and materials to hospitals are grouped
as B Category. And items fall under education,
art and sports development, pipe, tank, tap, valve and sanitary fittings, pump
sets and equipments/materials to anganwadies are
grouped as C Category (Table.6).
6.5 ABC Analysis in Grama Panchayats
Table:7 ABC
Categorisation of items in Grama Panchayats
|
No.
|
ITEMS
|
Average
Amount of Purchase
|
Total Consumption (%)
|
Cumulative
Percentage
|
Category
|
|
1
|
Animal Husbandry
|
13,99,078
|
20.10
|
20.10
|
A
|
|
2
|
Nutrition, Food
|
13,70,442
|
19.69
|
39.78
|
A
|
|
3
|
Medicine to Govt. Hospitals
|
6,08,751
|
8.74
|
48.53
|
A
|
|
4
|
Land
|
5,84,672
|
8.40
|
56.93
|
A
|
|
5
|
Agriculture
|
5,80,616
|
8.34
|
65.27
|
A
|
|
6
|
Waste Processing, Sanitation
|
5,20,860
|
7.48
|
72.75
|
A
|
|
7
|
Furniture
|
4,82,543
|
6.93
|
79.68
|
A
|
|
8
|
Computer and Accessories
|
3,65,170
|
5.25
|
84.93
|
B
|
|
9
|
Pump Sets
|
2,44,205
|
3.51
|
88.44
|
B
|
|
10
|
Street Light
|
1,82,098
|
2.62
|
91.05
|
B
|
|
11
|
Vehicle
|
1,67,500
|
2.41
|
93.46
|
B
|
|
12
|
Education, Art, Sports Development
|
1,35,620
|
1.95
|
95.41
|
B
|
|
13
|
Equipments/ materials to Anganvadies
|
88,448
|
1.27
|
96.68
|
C
|
|
14
|
Equipments for office and institutions
|
77,713
|
1.12
|
97.79
|
C
|
|
15
|
Equipments to Physically Challenged Persons
|
73,780
|
1.06
|
98.85
|
C
|
|
16
|
Equipments and Materials to Govt. Hospitals
|
33,350
|
0.48
|
99.33
|
C
|
|
17
|
Fisheries
|
24,800
|
0.36
|
99.69
|
C
|
|
18
|
Assets for Self employment Units
|
15,000
|
0.22
|
99.90
|
C
|
|
19
|
Energy Production, Energy Conservation
|
4,388
|
0.06
|
99.97
|
C
|
|
20
|
Pipe, Tank, Tap, Valve, Sanitary Fittings
|
2,250
|
0.03
|
100.00
|
C
|
|
Total
|
69,61,282
|
100.00
|
|
|
|
Source: Sulekha (Plan
monitoring software for LSGs)
On
the basis of the annual consumption value the items fall under Animal
Husbandry, Nutrition food, Medicine, land, Agriculture, waste processing,
sanitation and Furniture are grouped as A
category. Items come under computer accessories, pump sets, street light, Vehicles
and Art, Sports Development are grouped as B Category. And items fall under
equipments/materials to anganwadies, equipments for office and institutions,
equipments to physically challenged, Equipments and
Materials to Govt. Hospitals, fisheries, assets for self employment units,
Energy Production, Energy Conservation and Pipe,
Tank, Tap, Valve, Sanitary Fittings are grouped as C Category (Table.7).
7. Suggested procedure for the procurement and storage of A, B and C
category of items
7.1.
A
category items
·
Very strict control
should be applied on purchase, storage and usage of A category.
·
More frequent purchases
are advisable.
·
It is advisable to adopt very strict inventory
control ( by means of weekly inventory report etc.)
·
Centralised purchasing
and storing are to be adopted as far as possible.
·
Lead Time should be
reduced by making good relationship with supplier/transporter.
·
No or very low stock
level may be maintained to avoid over blocking up of fund.
·
Accurate forecasts
should be made before purchase of such items.
7.2.
B
category items
·
Moderate control should
be applied on purchase, storage and usage of B category.
·
Moderate stock level
may be maintained.
·
Accurate forecasts
should be made before purchase of such materials.
·
The frequency of
purchase suggested is once in three months
·
Monthly inventory report is required
·
Combination of
centralised and institutional purchase may be suggested for the purchase of
such B category items.
7.3.
C
category Materials
·
High stock level is suggested as the lock up of fund is small.
·
A loose control is desirable as the value of such items is very low.
·
Suggested purchase frequency is once in 6 months.
·
Institutional level purchase is advisable.
Based on the above discussion the
following methods are suggested for the procurement of goods and services by
LSGIs in Kerala.
Table 7 : Suggestive
Mode of Purchase for the procurement in LSGIs
|
#
|
Name of items
|
GP/BP
|
ZP/M
|
Corporation
|
|
1
|
Agricultural Tools
|
Beneficiary Purchase/tender
|
Beneficiary Purchase/tender
|
Beneficiary Purchase/tender
|
|
2
|
Animal Husbandry
|
|||
|
3
|
Alopathy (Medicine)
|
Tender
|
Tender
|
Tender
|
|
4
|
Ayurvedic (Medicine)
|
Tender
|
Tender
|
Tender
|
|
5
|
Cleaning Items
|
Petty
|
Quotation
|
Quotation
|
|
6
|
Computer
|
Tender
|
Tender
|
Tender
|
|
7
|
Computer accessories
|
Quotation
|
Quotation
|
Limited Tender
|
|
8
|
Electrical (Repairing)
|
Quotation
|
Quotation
|
Quotation
|
|
9
|
Energy Production and conservation
|
Limited Tender
|
Limited Tender
|
Tender
|
|
10
|
Equipment for office and institutions
|
Limited tender
|
Limited tender
|
Tender
|
|
11
|
Equipments for physically challenged
|
Quotation
|
Quotation
|
Quotation/Limited Tender
|
|
12
|
Equipments to Anganwadi
|
Limited Tender
|
Limited Tender
|
Limited Tender
|
|
13
|
Equipments
for Fisheries sector
|
Tender
|
Tender
|
Tender
|
|
14
|
Furniture
|
Limited Tender
|
Limited Tender
|
Tender
|
|
15
|
Hardware(Plumbing)
|
Quotation
|
Quotation
|
Quotation
|
|
16
|
Homeo (Medicine)
|
Tender
|
Tender
|
Tender
|
|
17
|
Nutrition Food
|
Tender
|
|
|
|
18
|
Periodicals
|
Petty
|
Petty
|
Quotation
|
|
19
|
Pump set
|
Quotation
|
Quotation
|
Quotation
|
|
20
|
Sports Materials
|
Quotation
|
Quotation
|
Limited tender
|
|
21
|
Stationary (Office)
|
Quotation
|
Limited Tender
|
Tender
|
|
22
|
Street light
|
Quotation
|
Quotation
|
Quotation
|
|
23
|
Vehicle
|
Tender
|
Tender
|
Tender
|
|
24
|
Vehicle Spares
|
Petty
|
Quotation
|
Quotation
|
|
25
|
Waste processing Plant
|
Tender
|
Tender
|
Tender
|
8. Conclusion
Local
Self Government Institutions (LSGI) in Kerala, in the course of carrying out
its administrative and developmental responsibilities, has to procure Goods,
Assets and Services in various contexts.
The Goods, Assets and Services are procured by LSGIs for performing
administrative and mandatory functions, by utilising own sources of funds and
funds that are set apart in the approved projects of LSGI during a specified
financial year. In order to ensure the principles of procurement viz; economy,
efficiency and effectiveness, the mode of purchase shall be scientific. It is
ascertained that the procurement of medicines, vehicle and the like items shall
be done through tender, and the sports materials, agriculture inputs
procurement may follow quotation. These classifications ensure economical and
legal backing for the procurement. The government can direct the Department of
LSG to insist such a mode of procurement to all the LSGIs in Kerala.
References
1. Chandra Bose, D,(2006), Inventory
Management, PHI Learning Pvt. Ltd, New Delhi.
2. Government of Kerala, (2010), guidelines
for the procurement of goods and services by the Local self Government in
Kerala, G.O. (P). 259/2010/LSGD, dated 8.11.2010, Local Self Government (AA)
Department, Thiruvananthapuram, http://www.go.lsgkerala.gov.in/pages/fileOpen.php?fname=go20101108_6951.pdf&id=6951,
accessed on 13/12/2014.
3. http://www.plan.lsgkerala.gov.in/formulation/Default.aspx
, accessed on 21/3/2015
4. Jain, S.P.and Narang.K.L, (2001),
Costing-Methods and Techniques, Kalyani Publishers, New Delhi.
5. Ravi M Kishore, (2001), Cost and
Management Accounting, Taxmann Pvt Ltd, New Delhi.
6. Tulsian, P.C., (2003), Practical
Costing, Vikas Publishing House pvt ltd, New Delhi,
.
Comments
Post a Comment