ETHIOPIAN CIVIL SERVICE UNIVERSITY

COLLEGE OF FINANCE, MANAGEMENT, AND DEVELOPMENT

DEPARTMENT OF PUBLIC AND SOCIAL SECURITY MANAGEMENT

RESOURCE MANAGEMENT IN
PUBLIC ORGANIZATIONS: HRM, MM
AND PFM

MASTER OF PUBLIC MANAGEMENT (MPM)

Module number: MPM 5051

Addis Ababa
July 2019
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PART ONE: HUMAN RESOURCE MANAGEMENT
1.1 Introduction to HRM
This part presents the definition and meaning of HRM, objectives of HRM, major HRM functions, and historical
development and evolution of HRM.
After completing this unit, you will be able to:
 define human resource management;
 identify the objective and major functions of human resource management
 explain the historical development and evolution of human resource management

Definition and Meaning of HRM

What is human Resource Management?
Let us start our discussion of HRM by asking and answering question like what is the relationship between HRM
and management? The term management refers to the process of achieving organizational objectives with and
through the effort of people and other resources. Several components of this definition warrant some discussion.
Hence, management implies that: a) organizational activities require human efforts and capabilities; b)
organizations depend on performance of people for achieving its mission and goals; and c) organizations are
directed by decisions of people. These facts about the people side of an organization highlight the importance of
employees that managers work with and manage in realizing an organization's strategic plans. Human resource is
an organization's most important asset. All organization requires mutually satisfying relationship between
management and the people who work in the organization. Managing people, therefore, should be one of the
most important functions of the total management process. Human resource management is part and parcel of the
broad field of study and practice of management. It represents the employees who engage in the process of
management. The term human resource has been defined in many different ways. For the purpose of our
understanding the following definitions are worth noting. According to Schermerhorn, human resource
management is the process of attracting, developing, and maintaining a talented and energetic workforce.
Mondy, Noe, and Premeaux also define human resource management is the utilization of human resources to
achieve organizational objectives.
From the above definitions one can note that human resource management is concerned with managing people at
work. Hence, management seeks to facilitate the effort and commitment of employees toward the achievement
of an organization's strategic plan. Human Resource Management is concerned with employees, both as
individuals as well as a team. It is a people-oriented process of bringing people and organizations together so that
the goals of each are met properly. In the discussion that follows, we will look at the definitions of HRM in terms
of its major essential features. These are:
 Human Resource Management is concerned with helping the employees to learn and develop their
potentialities to the highest level for their benefits as well as for the benefits of their organizations.

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 Human Resource Management is inherent in all organizations, as all organizations need people for the
conduct of their activities.
 Human Resource Management is a continuous function, in an organization as employees‟ problems continue
to exist as long as they are working in an organization.
 Human Resource Management as a dynamic function is affected by both the internal and external changes in
the environment.
 Human Resource Management as a system consists of interdependent and interrelated acquisition,
development, motivation and retention subsystems.
 Human resource management contributes to the strategic success of the organization; treats people as
valuable organizational asset; concerns every manager in the organization; and takes place within a larger
system.
Activity: Human resource management is the process of attracting, developing and retaining qualified people
to achieve organizational goals. What does this definition imply to you? Mention at least three major points.

Objectives of HRM
The main objectives of human resource management include: (1) Goal achievement – HRM makes effective
utilization of human resources to achieve organizational goals. It also helps achieve social goal by creating
employment opportunities and meeting social needs of employees; (2) Structure maintenance – HRM helps
maintain adequate organization structure. It facilitates improved working relationships among all members of the
organization; (3) Goal harmony – HRM creates harmony between organizational goals and the personal goals of
employees. It recognizes and satisfies individual needs. It maintains high morale of employees. (4) Productivity
improvement – HRM continuously develops employees through training and other opportunities. Better quality
of human resources result in improved productivity; and (5) Efficiency promotion – HRM ensures cost-effective
utilization of human resources. This avoids waste and promotes efficiency.

Major HRM Functions

Human resource management is one of the important aspects of management, which is directly concerned with
people in the organization. All aspects associated with people management come within the scope of human
resource management. The scope of HRM, therefore, refers to all the major activities in the working life of
employees i.e. from the submission of employment letter until leaving the organization. Human resource
management is the concern of all departments, as human resource is needed in all departments. Hence, the
human resource is broad in scope. All HRM functions come within this scope. HRM functions in all
organizations include the following among others human resource planning, job analysis and design, recruitment
and selection, orientation (induction) and placement, training and development, performance appraisal,
compensation, safety and health; and human resource research. Success for most organizations depends on
selecting the right employees with the required knowledge, skills and attitudes to help the organization in the

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realization of its strategic goals. Although, selection and other HRM functions will be discussed in greater
details in the units to come, let's now discuss each function very briefly.
Human Resource Planning (HRP)
Human Resource Planning is the process of systematically reviewing human resource requirements to ensure
that the required numbers of employees, with the required skills, are available when they are needed. It involves
matching the internal and external supply of people with job openings anticipated in the organization over a
specified period of time.
Job Analysis
Job analysis is the systematic process of determining the skills, duties, and knowledge required for performing
specific jobs in an organization. It provides a summary of job's duties and responsibilities, its relationship to
other jobs, the knowledge and skills required, and working conditions under which it is performed.
Recruitment
Recruitment is the process of attracting individuals on a timely basis, in sufficient numbers and with appropriate
qualifications, and encouraging them to apply for jobs with the organization. It involves identifying and
attracting a pool of candidates, from which some will later be selected to receive employment offers.
Selection
Selection is the process of choosing from a group of applicants the individual best suited for a particular position
in an organization. Whereas recruitment encourages individuals to seek employment with a firm the purpose of
the selection process is to identify and employ the best qualified individuals for specific positions.
Orientation and Placement
Orientation is the formal process of familiarizing new employees with the organization, their jobs, their work
units and employees. Through orientation new employees will acquire the knowledge, skills and attitudes that
make them successful members of the organization. Placement, on the other hand, is the assignment of an
employee to a new or different job.
Training and Development
Training and development aim to increase employee's ability to contribute to organizational effectiveness.
Training is a process designed to maintain or improve performance in the present job. Development is a program
designed to develop skills necessary for future work activities. It is designed to prepare employees for
promotion.
Performance Appraisal
Performance appraisal is a formal system of periodic review and evaluation of an individual's or team job
performance.
Compensation
Compensation refers to all types of rewards that employees receive in return for their services.

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Safety and Health
Safety involves protecting employees from injuries caused by work-related accidents. Health refers to the
employees' freedom from illness and general physical and mental wellbeing. These aspects of the job are
important because employees who work in a safe environment and enjoy good health are more likely to be more
productive and yield long-term benefit to the organization.
Promotions, transfers, demotions, and separations
Promotions, transfers, demotions, and separations reflect an employee value to the organization. High
performers may be promoted and transferred to help them develop their skills, while low performers may be
demoted, transferred to less important positions, or even separated.
Human Resource Research
Human resource research is a systematic gathering, recording, analyzing and interpretation of data for guiding
human resource management decisions. Every human resource management function needs effective research.
Other areas such as employee and labor relations, collective bargaining, employee rights and discipline, and
retirement are also the concerns and functions of human resource management.

Activity: From the list of HRM activities listed below, identify and indicate those that will be performed by a line
manager, HRM director, and a consultant.
 Job analysis;
 Training;
 Formulating a HRP;
 Selecting an accounting clerk; and
 Conducting a disciplinary interview

Evolution of HRM
One can analyze the historical trends of the HR function from different viewpoints: the evolution of HRM as a
professional and scientific discipline, as an aid to management, as a political and economic conflict between
management and employees, and as a growing movement of employee involvement influenced by developments
in industrial/organizational and social psychology. The analysis HRM evolution demonstrates the growing
importance of employees from being just one of the means of production in the 20th-century industrial economy
to being a key source of sustainable competitive advantage in the 21st-century knowledge economy. HRM
practices emerged during the industrial revolution in the 18th century when factories employed a large number of
people to operate machines. Recruitment, payment and training became specialized activities, which required
specialized people to do them for the organizations. Since then, the HRM function has evolved both in its
functions, roles and even in terminologies. In terms of terminological change, personnel administration,
manpower management, personnel management, human resource management, strategic human resource
management could be typical example. This change in terminologies is a reflection of the paradigm shifts in

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business life. A paradigm refers to a particular way of thinking about, seeing and doing things”. Kathryn McKee,
cited in Brewster (2000), has identified four periods in the evolution of HRM. These periods include:
Mechanistic period – This is the period from the 1900‟s – 1950‟s when manufacturing was the driving force in
industry. The main focus was on administrative functions such as recruiting, dismissing, paying, dealing with
labor unions and keeping records. Management of people was guided by the principles and ideas of scientific
management advocated by Fredrick Taylor and Henri Fayol. As such efficiency was more important than human
relations.
Legalistic period – This is the 1960‟s – 1970‟s which was characterized by legislation in the civil, social,
political and employment areas. This involved regulation of the employment and labor markets through laws and
policies such as Africanization in Africa and Ethiopianization in Ethiopia created an opportunity to regulate labor
unions and employment contracts. This period also ushered the computerization of HR information.
Organistic Period – This is the period of organizational change associated with the1980‟s. Globalization as a
result of technological change led to mergers, acquisitions, downsizing and rightsizing of organizations.
Workforce became more diverse as a result of immigration, expansion of cross-border businesses, more educated
workers with increased awareness. These changes required specialist personnel systems.
Strategic period – 1990’s – This is a period of more complicated organizations with complex structures and
networks. The hallmarks of this period are increased competition due to globalization hence the need for
survival. Organizations adopted strategic planning. The role of HR was elevated to the highest level in the
organization reporting to the CEO and the Board of Directors.

Summary
Human resource management (HRM) is the process of accomplishing an organization's objectives by acquiring,
developing, retaining, and properly using its human resources. HRM is an important subject. It is important
because human resources are critical element to the organization. People make decisions, determine objectives,
and produce and sell goods or services. HRM refers to the management of activities involving the human
resources of an organization. HR managers are increasingly important, as they are more involved in strategic
planning and changing the organizational culture. The growing recognition of HR as a legitimate business unit
has made it highly strategic in nature and increasingly critical to achieving organization objectives. HR
involvement in strategy is necessary to ensure that these functions support the organization's mission. The human
resource management includes function such as human resource planning, recruitment, and selection; human
resource development; compensation and benefits safety and health; and employee and labor relations.

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1.2 THE INCEPTION FUNCTION
Introduction
This part introduces you to job analysis, human resource planning, and recruitment and selection. Job analysis
and design are essential in carrying out effective human resource activities. Job description, job specification and
performance standards, which are the outcomes of job analysis are discussed under these theme. HRP is another
essential function of HRM. We know that every organization contains employees, and that part of the manager‟s
job is to ensure the effective use of employees by making sure that the right number and type of people are
available to the organization at the right time. This can be ensured only through appropriate HRP. Hence, the
essence of human resource planning will be discussed in this part. In addition, the achievement of organizational
objectives is to a large degree determined by the quality of staff it hires. Staffing decisions are critical in
ensuring that organization employs and retain the right people. In this part, the essential elements of staffing will
also be covered. It begins by examining what is meant by recruitment, factors that affect recruitment,
recruitment process, need for and sources and methods of recruitment. Next the selection process is reviewed
from the submission of application form to final selection decision and the unit ends with a look at placement
and employees' orientation.
After completing this unit, you will be able to: Define job analysis and job design; identify methods and tools of
job analysis; identify job redesign and methods used to improve job performance; define human resource
planning; describe HRP processes and major HR forecasting techniques; identify recruitment processes and
factors affecting the process of recruitment; identify the process of employee selection; and explain the purposes
of giving orientation for new employees.

1.2.1 Job Analysis Job Design & Strategic Human Resource Planning
Job Analysis - Meaning & Methods
Job analysis is the systematic recording of activities involved in a job. It defines duties, responsibilities and
accountabilities of a job, and qualifications needed to perform the job. Job analysis is a process of determining
the tasks that make up the job and the skills, abilities, and responsibilities that are required of an employee to
perform the job. According to Wendell French job analysis is the systematic investigation of job content, the
physical circumstances in which the job is carried out, and the qualifications needed to carry out job
responsibilities. The major components of job analysis include job description, job specification, and job
evaluation.
a) Job description - is a written statement of what the jobholder does. It describes job content, job
environment, and conditions of employment. It also shows job title, duties and responsibilities, authority,
accountabilities and job relationships.

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b) Uses of Job Description – job description helps to describe the job to the recruiters. It guides newly hired
employees about what they are expected to perform. It is also used for appraising whether the actual activities of
the employees match with their stated duties.

Position: Project General Manager Responsible to:

Level: Responsible for:
Summary
Manages engineering procurement, operations, and construction of power project
Specific duties
1) Establishes with owner and power division, Engineering, operations, and construction the basic criteria for
project plan and schedules.
2) Reviews project status to measure performance and minimize delays.
3) Continually monitors reject to identify and resolve potential or real problem areas.
4) Administers contract and coordinates contract changes.
5) Reviews and issues progress reports to owner and Division management
6) Reviews and issues engineering and construction change notices.
7) Reviews and issues estimates and cash flow schedules to provide financial information to Owner.
8) Arranges and conducts project status meetings with owner, Engineering, procurement, and Construction
management.
9) Prepares Project Management Office procedures.
10) Performs other related duties as assigned
Supervisory responsibilities: Directly supervises four or more project coordinators; indirectly supervises
three or more project team leaders.
Desirable Qualifications: College degree in Engineering with 10 or more years of related experience.

c) Job Specification - states personal characteristics and qualifications needed to perform the job. It identifies
knowledge, skills and abilities needed to perform the job effectively.
Uses of Job specification - it sets minimum qualifications needed in potential candidates for recruitment
purposes. It also guides selectors to select candidates with right qualifications. It is an important input for
preparation of Human Resource Inventory.

Activity: Write a job description for the following positions

Groups 1 & 2 – Admin & Finance Dep‟t Head
Groups 2 & 7 – HR Dep‟t Head
Group 3 & 5 - Secretary
Use the following format
Position/job Title Position/Job level
______________ _______________
Report To Department /section
_____________ ________________
Job summary
______________________________________________________________________________________
Key task Areas
______________________________________________________________________________________
Qualification Required
______________________________________________________________________________________

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Job Performance Standards - they are the statement of attainable as well as acceptable levels of job
achievement. They indicate quality and quantity of job performance.
Uses of job standards - three factors are essential to be considered in setting job standard. The first one is
motivation. It serves as targets for employee efforts. The second one is performance evaluation. Performance
standards facilitate objective performance evaluation of employees. The last one is control. Actual performance
is measured against standards. Corrective actions can be taken for deviations in performance (if any).
d) Job Evaluation - job evaluation specifies the relative value of each job in the organization. It ranks all jobs
in a hierarchy. Job description, job specification and job standards serve as inputs for job evaluation.
Uses of job Evaluation - it provides information for developing a compensation package. It serves as the basis
for fixing a fair and equitable salary and wage structure.
Uses and Application of Job Analysis - Job analysis is an important input for conducting the following human
resource management activities: preparation of Human Resource Inventory and development of Human
Resource Information System for human resource planning, Recruitment, selection and placement of employees,
training and development of employees, performance appraisal of employees, developing a compensation
package based on job evaluation, welfare, safety and health schemes for employee retention, and job design and
redesign.

Job Analysis

Job Job Job

Description Specification Performance
standards

Job
Evaluation

Purpose of Job Analysis

Job analysis achieves two vital purposes in the organization. These include specifying the tasks that must be
accomplished to complete a job and determining the knowledge and the skills necessary to perform the tasks. Job
analysis generates such essential factors as job description, job specification, job standards, and job evaluation. It
provides information to recruit and select effectively, qualified person must be matched with job requirement and
to establish equitable pay system. Job analysis translates task, human and technological factors into job designs.

Collecting Job Analysis Information

Job analysis is the systematic recording of activities involved in a job and the qualifications needed to
accomplish the job. It is the process of collecting information about jobs and the characteristics of jobholder.

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Before carrying out job analysis, the job analysts should understand the organization goals, strategies, structure,
inputs, out puts and its environment; and identify the jobs to be analyzed.

Steps in Job Analysis

A typical job analysis involves five steps (see figure below)

Examine how each job fits into the overall organization - This step involves creating or reviewing the
organization chart, focusing on the formal relationships among departments, jobs, and individuals.
Select the jobs to be analyzed - Managers must zero in on the specific jobs to be analyzed and determine that
job's unique function within the overall organization
Collect data on the jobs to be analyzed - Data must be collected on the characteristics of the job, the behaviors
and activities it requires, and the necessary employee‟s skills and knowledge.
Prepare a job description - The job description is a written summary of the job and its activities, equipment
required to perform the activities, and the working conditions of the job. Job description can help the
organization with planning, recruiting, selecting the right person, evaluating performance, training, etc. Job
description helps workers understand what a specific job entails and what jobs fit their skills and interests.
Prepare a job specification - A job specification is a written explanation of skills knowledge, and abilities
needed for a job. A job specification describes the characteristics of the person doing the job.
Types of Information needed for Job Analysis
The following types of information are needed for Job analysis: a) Work Activities (what the worker does?) -
These include specific tasks or activities that are involved in the job, procedures used to perform activities,
complexity of activities and their relative timing, personal responsibility for property, funds, etc., and hazards
and discomforts of job; b) Worker-oriented activities (how the job is performed?) - These include nature of
operations, motions such as handling, lifting, walking, driving etc., and human behaviors such as
communicating, sensing, decision making skills; c) Machines and materials used (What does the worker use?) -
These include types of machines, equipment and tools used, type of materials used, such as metal, plastic, yarn,
grain etc., knowledge dealt with or applied, such as in accounting, law, and products made or services rendered;
d) Job performance standards (What are performance standards?) include quantity standards for the job, quality
standards for the job, time taken for the job (Time study), job context (What is the job context?), physical
working conditions, work schedule, incentives, financial and non-financial, and job relationships (interactions
with people and organizations); and e) Personal Attributes (What personal attributes are needed?) include
education and training required, work experience needed, aptitudes and social skills, and physical strength, etc.

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Information about job analysis can be collected from the following sources: a) Employees - They actually
perform the job. They possess firsthand knowledge about the elements and activities involved in jobs; b)
Supervisors - They supervise the employees while the job is being done.

Activity: Complete the following hierarchical task analysis-making a cup of tea

Stage 1- Boiling water
1) Fill kettle with water
2) ________________
3) Switch kettle on
4) _______________
5) _______________
Stage 2- Adding tea bag
6) Empty tea pot
7) __________________
8) __________________
Stage 3 – Adding sugar
9) Get cup ready
10) ____________
11) _____________
Stage 4 – Final
12) _________
13) Serve tea
Sources of Information for Job analysis

They deal with the problems that arise while the job is being performed. This makes them knowledgeable about
the job; c) Independent Expert - Persons specializing in job analysis are appointed to watch the employees
performing the job. They systematically record the activities involved in a job. They also possess rich
experience in analyzing jobs; d) Job Review Committee - Such committee consists of representatives from human
Resource department, and labor unions. They review the job for analysis purposes; and Nonhuman sources -
which consist of existing job description and specifications, equipment maintenance records, blueprints of
equipment and architectural designs of work areas, films of workers on the job, training manual, etc.
Methods for Collecting Job Analysis Information - The important methods used for job analysis information
are:
Observation Method - The job analyst actually watches employees directly on the job to get firsthand
information. A visual impression is obtained about the activities, equipment, materials, working conditions and
job hazards. This method is useful for gathering information about simple and repetitive jobs involving manual
skills. This method is not suitable for analyzing mental activities.
Interview Method - Face-to-face interview of individual or group is conducted to collect information for job
analysis. This method allows explanation of unclear questions. Better accuracy is ensured for assessing what a
job entails. The method, however, is costly and time consuming
Questionnaire Method - This method is very popular for collecting information for job analysis. Employees are
sent a structured questionnaire containing a list of possible activities. They check or rate activities they perform

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on the job. This method is quick and economical for gathering information about jobs. It allows many jobs to be
studied at one time. Responses may be incomplete. Questionnaire may be unreturned. Feedback is often lacking.
This may lead to less accurate job analysis.
Diary Method - Employees record their daily activities in a diary. Comprehensive information can be obtained
about the job if entries are made for the entire job cycle. This method is an economical and a feasible way of
collecting job information. Employees regard the method as an added workload.
Technical Conference Method - Supervisors with extensive knowledge of the job are interviewed to collect
information for job analysis. Specialists and technicians can also be used. Supervisors and experts may lack
familiarity with the complexity of jobs. The information may lack accuracy.

Activity: If you are to analyze the duties and responsibilities of finance head‟s job in
your organization how would you collect the necessary information?

Job Design
Job design is the result of job analysis. A good job design will enable employees to exercise discretion on
decision-making in their work roles. Managers, to the extent possible, must involve employees in the job design
process. The manner in which jobs are designed has an important bearing on what they ultimately deliver to the
organization. An effective job design specifies three characteristics of jobs: range, depth, and relationships.
Range and Depth
Job range refers to the number of tasks a jobholder performs. The individual who performs eight tasks to
complete a job has a wider job range than a person performing four tasks. In most instances, the greater the
number of tasks performed, the longer it takes to complete the job. Job depth, relates to the amount of discretion
an individual has to decide job activities and job outcomes. Job depth relates to personal influence as well as
delegated authority. Thus, an employee with the same job title and at the same organizational level as another
employee may possess more, less, or the same amount of job depth because of personal influence.
Job Relationships
Job relationships are determined by managers' decisions regarding departmentalization bases and spans of
control. The resulting groups become the responsibility of a manager to coordinate toward organization
purposes. These decisions also determine the nature and extent of jobholders' interpersonal relationships,
individually and within groups. Group performance is affected in part by group cohesiveness. And the degree of
group cohesiveness depends upon the quality and kind of interpersonal relationships of jobholders assigned to a
group. The wider the span of control, the larger the group, and consequently the more difficult it is to establish
friendship and interest relationships. Simply, people in larger groups are less likely to communicate than people
in smaller groups. Without the opportunity to communicate, people will be unable to establish cohesive work
groups. Thus, an important source of satisfaction may be lost for individuals who seek to fulfill social and
esteem needs through relationships with coworkers.

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Perceived Job Content
Perceived job content refers to aspects of a job that define its general nature as perceived by the jobholder and
influenced by the social setting. Individuals perceive and describe their jobs using many different adjectives.
These adjectives describe aspects of the job's range, depth, and relationship and are termed job characteristics.
The job characteristics model suggests that jobs should be designed to include five important core dimensions
that increase motivation, performance, and satisfaction, reducing employee turnover and absenteeism. The five
characteristics of perceived job content are: Skill variety: the degree to which the job requires a variety of
different activities in carrying out the work. Task identity: the degree to which the job requires completion of an
identifiable task or output. Task significance: The degree to which the job has an impact on other jobs within the
organization or related organizations. Autonomy: The degree to which the job provides the worker with the
freedom and discretion in setting work schedules, and in determining the appropriate means of doing the job.
And Feedback: the degree to which individuals are able to obtain data concerning the fulfillment of the job
requirements.
Redesigning Job Range
Job Rotation - Rotating an individual from one job to another to enable the individual to complete more job
activities because each job includes different tasks. The practice of job rotation does not change the basic
characteristics of the assigned jobs.
Job Enlargement - Job enlargement strategies focus on the opposite of dividing work they are a form of
increasing the number of tasks that an employee performs. For example, a job is designed such that the
individual performs six tasks instead of three. An enlarged job requires a longer training period; job satisfaction
usually increases because boredom is reduced. The implication, of course, is that the job enlargement will lead to
improvement in other performance outcomes. If they have the required ability, then job enlargement should
increase satisfaction and product quality and decrease absenteeism and turnover. If management desires to
implement the redesign strategy that enlarges job depth and job enrichment. Job enlargement is a necessary
precondition for job enrichment.
Redesigning Job Depth
Enrichment - The impetus for redesigning job depth was provided by Herzberg's two-factor theory of
motivation. The basis of this motivation theory is that factors, which meet individuals' need for psychological
growth, responsibility, job challenge, and achievement, must be characteristic of their jobs. The implementation
of job enrichment is realized through direct changes in job depth. Managers can provide employees with greater
opportunities to exercise discretion by making the following changes. Direct Feedback: the evaluation of
performance should be timely and direct. New learning: A good job enables people to feel that they are growing.
All jobs should provide opportunities to learn. Scheduling: People should be able to schedule some part of their
own work. Uniqueness: Each job should have some unique qualities or features. Control over resources:
Individuals should have some control over their job tasks. Personal accountability: People should be provided

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with an opportunity to be accountable for the job. Job enrichment incorporates high-level motivators, including
more job responsibility, greater recognition, more opportunities for personal growth, and greater job discretion or
autonomy.

Activity: Tick any of the following symptoms of low commitment and dissatisfaction amongst
members of your organization
 High staff turnover
 Absenteeism
 Poor performance
 Uncooperative attitudes
 Poor quality service
 Resistance to change

Case Study: Efforts-Reward Conflict

One serious problem before the management of ADDIS MOTORS Ltd. relates to lack of workers' interest in the work
assigned to the Jeep assembly lines. The result was lower production rate and deterioration in quality. Inferior quality was
noticed due to lack of proper care in assembling components and the automobile itself. The company has to use the services
of outside experts for suitable remedial measures before bringing automobiles in the market. This is a costly and time-
consuming exercises for the company' but it is necessary.
As per the directive of the chairman, the general manager called a joint meeting of managers of key departments in order to
discuss this issue and also to decide the steps to be taken for solving the problem of lack of interest of workers working in
the assembly lines. During the discussion, some key departmental heads made the following observations.
Ato Getachew Gebre the production manager claimed that the problem of quality is related to engineering aspect to some
extent. He held that if only the engineering department would design components and the automobile carefully enough,
many quality problems would disappear. He also blamed the HR department for not making scientific recruitment and
selection of workers, in the initial stage. This raises the rate of labor turnover and the workers in the assembly line do not
take interest in the work. They are careless in the work and do not give any attention to quality. Even the high rate of
absenteeism among the workers affects the type of labor force available, at present, in the assembly line of the company.
W/ro Serkalem Temesgen HR Manager agreed that employees take limited interest in the .jobs assigned. Their interest and
initiative in the work are extremely poor. However, she gave certain serious reasons responsible for this disturbing situation.
According to her, the trade union is very strong in the company and dominates recruitment and selection procedures. As a
result, HR department has practically no control on the recruitment and selection of workers. Naturally, scientific
recruitment and selection are just not possible in the company. She also pointed out that the assembly work in an automobile
factory is always repetitive dull and monotonous. Naturally, the company should not expect workers to take more interest in
this work beyond their pay packets. It is, therefore, not fair to blame workers for limited interest they take in the work. For
motivating them the management has to take some special remedial measures.
In this regard W/ro Serkalem made the following two concrete suggestions.
(a) To rotate workers (from the assembly lines) each week from one location in the line to a completely different location in
order to give them new and more challenge work. Her suggestion was related to job design and she wanted to use job
rotation technique of designing the job.
(b) To make fresh evaluation of jobs in the assembly and to give benefit of such fresh evaluation to jobholders. In other
words, she suggested upward revision to assembly line jobs and attractive wage payment to assembly line workers for their
interest and initiative in the work.
In brief W/ro Serkalem advanced strong case in favor of job rotation and job evaluation as two techniques for developing
workers initiative and involvement in the work and also for improving quality of production.
Both the suggestions were discussed at length in the meeting and approved unanimously. Ato Getachew, the Production
manager agreed to introduce job rotation scheme within the next four days. It was also decided that job evaluation process
should be short and prompt. A committee of three managers (production, HR and finance) was formed to take final decision
and communicate the same to the General Manager within four days. On the opening day of the following week, both the
suggestions were executed. The job rotation was introduced and the next higher grade was given to workers in the assembly
line. As a result, their monthly salary increased by Birr 50
To everyone's surprise, workers expressed their dissatisfaction and anger. They were not happy with the two changes
introduced. Workers felt that job rotation was introduced for their transfer to other departments. They also felt that such
rotation will create inconvenience to them and that the management will get some benefits at their cost. Workers also felt
that increase in the salary by Birr 50 as a result of fresh job evaluation is meaningless in these days of rising prices and new

14 | P a g e
life styles. They expressed the view that they are put in the higher job grade but the monetary benefit is insignificant. After a
week of dissatisfaction and confusion, assembly line workers closed the assembly lines because of sudden strike.
The General Manager and other managers were shocked by this sudden development. This is the unfortunate outcome of
their hard work. The managers felt that an honest attempt was made to raise the salary of workers and also make their jobs
more interesting and varied. But the response was in the form of sudden strike.
Questions
(1) What are the major issues in the case?
(2) What went wrong while introducing job rotation and job evaluation?
(3) What would you have done, if you had been the HR manager at that time?
(4) Indicate the best solution to the whole issue under consideration
(5) What is responsible for the strange behavior of the workers?

Strategic Human Resource Planning

Planning is the process of deciding exactly what an organization wants to accomplish and how to best go about
it. It enables the organization decides where to go and how to get there. Human resource planning is the starting
point of Human resource Management. Human resource planning is the process of predetermining future human
resource needs and courses of actions needed to satisfy those needs to achieve organizational objectives. It
involves estimating the size and composition of future work force to ensure survival and growth of an
organization. According to W. French, human resource planning is the process of assessing an organization's
human resources needs in relation to organizational goals and making plans to ensure that a competent, stable
workforce is employed.
Benefits of planning include planning forces managers to think ahead; planning leads to the development of
performance standards that enable more effective management control to be taken; having to formulate plans
forces management to articulate clear objectives; and planning enables an organization to be better prepared for
sudden changes.
Steps in Human Resource Planning
The process of human resource planning involves the following essential steps:
Assessing current human resources - This step looks at jobs currently being done and the employees doing
those jobs. It is based on:
Human resource inventory - It describes skills currently available in the organization. Human resource
information system (HRIS) serves as the database for skills information.
Job Analysis - It provides information about jobs currently being done.
Demand Forecasting - This step estimates future human resource needs in terms of quality and quantity based
on organization's strategies and objectives as well as revenue forecasts. Organization's strategies and objectives
provide future direction to the organization. Revenue forecasts are based on demand forecasts for the
products/services. They are translated into a forecast of demand for human resources. The demand is expressed
in terms of number of people required and the skills needed.

Activity: Bekele Mola Hotel has 25 outlets of almost identical size and structure in the south of
Ethiopia. Analysis suggests that a ratio of 1 waiter/waitress is required for 10 customers. How
many staffs are required at the Langano branch during weekend, if averages of 200 customers are
served each day?
_____________________________

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Supply forecasting
This step estimates future sources of supply of human resources from inside and outside the organization.
Internal sources of supply may be through promotion; transfer and employees returning from study leave.
Sources that can reduce supply can be resignation, retirement, dismissal, prolonged illness or death. External
sources can be graduates from schools and colleges, people entering job market, and other job seekers in the
labor market.
Matching demand and supply
This step matches demand and supply forecasts to determine future shortages or surpluses of human resources in
terms of quality and quantity. Additional staff will be required to meet the shortages. Retrenchment will be
needed for surplus staff. It can consist of early retirement, lay-offs, leave of absence, work sharing, reduced
working hours, etc.

Activity: Seasonal agricultural products such as cotton and coffee require a highly flexible labor
force that can be hired swiftly when demand is high and then removed when demand falls. How can
an organization structure its staff to accommodate this?
_________________________________________________________________________________
____________________________________________
Action plans
This step is concerned with the preparation of action plans to deal with shortages and surpluses of human
resources.
Step 1: Review
Organization mission objectives
strategies

Step 2: Review
Human resource

Step 3: Assess current objectives and strategies Step 4: Forecast human

human resources resource needs
Make Comparison

Step 5: Develop and implement HRP

 Correct/avoid HR surplus
 Correct/avoid HR shortage

Importance of Human Resource Planning

Organizations are composed of people. People represent an important resource in achieving organizational
goals. Human resource planning is the starting point of human resource management. Its importance is clear
from the following points:
Uncertainty Reduction - Human resource planning offsets uncertainty by predetermining future human resource
requirements. It matches demand and supply forecasts to determine future shortages and surpluses of human

16 | P a g e
resources in terms of quantity and quality. Action plans are developed to deal with the problems arising from
shortages and surpluses.
Objectives achievement - Human resource planning focuses on the overall achievement of organizational
goals/objectives. Demand forecasts for human resources are based on the strategies, goals, objectives, and
revenue plans of the organization
Environmental Adaptation - Human resource planning assesses current human resources through human
resource inventory and job analysis. Existing human resources can be quickly adapted to changing technology,
markets, competition as well as political, legal, economic, social and cultural forces.
Effective and Efficient Utilization of Human Resources -Human resource Planning ensures that the
organization acquires and retains the quality and quantity of human resources it requires. Existing human
resources can be properly placed and deployed to ensure their effective utilization. Human resource costs can be
controlled to achieve efficiency through planning. Human resource planning ensures the right number and type
of human resources at the right time performing the right job.
Human Resource Development - Human resource planning anticipates knowledge and/or skills requirements for
various levels of human resources. This provides adequate lead-time for planning of training and development
programs. Training and development experiences often lead to greater employee satisfaction, lower turnover and
lower absenteeism.
Control - Human resource planning sets standards for control purposes. It serves as a standard for controlling the
quality and quantity of human resources actually deployed. Human resource control is not possible without
human resource planning.
Activity: The manager of your organization requested you to advertise the legal service job vacancy
in the local newspaper. You, the HR Department head, replied that recruitment and selection could
be initiated after having consulted the HRP of the organization. Why?
_________________________________________________________________________________
_______________________________________________________
Assessing Current Human Resource
Human Resource Planning begins by reviewing the current status of human resources. It is an internal analysis
that looks at jobs currently being performed and employees doing those jobs. The tools used for assessing current
human resources are human resource inventory and job analysis.
Human Resource Inventory
It is a skills inventory of human resources currently employed in the organization. It tells management what
individual employees are doing. Computers are generally used to generate such inventory.
Contents of Human resource Inventory
Forms completed by employees serve as the source of information for developing Human resource Inventory.
The main information contained in the inventory are name of the employee/age/gender/marital status,
qualifications of the employee, training undertaken by the employee, prior employment experience of the

17 | P a g e
employee, current position held by the employee, performance ratings of the employee, salary level of the
employee, capabilities of the employee, specialized skills of the employee, and job and location preferences.
Benefits of Human Resource Inventory
The Following are the benefits of Human Resource Inventory: a) It enables management to assess what skills are
currently available in the organization; b) It is useful for planning the selection, training, development,
promotion and transfer of employees; c) It serves as a decision making tool for deploying and effectively
utilizing existing human resources; d) It serves as a guide for considering opportunities for diversification and
expansion of operations; and e) It provides crucial information for identifying human resource-related threats to
the organization. For example, technical obsolescence of employees can be managed effectively.
Activity: What could an organization do if:
It finds it has too many employees in a particular area,
It finds it has too few employees in an area?
____________________________________________________________________________________
__________________________________________________

Human Resource Information System (HRIS)

HRIS is a database device for tracking Human Resource Inventory Information. HRIS is designed to store
information about employees and about jobs. HRIS information can be retrieved as and when needed. Generally,
it is a computer-based system developed from employee and pay-roll records.
Contents of Human Resource Information System
Human Resource Information system contains the following data about each employee: Personal Data: name,
address, date of birth, marital status, children, etc. Skills and knowledge data: Educational qualifications, training
received, languages spoken, capabilities, special skills, etc. Position Data: Current position, occupational history,
various jobs held in the organization, work location, etc. Compensation Data: Current salary, salary history,
bonus, overtime payments, deductions from salary, tax information etc.
Benefits of Human Resource Information System (HRIS)
Analysis of HRIS data facilitates preparation of Human Resource Inventory by providing the following
information: Number of current employees by departments, service, skills level, age, etc.; number of employees
joining and leaving, including reasons for leaving; staff turnover rates (or labor wastage rate), including its trend;
sickness and absenteeism rates; salary bill, including overtime payments etc.
HRIS data can be useful for the forecast of future human resource requirements. HRIS data can be used for
identifying persons for training, development, promotion or transfer etc. It can also be used for succession
planning.
Job analysis
It is the systematic investigation of a job's content. It provides information about jobs currently being done. It
defines the jobs and the behaviors necessary to perform those jobs. It is the framework on which all human
resource management activities are based. It consists of defining tasks that make up the job and knowledge, skills
and abilities needed to accomplish the job.

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Job analysis information is used to develop job description - that is a profile of what the jobholder does, job
specification – that is a profile of the qualifications needed by the person performing the job, and job evaluation
that provides comparative information about jobs. It is used in developing compensation package. Job analysis is
important for recruitment, selection, development, and performance appraisal and compensation management
purposes. It is an important tool for assessing current human resources.
Forecasting Human Resource Demand
Forecasting future human resource demand in terms of quantity and quality is an important aspect of human
resource planning. It is the process of determining future needs for human resources. Factors that affect human
resource demand forecast are: a) External Environmental forces. They can be economic, technological, political,
legal, social and cultural forces. They influence future demand for human resources; b) Overall organizational
objectives. They indicate the courses that the organization plans to take in future. They can be expansion or
contraction of activities or new ventures, planned technological changes, for example computerization, planned
organizational changes, for example restructuring, new product lines, budgetary ceilings etc.
Human resource demand forecast must follow from overall organizational objectives. Marketing plan: This
indicates the sales estimates for future revenue forecast. The revenue forecast serves as an important basis to
estimate the number and mix of human resources. Human Resource Inventory: It indicates the present and
potential skill levels within the organization. It serves as the point of reference for estimating future human
resource needs. Work Force Factor: They consist of: employee reallocation, resulting from promotion and
transfers; separation, resulting from retirement, resignation, termination, death etc.; turnover: resulting from
employees leaving the organization; temporary help: resulting from need for temporary or part time employees.
Projected HR Inventory
Demand forecasting for human resources consists of preparing a projected human resource inventory for
specified future years. A year-by-year analysis for every job level and type is done. Jobs are redesigned as
needed. Both qualitative and quantitative estimates for future demand are made.
Demand Forecasting Techniques
The techniques available for demand forecasting of human resources are management judgment, expert
forecasts, statistical analysis, work study method,
Management Judgment
The demand forecast for future human resources is based on the judgment of the managers. It is a guesswork
based on rules of thumb. The estimates of human resource needs can be based on: Top-down approach: Top
management prepares the estimates of requirements and sends the information to lower level managers. Bottom-
up approach: sectoral managers prepare the estimates of requirements and send the information to top
management. Participative approach: management and supervisors estimate requirements through joint
consultation.

19 | P a g e
Expert Forecasts
They can be based on: surveys: Human resource experts conduct a survey of line managers about the future
human resource needs. The responses are analyzed to forecast requirements. Delphi Technique: It is pooling of
opinions about estimates of future human resource needs from a group of experts. Various rounds of responses
are solicited to find out-group consensus about the requirements.
Statistical Analysis
They can be: Trend Analysis: this technique projects past trends into the future. The methods can be
Extrapolation: Past rates of change are extended into the future. For example, if 100 workers were employed last
year, extrapolation will forecast the need for 100 workers for the coming year. Indexation: A particular index is
used to forecast future needs. For example, one employee may be required for Br. 200,000 increase in sales. It is
based on existing ratios of activities. Econometric Models: They are based on analysis of movements in various
variables affecting human resource needs. Such variables can be sales, production, workload etc. Relationship
among variable is mathematically described. Computers are generally used for building econometric models.
Work Study Techniques:
This technique is based on work measurement. It indicates how much time an operation should take to complete.
Work standards are laid down which are used to calculate human resource needs for a given volume of work.
For example:
Planned production units 40,000 units
Standard hours per unit 2 hours
Yearly standard hours 80,000 hours
Productive hours per man year 2,000 hours
Number of workers required 40
Forecasting Human Resource Supply
Supply forecasting estimates future sources of human resources that are likely to be available from inside and
outside the organization. Factors that affect human resource supply forecasts are: Internal Sources Forecasts: the
Human Resource Inventory of existing human resources provides information about human resources that are
likely to be available from internal sources. Potential additions to human resource inventory can be through
promotion, transfers, demotions and employee returning form leave of absence and study leaves. Succession
planning also provides information about future internal job placements. Potential losses to human resource
inventory can be through retirement, resignation, termination, death, disablement etc. Labor turnover rate is also
a good indicator of potential losses of human resources. Human Resource Audit is an important technique to
estimate internal supply of human resources. It summarizes each employee's skills and abilities. The audit of
non-managers is called "Skills inventory" The audit of managers is called "management inventory" The search
for human resources should always begin within the organization. External Sources Forecasts: external sources
consist of human resources who currently do not work for the organization. The sources can be: educational and
training institutes or labor market. The information flow from the labor market about job seekers should be
constantly monitored to analyze trends.

20 | P a g e
Activity: Based on the statistics for employees at X organization shown below, calculate the annual labor turnover index:
 For each of the four staff categories
 For the organization as a whole
Managers 6
5
Clerical staff 125
. 13
Semi-skilled staff 55
. 3
Unskilled workers 40
. 2

Matching Demand and Supply Forecasts

Demand and supply forecasts of human resources should be matched to determine future human resource
requirements. Additional human resources will be needed to meet the shortages. Retrenchment may be needed to
minimize surpluses. Action plans should be prepared to deal with shortages and surpluses of human resources.
They can be: recruitment plan, development plan, retention plan, redeployment plan, and redundancy plan.
Activity: What factors do organizations consider when they prepare HR plan?
___________________________________________________________________________________________________
____

1.2.2 Recruitment and selection

Recruitment
What is Recruitment?
Recruitment is an important part of the acquisition aspect of human resource management. It is the process of
finding the right person for right position at the right time. It is concerned with identifying and attracting a pool
of qualified candidates to fulfill human resource needs of an organization. The quality of human resource is very
much depended on the quality of recruits. According to Ivancevich and Glueck recruiting is that set of activities
that an organization uses to attract job" candidates who have the abilities and attitudes needed to help the
organization achieve its objectives. The process begins when new recruits are sought and ends when applications
are received.
Need for Recruitment
Recruitment is needed in all types of organizations to locate and attract potential candidates to fulfill job
vacancies. Vacancies can occur due to: Mobility of Human Resources: this can result from transfer, promotion,
retirement, resignation, dismissal, disability, and death of employees. Growth of Business: This can result from
expansion, diversification, acquisition, growth and job redesign.
The Recruitment Process
Locating sources of recruitment - this could be from internal, within the organization and external, outside the
organization. Mechanisms of attracting qualified candidates to apply for the jobs could be done through one of
the following ways. These include job posting, employee referrals and human resource inventory methods can

21 | P a g e
attract internal candidates. External candidates can be attracted by advertising, employee referrals, educational
institution placements, employment exchanges, walk-ins, trade union, and labor contractor methods.
Factors Affecting Recruitment & its Sources
Recruitment is affected by the following factors. Size of the organization: Recruitment is continuously done in
large sized organizations. Small-sized organizations carry out recruitment as and when needed. Employee
Turnover: Working conditions and compensation packages greatly affect employee turnover. The higher the rate
of turnover, the greater will be the need for recruitment. Organizational Growth: Organizations that are rapidly
growing need more recruitment activities compared to stagnant or declining organizations. Image of
organization: Organizations with positive image would attract a pool of 'best' qualified candidates. Organizations
with unsafe working conditions may not attract the best candidates. Nature of the Job: Unattractive jobs, which
are boring, and lack promotional potential, do not attract a qualified pool of candidates. Enriched jobs generally
attract best-qualified candidates. Organizational policies: Organizational policies greatly affect recruitment.
Example: Promote from within policy, lateral-entry policy and compensation policies. Government:
Government can influence recruitment through legal provisions which organizations are required to comply with.
The constitution of Ethiopia prohibits discrimination based on religion, race, gender, tribe or ideological
conviction. Costs of Recruitment: Recruitment involves costs. Budget restrictions can limit recruiting efforts.
Sources and Methods of Recruitment
Sources serve as the pool for locating prospective job applicants. Methods stimulate the prospective job
applicants to apply for he jobs. The sources and methods of recruitment can be: internal sources and methods and
external sources and methods.

Recruitment

Interna
Locating Sources of Recruitment l
Extern
al

Interna
Attracting qualified candidates to
l
apply for jobs Extern
al
Internal Sources and methods - Internal sources involve recruiting within the organization. Prospective
qualified candidates are found within the organization to fill up job vacancies above the entry level. Many
organizations follow the deliberate practice of recruiting from internal sources.
Methods for Internal Recruitment - The most common methods used for internal recruiting are: Job posting,
employee referrals, Human Resource Inventory (Skills inventory). Job posting involves announcing job openings

22 | P a g e
to all current employees. Position, location, pay scale and qualifications are described. Interested employees
apply for the jobs. This is called 'bidding' or self-nomination. The means used for announcing the job vacancies
can be: Bulletin boards: Notice about job openings is placed on the bulletin boards. In-house
Newsletters/Newspapers: Job vacancies are published in house newsletters and newspapers. Circulars: Job
vacancies are announced in circulars or memos sent to supervisors. Electronic mail: Employees receive
information about job vacancies on their computer screens through e-mail. Employees can also submit
applications by e-mail. Employee Referral involves locating applicants within the organization. Supervisors
generally recommend best-qualified candidates for the vacant jobs. Informal communication among managers of
various departments can lead to the discovery of qualified candidates working within the organization.
Human Resources Inventory - Human resources inventory/ skills inventory is a search of human resources
currently employed in the organization. It tells management what individual employees can do. The major
information included in the inventory about each employee is personal: name, age, gender, marital status;
educational qualifications/professional qualifications; training undertaken/special skills; employment
experience/current position; performance ratings; salary level/benefit plans; and job and location preferences.
Skills inventories can be manual or computerized. They can be searched to quickly identify qualified employees
within the organization to fill up the vacancies. Managerial succession plans, based on Human Resource
Inventory, also serve as a useful tool for locating candidates for managerial vacancies.
Advantages of Internal Recruiting – this include: Better selection: The employee is already known, information
on employee performance is readily available and predictable. The probability of a better selection is high. Moral
Building: Motivation will be higher among employees because of greater chances for advancement and career
development. Employee loyalty will be higher and turnover will be low. Adaptability Less time will be needed
for employees to adapt to new work environment. Those chosen internally already know the organization. Less
training and orientation will be required. Management Development: Promotion from within can act as a
training device for management development. Cost-effective: Internal recruitment is less costly as compared to
external recruitment. Training costs will also be low.
Disadvantages of Internal Recruiting – this could include: Limited Choice: Internal recruitment limits the choice
to internal sources only. This excludes excellent candidates that may be available from external sources. In-
breeding: Internal recruitment may promote excessive in-breeding. Management may become stagnant owing to
lack of new ideas, knowledge and enthusiasm. Favoritism: Managers may overlook good candidates and
recommend favored ones. This may create tensions and nepotism. Limited Opportunities: The morale of
employees can be adversely affected by limited opportunities for internal recruitment. In-fighting can happen for
promotions.
External Sources and Methods - External sources involve recruitment from outside the organization. Qualified
candidates from outside the organization are attracted to apply for job vacancies. This source is widely used
especially to make recruitment for entry-level jobs and skilled jobs from the labor market.

23 | P a g e
Methods for External Recruitment - The most common methods used are: advertising, employment exchanges,
educational institution placement, employee referrals, and walk-ins/write-ins/electronic search. Advertising -
this is the most common method for external recruiting. It reaches a much wider audience through various media.
Advertising media can be Print: Newspapers (local or national), Magazines, Journal, Internet; Visual: Billboard,
Poster etc.; Audio-visual: Radio, Television etc. The effectiveness of an advertisement for a job vacancy can be
judged by: the number of enquiries it stimulates, the number of applications submitted, and the suitability of the
candidates. The nature of job determines the type of media to be used. Newspapers are the most popular media
for external recruiting. Vacancies for higher-level positions are advertised in national newspapers. Lower level
positions are advertised in local or regional newspapers. Employment Exchanges/Agencies - Employment
exchanges: They maintain a databank of job seekers and job vacancies. They furnish a list of suitable candidates
to prospective employers. Private Employment Agencies: They carry out recruitment function on behalf of their
client organization. They not only advertise vacancies but also screen the applicants. Management consulting
firms are also used for recruiting senior management level positions.
VACANCY NOTICE
The X Regional Office for South invites applications from qualified candidates for the post of IT Assistant.
Purpose of the Post:
Under the supervision of the Regional IT Office, and as a member of the regional office IT (information technology)
section, provide technical, operational and procedural support and end-user services in the implementation of IT systems,
procedures and activates of the Regional Office.
Major Responsibilities:
 Assist with the introduction and technical operation of organizational computer applications
 Assist in arranging for and/or perform training and support for computerization in the Regional Office
 Assist in administering the office multi-user network and other data and telecommunication facilities.
 Assist in the installation of new hardware and software
 Maintain the inventory of computer equipment and software
 Provide necessary assistance to staff members in the operation of standard computer applications and in resolving
minor hardware/software problems
 Perform preventive maintenance of computer equipment (i.e. servicing of computers, printers and accessories).
Qualifications and Experience Required:
 Higher secondary (intermediate) or equivalent
 IT training from reliable institutions(s).
 Good theoretical and practical knowledge of computer information management,
 5-6 years of progressively responsible work experience in IT support
 Fluency in English. Good writing and communication skills
Compensation: Competitive salary plus benefits and allowances
Please send detailed resume in closed cover together with a recent passport-size photograph, marked "Application", to the
Personnel Officer, X Regional Office Addis Ababa, Ethiopia.
Qualified Female Candidates are encouraged to apply

Educational Institution Placement - Most educational institutions operate placement services. Prospective
employers can directly recruit graduates or 'graduates-to-be' for entry-level positions from such institutions,
especially for technical and professional posts. Educational institutions are usually the sources for young and
bright-educated individuals who generally lack work experience. Organizations send their representatives to
educationa1 institutions to locate qualified candidates and to stimulate them to apply for the job. Employee

24 | P a g e
Referrals (Word of mouth recruiting) - Current employees recommend their friends and relatives from outside
the organization for hard-to-find job skills. Such candidates tend to be better qualified for the jobs. Walk-ins,
Write-ins, and Electronic Search - Walk-ins: They are the job seekers who arrive at the organization gates or
human resource department in search of a job. They serve as a source for recruitment of unskilled or semi-skilled
workers. Write-ins: They are the job seekers who send written enquiries in search of a job. They serve as a
source of recruitment for future job openings. Electronic Search: Bio-data of prospective candidates are made
available through Internet. Such database becomes a source for recruiting prospective candidates.

Activity: Prepare vacancy notice in English or Amharic for the job of secretary. Use the format below
Vacancy Notice
 Job Title: - ________________
 Organization: - _____________
 Location: - ________________
 Purpose of the position_____________________________________________
Major duties and Responsibilities
1) ________________________________
2) ________________________________
3) ________________________________
4) ________________________________
5) ________________________________
Qualification __________________________________________
The closing date for the application is ______________________________

Advantages of External Recruiting - Qualitative Human Resources: External sources provide a sufficiently large
pool of qualified candidates. Management has greater choice for selection. Organizational Rejuvenation:
External recruitment facilitates inflow of new ideas, knowledge, skills, and enthusiasm in the organization.
Environmental Adaptation: The inflow of new knowledge, specialized skills and experience helps organizations
adapt to changing forces in the environment. Balanced Human Resource Mix: External sources facilitate
recruitment of specific groups like women, disables, ethnic minorities etc. This not only helps achieve legal
compliance but also results in balanced human resource mix. Fairness in Recruitment: There are no
preconceived notions, reservations, favoritism and nepotism in external recruitment. The recruitment is fair.
Disadvantages of External Recruiting - High cost: External recruitment is costly compared to internal
recruitment. The cost of training new entrants is also high. Poor Employee morale: Recruitment from outside can
adversely affect the morale of existing employees. Their chances of advancement may be reduced. Adaptability
Problems: More time will be needed for new employees to adapt to the work environment of the organization.
The orientation and training requirements will also be high. Wrong Selection: External recruitment can result in
wrong selection of employees. This can adversely affect the quality of human resources and effectiveness of the
organization.

25 | P a g e
 Activity: Consider the following sources of recruitment: For what kind of jobs would they be
most suitable?
 Internal job advertisements
 Advertisement in local newspapers
 Advertisement in professional journal
 Advertisement in the job centers
 Visits to schools/universities
 Using commercial employment agencies
 Words of mouth
____________________________________________________________________________
____________________________________

Selection
What is Staff Selection?
Selection is the process of choosing the most suitable candidate for a particular position from among the
prospective applicants. Selection follows recruitment. It is concerned with hiring the right person for the right job
as well as rejecting the applicants. According to Byars and Rue, selection is the process of choosing from those
available the individuals who are most likely to perform successfully on the job. Effective selection process
requires clearly spelled out job description and job specification, sufficiently large pool of prospective
applicants, series of steps through which applicants pass, and selection standards to be used in selection.
Organizational effectiveness depends on the quality of human resources. Right selection creates human capital,
improves employer-employee relations, increases productivity and commitment of employees, and facilitates
environmental adaptation. On the contrary, poor selection leads to increased employee turnover, absenteeism,
accidents, job dissatisfaction, high costs of training, and productivity losses. Selection is a two-way process. The
organization chooses the employee. The employee chooses the employer.
The Selection Process
The selection process consists of a series of steps through which applicants pass. Each step serves as a hurdle,
which the successful candidate must pass. The steps differ from organization to organization-some use only
interview, others use written tests plus interview, still others follow all the steps. Systematic selection process
consists of the following steps:
Application Form Evaluation
The recruitment process generates sufficiently large number of filled-in application forms from prospective'
candidates. Such forms consist of information about: Personal background information: Name, gender, age,
marital status, nationality etc.; Qualifications: Educational, professional and other qualifications and specialized
skills; Work Experience: Experience in previous jobs and the name of organizations served; duties,
responsibilities, etc.; Salary: Salary drawn in present employment and expected salary; and References: Names
and addresses of persons who can be contacted for references. The application forms are evaluated. Forms of
under qualified candidates and those not meeting job specifications are rejected.

26 | P a g e
 Selection Reasons for
steps Rejection

Application form Under-qualified

Evaluation

Below average in ability

Preliminary interview

Poor Scores
Selection Tests

Non-verifiable or Poor
Reference Checks
reference

Not selected
Selection interview

Physically unfit
Medical test

Candidate rejects the job

Hiring Decision
offer
selection process

Preliminary Interview
Preliminary interview is held for initial screening out of candidates. It is short and centers on job requirements.
Unqualified, unsuitable and misfit candidates are screened out. The candidates also get a chance to find out more
about the organization and the job. Some of them may voluntarily withdraw. Some organizations administer a
screening test.
Selection Tests
Standardized written tests are administered to the candidates passing the preliminary interview hurdle. They
assess the suitability of candidates to the job. They provide objective information about the candidate. The major
types of tests can be: Aptitude Tests: They measure aptitude for the job. They test a candidate's learning capacity.
Achievement Tests: They measure theoretical and/or practical knowledge and skills, which candidates claim to
know. Achievement test can be: Situational Tests: This may be abstract real life situations. Candidates are asked
to cope with the situational problems. Group discussion is an example of such test. Interest Tests: They are

27 | P a g e
inventories of the likes and dislikes of candidates in relation to work, hobbies, recreational activities etc. The
assumption is that interests and job satisfaction are correlated. Personality Tests: They measure personality
dimensions of the candidates. Honesty Test: They measure the level of honesty of the candidates. Polygraph test
is an example. Candidates scoring low in the selection tests are rejected.
Reference Check
Information about background and character of the candidate is checked from referees listed in the application
form. The responses from the personal referees generally lack objectivity and tend to provide favorable
impression of the candidate. Information provided by previous employers of the candidate about job
performance, remuneration and character tend to be reliable. Educational, professional and training
accomplishment of the candidates can also be verified. Reference checks can be done by mail, e-mail, telephone
or personal visit.
Selection Interview
It is face-to-face observation and appraisal of the candidate's suitability for the job. It probes the areas that cannot
be addressed by the application form or selection tests. It is based on in-depth conversation to evaluate the
candidate's acceptability. It is related to job description and job specification. It assesses the candidate in the
following areas: ability to do the job and career goals, motivation and enthusiasm to do the job, ability to work
under pressure (stress), ability to 'fit-in' with the organization, personality and interpersonal skills, and standing
of the interviewee in relation to other candidates.
Types of Interviews - The following are the major types of interviews. Unstructured Interview (Non-directive
approach - In this case questions are not planned in advance. They are made up during the interview on the spur
of the moment. Questions vary from candidate to candidate. They prompt the candidate to self-expression. Semi-
structured Interview (Mixed approach) – In this case, major questions to be asked are broadly planned in
advance. But the interviewer has flexibility in asking specific questions for detailed -probing purposes. The
candidate's response is generally lengthy. Structured Interview (Directive approach) – In this case, a standard
list of questions is asked to all candidates. All questions are planned in advance. They focus on past work
activities, education, career goals. Some examples are: what are your strengths and weaknesses? What are your
career goals in ten years from now? Standardized evaluation forms are used to rate the candidates. This method
has high validity and reliability. Structured interview can be behavioral Interview which focuses on past
behaviors- what the candidate did in past situations related to the job or situational Interview which focuses on
what the candidate would do in future-related hypothetical job situations.
Methods of Interview - They can be: one-on-one Interview where a single candidate is interviewed by single
interviewer or panel Interview where one candidate is interviewed by a panel of two or more experts. Group
Interview is an interview mechanism where a number of candidates are interviewed at once. They are given a job
related topic or problem for group discussion among themselves. Observers rate the performance of each
candidate.

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The Interview Process - The interview process consists of the following stages. Preparation - The interviewers
should review the applications, job description and job specification, prepare, specific questions or checklist in
various areas; decide about the techniques of interview: It can be unstructured, semi structured or structured; and
decide about type of interview: It can be one-on-one, panel or group) interview. Conducting the interview - This
consists of conducting the interview by creation of rapport with the candidate. The starting question may be, to
ask the candidate to briefly introduce him/herself. Information exchange takes place through two-way
communication between the interviewers and the candidate. Questions are asked. Responses are observed and
recorded. Termination - The interview is closed by asking a final question or by thanking the candidate.
Nonverbal communication can be useful for closing the interview. Evaluation - The interviewers evaluate the
candidate based on observations, impressions, responses and information exchange. The evaluation is generally
done on a grading form or rating form. A point system can also be used for evaluation purposes. The interview
results greatly affect the selection decision.

Activity: Imagine you are preparing to conduct an interview for the post of a Secretary, what you would
need to do before the interview to ensure that you are properly organized.
_____________________________________________________________________________________
_____________________________________________

Medical Test
Medical examination is the final step in the selection process: It can be done in one of the following ways: an
approved physician conducts the physical examination such as drug testing, strength and fitness testing can be
part of such examination. Medical tests permit organizations to screen out candidates with health problems or
drug problems. They also facilitate placement of employees in suitable jobs. The physical examination must
comply with the legal provisions.
Hiring Decision
The hiring decision marks the end of the selection process. The competent authority in the organization makes
this decision. The candidates passing the hurdles of the selection process are given a job offer. Those accepting
job offer are issued appointment letter. Organizations should also notify the candidates who have not been
selected. The list of successful candidates should be posted on notice board. Some organizations also publish
such list in the newspapers.

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Case Study: Advantages of Numerical Rating:
Addis Import & Export Company decided to select ten promising marketing executives for promoting sales of its two newly
introduced consumer durables. The company decided to use numerical rating system for selecting suitable candidates. Five
factors are to be assessed and quantified for each applicant. The details are as follows:

Factor Assumption Allocation of points

Age Age is an advantage 21-30: 3 points
up to the age of 50 30-40: 4 points
40-50: 7 points
Marital status Married with family is Single: 0 point
an advantage Married without children: 3 points
Married with children: 5 points
Education MBA in Marketing (i) University degree: one point
contributes to success (ii) Degree plus diploma or certificate course in marketing management: one
extra point for a marketing diploma/degree.
(iii) Degree plus MBA in Marketing: two extra points
Experience Marketing experience One point for each year of marketing experience.
is necessary.
Sales Aptitude can be 0-7 points based on the results of a test
Aptitude measured

The points are to be totaled for an overall rating. Applicants securing 20 or more points (maximum points are 32) are to be
considered definite hires, those getting points between 10 and 20 will be treated as possible hires and those getting less than
10 points will be rejected. Final decisions are based on the numerical rating and performance of candidates in a series of
personal interviews.
Questions:
1) What is your opinion on the above noted numerical rating system?
2) Do you feel that selection of most suitable candidates will be possible by such numerical rating?
3) Are there any potential difficulties with this system?
4) Would you suggest additional factors in the rating system?

Orientation of New employees

Every organization has a culture consisting of shared norms and values that define appropriate behaviors for its
members. New employees need to be socialized not only to job environments but also to organization's culture.
They need to make adjustments while making the move from being an outsider to being an insider. Orientation is
a means of familiarizing new employees with their job, responsibilities, organizational policies, coworkers and
other key aspects of the organization as a whole. This includes clarifying the organizational vision, mission and
goals. Orientation is a tool of the socialization process. It introduces the new employee to the organization and its
work environments.
Purpose of Orientation
The major purposes of orientation are to familiarize the employee with organizational issues: they can be related
to history, philosophy, objectives, policies, rules, procedures, physical facilities etc.; to communicate human
resource policies: they can be about benefits, pay scales, hours of work, holidays, etc.; to review job duties and
responsibilities of the employees; and to introduce the employees to supervisor, co-workers etc. Orientation
helps to improve the performance of the employee, increase organizational stability, reduces conflict, and save
time and effort.
Placement

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Proper placement builds a competent and satisfied workforce. Not only should the person be suitable to the job
but also the job should be suitable to the person. Placement is the determination of the job to which an accepted
candidate is to be assigned and his/her assignment to that job. When selected candidates report for duty, they
should be placed in the right job. A misplaced employee is a frustrated employee. The first placement is for a
probation period, usually extending from 6 to 12 months in the case of the Ethiopian civil service. Orientation
and pre-service training are given to the employee during the probation period. If the performance is satisfactory
during the probation period, the employee is given a permanent posting. If the performance is unsatisfactory, the
probation period may be extended or the employee is asked to quit the job. Some employees may themselves quit
the job during the probation period if they are not satisfied with the job or placement.
Case study: Orientation Program
Akaki Metal Factory is a big firm manufacturing and marketing many engineering products. It has 24 different departments
and a workforce of 550 employees (lower level) and 70 supervisors, officers and managers. Every month 20-30 new
employees were hired, as the rate of labor turnover was rather high.
Up to 2003 the induction/orientation program in the company was as noted below:
On the day of appointment, an office messenger escorted the newly appointed employee from the employment office to one
of the factory departments. The departmental head was not given prior intimation. The new worker was taken to the
superintendent's office. The messenger used to give a slip with few details of new employee and move away. The
superintendent used to call the new employee as per the time available and used to give very brief details of rules, job details
and the supervisor under whom he/she a has to work. The whole process was over within a period of ten minutes.
Thereafter, the new worker is sent to the supervisor who normally asks few routine questions and asks him/her to join a
specific group from the department. Suitable introduction, proper information and guidance, job training, etc. were absent.
As a result, the new employee becomes shy and nervous after joining the company. He used to feel insecure and uneasy.
He fails to develop good opinion about the company, his superiors and co-workers. As a result, the rate of labor turnover
and absenteeism was exceptionally high.
The matter attracted the attention of top-level management. The situation was treated as insulting to the company. High
labor turnover was treated as disgrace to the company. Moreover, the company had to face many problems (in the normal
working/production activities) due to high labor turnover, low morale and absence of motivation. Series of meeting of
senior managers/departmental heads were arranged to study the problem of high labor turnover. It was concluded that this
situation was mainly due to ineffective/defective/inhuman orientation program of the company. The orientation was not
giving any benefit to the company but operates against the company. As a result, stable labor force is not available to the
company. Ato Belay Kassa, the newly appointed but competent HR manager was asked to study the problem in depth and
introduce new, attractive, agreeable, scientific and employee friendly orientation program.
HR Manager Ato Belay gave immediate attention to the issue and decided to introduce new orientation program in
consultation with the top management. The features of new orientation program procedure are as noted below:
 Each new employee is to be presented an information booklet containing general information about the company,
organizational details, rules, regulations and procedures followed in the company, facilities provided to employees and
the rules of discipline, etc. The booklet is to be given on the first day with a request to study the same within the first
few days after joining the company.
 A 30-minute film will be shown to newly appointed employees in the auditorium of the company. This film is
informative and shall give all broad features of the company. It is an easy introduction to the company-its products,
directors, to officers and so on. The film will create a feeling of affinity and oneness with the company.
 The pay scale, promotion possibilities, career opportunities, code of conduct, concessions available, etc. are to be
discussed in detail, in joint meeting with the HR. manager and a few other managers. Two or more such meetings are to
be arranged by the department for the benefit of newly appointed employees.
 All facilities available in the plant/production unit are to be explained and actually shown to new employees. For this, a
small trip to departments, administrative offices, canteen etc. is to be arranged as a part of the orientation program.
 Each employee is to be welcomed properly on the first day of his/her joining duties. Prior intimation about his/her
appointment is to be sent in advance to concerned department with a request to concerned officers to give personal
attention to newly appointed employees for the first two weeks.
 At the conclusion of the orientation, each employee is invited to come back to the HR department to discuss and talk
over any problem pertaining to work or human resource matters.
 The HR manager or his/her assistant will personally escort each new employee to his/her assigned department and
properly introduce the employee. Every possible effort‟s will be made to create a feeling of confidence among new
employees. Efforts are made to reduce tension and to create positive impression on their minds as regards company, its
officers and co-workers.

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The new orientation program introduced in May 2005 proved successful. It gave promising results.
Questions
1) Why labor turnover was high under the old orientation program?
2) Do you feel that the new orientation is positive and employee friendly?
3) What, according to you, will be the promising results of new orientation program?
4) What are the advantages of scientific orientation?
5) Do you feel that orientation is a neglected aspect of management in Ethiopia?
Summary
Job analysis is a systematic process of determining the job duties, skills and knowledge required for performing
jobs in an organization. Job design involves managerial decision and actions that specify job depth, range, and
relationships to satisfy organizational requirements as well as the social and individual requirements of the
jobholders. The purpose of job analysis is to: clarify vacant positions for which new recruits are sought. Produce
job description, specification and standard, which can provide evidence for recruitment, selection, compensation,
performance appraisal and assessment of training needs. Job description is a document that provides information
regarding the tasks, duties, and responsibilities of a job. A job specification is a document containing the
minimum acceptable qualifications that a person should possess in order to perform a particular job. Items
typically included in the job specification are educational requirements, experience, personality traits, and
physical abilities. The need for a sound job analysis system is extremely critical. New jobs are being created and
old jobs are being redesigned. Job analysis helps organizations address the reality that change is taking place.
The job analyst identifies the actual duties and responsibilities associated with the job. Work activities and
worker-oriented activities are important. In addition, knowledge of the types of machines, tools, equipment, and
work aids that are used in performing the job is also important. The most widely used methods of job design are
job rotation, job enlargement and job enrichment.
Human Resource planning (HRP) refers to the estimation of the number and the type of people needed during the
ensuring period. HRP is significant as it helps to determine future personnel needs; ensures protection to poor
sections; helps overcome resistance to change; and so on. HRP is influenced by several factors, such as the type
and strategy of organization, environmental uncertainties; time horizons; type and quality of information and the
type of jobs being filled. After strategic plans have been formulated, human resource planning can be
undertaken. Organizational plans identified in the strategic planning process are reduced to specific quantitative
and quantitative human resource plans. Human resource planning has two components. These are requirements
and availability. When the requirements and availability of employees have been analyzed, the firm is in a
position to determine whether there will be a surplus or shortage of employees. Ways must be found to reduce
the number of employees if a surplus of workers is projected. Zero-base forecasting uses the organization's
current level of employment as the starting point for determining future staffing needs. The bottom-up approach
is a forecasting method that projects progress upward in the organization from small units to ultimately provide
an aggregate forecast of employment needs. Using predictor variables, managers can forecast human resource
requirements, with past employment needs serving as a predictor of future requirements. When a surplus of

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workers exists, an organization may implement one or more of the following: restricted hiring, reduced hours,
early retirement, or layoffs.
The purpose of recruitment activities is to attract sufficient and suitable candidates to apply for vacancies in the
organization. The selection activities, by comparison, are to identify the most suitable applicants and persuade
them to accept positions in the organization. Before a recruitment and selection decisions can be made, the
organization must reflect upon any vacancy that occurs and link the decisions to the objectives set by the HR
plan of the organization. The HR plan set the strategy for resourcing the organization and each job vacancy will
need to be linked to this strategy before deciding how to proceed. In some cases the organization may be
reducing staff overall, so the vacancy could provide the opportunity to transfer another employee from an over-
staffed area. Recruitment and selection functions can be affected by factors such as size of the organization,
employee turnover, organizational growth and image of the organization. Steps in a typical selection process
include completion of a formal application form, interviewing, testing, reference checks, medical examination,
and final analysis and management decisions to hire or reject. Making the right recruitment and selection
decisions are key in ensuring the present and future success of an organization. Recruiting and selecting the right
people at the right time is an essential management skill. Orientation is the guided adjustment of new employees
to the organization the job, and the work group. Orientation acquaints employees with the employment situation,
organizational policies and rules, compensation, benefits and organizational culture.

1.3 THE DEVELOPMENT FUNCTION

Introduction
Once organizations have selected and employed competent people, they need to help them ensure that their job
skills and knowledge are kept current. Organizations do this through training and development programs. The
organization is also required to have career development strategies. This part introduces you to the essential
elements of training and management development including human resource development needs assessment
and training and development evaluation. It ends up with the discussion of issues related to career development.
After completing this unit, you will be able to: define training and management development; explain the
processes of training and development; describe the purpose of training and management development toward
improving job performance; identify various training and development methods and types; explain
organizational and staff motives for training and development programs; define career development; and identify
stages of career development and pertinent contemporary issues.
Human Resource Development (HRD) is an important function of human resource management. It ensures that
organizations have adequate human resources with capabilities needed for achieving goals effectively. Human
resource development is about two things: Training: helping employees do their present jobs and development:
helping mangers handle future responsibilities. Training seeks to improve ability to perform present jobs. It is
skills- oriented. Development seeks to improve experience to handle future challenges and responsibilities. It is

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education-oriented, given to managerial employees who supervise the activities of others. Human resource
development is concerned with preparing employees to work effectively and efficiently in the organization.
Distinction between Training and Development
Training Development
1) Focus on present jobs; task oriented 1) Focus on future responsibilities; growth oriented.
2) Short-term periodic process. 2) Long-term on-going process.
3) Target is operative employees 3) Target is managerial employees
4) Confined to hands-on skills and knowledge4) Develops conceptual, interpersonal, technical and
5) Remedial effort decision-making skills
5) Develop employee potential
Degree of changes in the external environment (technological changes, new legislation, etc) and internal changes
(new work procedures, new markets, etc) are making the jobs more complex and, demanding. Organizations,
through training and development, need to raise skill levels and make their employees versatile.
1.3.1 Employee Training and Learning
Training enhances capabilities required to improve performance in the present job. Training involves positive
changes in knowledge, skills and attitudes of employees to increase their efficiency and effectiveness on the job.
According to Fish, Schoenfeldt and Shaw, training is a planned effort by an organization to facilitate employees'
learning of job-related knowledge and skills for the purpose of improving performance. Training serves as a
balancing factor between employee capabilities and job requirements. It transforms the behavior of the
individual.
Benefits of Training - The benefits of training are improves job knowledge, skills and attitudes of employees;
quality of human resources improves; aids in increasing productivity and quality of work; heightens employee
morale; absenteeism and labor turnover is reduced; job satisfaction is increased; improves labor-management
relations; helps keep costs down; materials and equipment are properly utilized; wastes and scraps are reduced;
safety is improved; aids in improving organizational communication; fosters openness and trust; helps in
planning change and managing conflicts; and improves organizational climate.

Activity: Think of the reasons why you are following this HR &PM short-term training. What are some of
benefits you are going to get from this training?
_____________________________________________________________________________________
_____________________________

Training Process
The training process consists of the following steps
 Determine training needs: Training need is the gap between skills needed for a job and the present skill level
of employees. It should be properly determined.
 Specify Training Objectives: Training objectives are desired outcomes of training. They should be specific
and measurable in terms of outcomes. They can be in terms of skills to be taught, changes in behavior or
performance results.

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 Determine Specify Determine Select Develop Conduct

Training training Curriculum/ Trainees/Tr Training Training

Program
Needs Objectives Methods ainers Budget

Evaluation and
Feedback The Training Process
 Determine curriculum and Training Methods: The courses to be offered and training methods to be used
should be determined. The methods can be on-the-job and off-the-job training.
 Select Trainees and Trainers: Right kind of trainees and effective trainers should be selected.
 Develop Budget: Costing should be done for each training program.
 Conduct Training: The training program should be delivered to the trainees as per schedule.
 Evaluate Training: The outcome of training should be evaluated. Performance factors can also be measured
Eval1ation results provide feedback to improve current activities and plan-future training programs.
Assessing Training and Development Needs
 Training or development should be given when there is a need. A need exists when a work performance
problem can be traced to a knowledge or skill deficiency. This represents a gap between the capabilities of
an employee and the requirements of the job.

Job Employee Training/

Minus (-) Equals (=)
Requireme Capabilities Development
nts Needs
Training and Development Need Model
 Training or development need is a specific skill that an employee needs to acquire to get the jobs done
efficiently and effectively.
 Proper identification of need implies that performance gap can be overcome through appropriate training
 Training and development need exists at three levels. These are: organizational level, task level and
individual level.
Organizational level
 This refers to shortcomings within the organization as a whole. The assessment of need at this level is done
to determine the problem areas where training or development is needed.
 Training or development needs at organizational level can be created by:
 Projected growth and development,
 Changes in environment, objectives, structure, technology
 Changes in products and productivity, and
 High absenteeism, turnover, reject rate and accidents

Task Level

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 The duties and responsibilities of the job, together with the knowledge, skills and attitudes needed to perform
them, are the focus of needs analysis at the task level.
 Training or development needs at task level can be created by:
 Job redesign, task relocation,
 Changes in work methods and procedures, and
 Upgrading of job functions. An example is computerization in office

Individual Level
 This refers to assessing present deficiencies in specific skills, knowledge and attitudes on the part of
individual employee.
 It identifies who needs training or development in what and how long.
 This level is very important for assessing needs because individual employees are the targets for training or
development
 A careful and systematic determination of training or development needs is essential to diagnose deficiencies
at all the three levels: organizational, job, individual.
 Training or development needs at individual level can be created by:
 Human resource policies and plans,
 Job descriptions and job specifications, and
 Skill deficiencies on the job.
Activity: How would you identify departmental training needs?
_________________________________________________________________________________
_____________________________________________________________

Training /development Needs Indicators

 Organizational Plans - Changes in goals, programs, structure, technology, people, products, markets and
productivity.
 Employee Records - High rates of staff turnover, absenteeism, accidents, and low performance.
 Work and Work flow - Production bottlenecks and backlogs; high waste, scrap, rejects, job redesign, task
relocations, changes in work methods and procedure, new jobs.
 Employee Factors - deficiencies in knowledge, skills, attitudes, low morale, poor communication, poor
supervision; and selection, transfer, promotion of employees
Importance of Training and development Need Determination
 Training or development needs assessment is the foundation of all human resource development programs. It
is important because of the following reasons:
 Develop Objectives: Properly assessed human resource development needs are essential for developing
objectives. Such objectives should follow from organizational objectives related to performance standards.

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  Identify Problems: Not every human resource problem will respond to solution. Training or development
needs assessment helps identify problems that will respond to human resource development intervention.
 Develop Programs: human resource development programs must be relevant to the needs of the organization
and individual. This is to helps develop appropriate programs including curriculum. It also facilitates
selection of methods, trainers and trainees.
 Evaluation: human resource development needs assessment is essential to evaluate the outcome of training
and follow-up of activities.
Methods of Determining Needs
Training or development needs should be carefully and systematically determined. They form the basis for
formulating objectives. The major sources of information for assessing needs are: environmental changes,
organization's objectives, strategies and structure, job description and job specification, job demand, human
resource plans, policies and practices, and performance standards. There are various methods for assessing
training and development needs. The widely used methods are: management audit, performance analysis, task
analysis, supervisory recommendations, and need survey.
Management Audit
It is a comprehensive; systematic, independent and periodic examination of organization to assess human
resource development needs. The factors examined are environmental Assessment and organizational
Assessment
Environmental Assessment: Organizations do not function in isolation. They exist and function within an
environmental milieu. Changes in environmental forces influence the functioning of organizations. Such forces
can be political-legal, economic, technological, and socio-cultural. Training needs are identified to cope with the
environmental changes.
Organizational Assessment: Organizational objectives may change due to goal succession or goal displacement.
Strategies may also change. Activities may change due to changes in structure of the organization. Human
resource development needs are identified to manage such changes.
 Independent experts to assess training needs at the organizational level should conduct management
audit. Departmental analysis can also be done to assess department training needs.
 Management audit facilitates environmental adaptation to need identification. But it can be costly and
time consuming.
Performance Analysis
 There should be a fit between people and performance in organizations. Human resource development needs
can be identified by analyzing
 Organizational performance analysis
 Employee performance analysis

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 The difference between desired performance standards and actual performance is the deficiency indicating
human resource development needs.
 Organizational Performance Analysis: This analysis is based on records and reports. The following
indicators of overall performance are analyzed:
o Goal achievement in terms of profit, target share, etc.
o Production performance: Productivity and outcomes.
o Quality Control: Scrap, reject and wastage rates.
o Sales performance: Quantity, value, growth.
o Costs: Comparison of standard costs with actual costs.
o Absenteeism and labor turnover rates
o Accident rates
o Grievance reports etc.
Organizational performance analysis determines the overall organizational human resource development needs.
 Employee Performance Analysis: this analysis is based on observation of employee performance on the
job. Performance deficiencies and problems faced by current employees are identified to determine
training needs.
 Other tools for assessing employee performance are
 Employee performance appraisal reviews: The human resource department and supervisors of
employees generally conduct them. Performance deficiencies indicated by such reviews become
indicators of training needs.
 Career Planning Discussions: They identify training needs for career planning of employees through
discussion.
 Exit Interviews: Exit interviews with employees leaving the organization may indicate training needs for
those employees working in the organization.
 Performance Tests: They identify gaps in knowledge and skills. Performance analysis method links
training needs to job performance.
 Employee performance analysis is widely used for determining human resource development needs of
the individual
Task Analysis
This consists of collecting and analyzing task-related information. Details are found about how tasks are done. A
task is an element of job. Several tasks form a job.
 Job description is evaluated to list the various tasks to be performed by the employee. Job specification
is evaluated to find out knowledge and skills needed to perform tasks. A performance criterion for each
task is established. From task information, human resource development needs are determined for each
employee.

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  Observation, questionnaire and interview tools can be used to obtain task-related information from good
performers.

Collect Task-related Establish performance Determine training needs

Information criteria for each task for effective task
performance

Task Analysis Process

Supervisory Recommendations
 The supervisor sees and guides the employee on a daily basis. He/she is knowledgeable about:
 Realities of work situation
 Performance standards for the job
 Present knowledge and skills of the employees
 Desired knowledge and skills to perform the job.
 Supervisors can identify gaps in knowledge and skills and recommend needed training for the employee.
Needs Survey
 Survey method consists of direct questioning to gather data about human resource development needs. The
survey can be of three types:
 Individual Survey: Each employee is asked to give opinion on training or development needs to perform
the job effectively.
 Group Survey: A group of present employees, former employees or supervisors is asked to give opinion
on training or development needs to perform the job effectively.
 Competency Survey: Experts are asked to give opinion on desired competencies to perform the jobs
effectively. The competencies so identified become training needs.
 The results of survey become training or development needs.
 Three major instruments for survey can be:
 Questionnaire: Sets of carefully prepared questions are presented to the respondents for their answers.
Generally a structured questionnaire is used.
 Interview: Face to face or telephonic interview is conducted with the respondents to identify training or
development needs. A checklist of questions is used for interview purposes.
 Focus Group Discussion: A group of up to 10 people are invited to spend a few hours with a skilled
moderator to discuss and determine training or development needs

Activity: List the method for determining training needs for an organization.
_____________________________________________________________________________
_____________________________________________________

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Training Pedagogic/Methods
Training methods are important for delivery of training. They can be:
 On-the-job Training Methods
 Off-the-job Training Methods
On-the-job Training
 This method involves "learning while working". Training takes place on the job. It places the employee in
the context of real work situation.
 It is learning by doing under the supervision of an experienced employee. It is most widely used in practice.
 The methods available for on-the-job training are: apprenticeship training, internship training, and job
instruction training.
Apprenticeship Training
 Employees learn by working with those already skilled in their jobs. Examples are plumbers, electricians,
accountants.
 The duration for apprenticeship varies from job to job-generally from two to five years.
 Trainees are allowed to perform sophisticated tasks as their skills and experience increase. A master worker
guides the trainee.
Internship Training
 It is provided to skilled and technical personnel. The goal is to combine practical experience with classroom-
oriented theoretical knowledge.
 The trainee is interned in organizations for a specified period and works as an employee. Students of
technical subjects generally undergo internship training.
Job Instruction Training
 It is a systematic approach to on-the-job training to teach new task. It is received directly on the job and
consists of four steps:
 Preparation: The trainees are told about the job. They are put at ease. Their desire to learn is aroused.
 Presentation: The trainees are given instruction by telling showing, illustrating and explaining about new
knowledge and skills.
 Practice: The trainees actually perform the job to demonstrate their understanding. Errors are corrected.
Practice is continued.
 Follow-up: The trainee is placed in the job on his own. A resource person is designated for providing
needed assistance.
 Job Instruction Training is designed for supervisors to train operatives. It is based on the principle:
 Job Instruction Training is directly related to specific work situation. It is easy to deliver. It is an effective
low cost training solution.
Off-the-job Training

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 The training takes place outside the work situation. It is mostly classroom-based. The trainees focus on
learning experience. They removed from the stresses and demands of workplace.
 The methods used for off-the-job training are lecture/ conference, simulation exercises, and programmed
instruction.
Lecture/Conference:
 It is based on talking and showing. It is oral communication of specific information by instructor to trainees.
 It is teacher-centered "training by telling". The use of audio-visual aids like films, video, television,
overhead, projector makes the formal presentation interesting.
 The training can be conducted on-site or elsewhere depending on the availability of facilities.
 A conference is a group meeting based on trainee participation guided by a leader. Conferences can be held
off-site to provide relaxed environment. Subjects of common interest are discussed in conferences.
Simulation Exercises
 Simulation is abstraction of real working conditions in the lab or classroom. The trainee is placed in an
artificial environment that closely resembles actual working conditions. Computer modeling is an example of
simulation. Airlines use simulation exercises to train pilots. The techniques of simulation can be:
 Computer modeling: They simulate the real world situation through computer modeling. Trainees
analyze the situation for learning purposes.
 Vestibule Training: Trainees learn their jobs on the equipment they will be using on the job. The training
is conducted away from the actual work place.
 Simulation exercises avoid costly errors and injuries that may result during training on the job.
Programmed Instruction
 They can be in the form of programmed text or manuals. They condense information to be learned into
organized and logical sequences.
 Trainees are required to provide feedback on their learning progress.
 Computer assisted instruction is widely used for the delivery of programmed instruction.
 Interactive video training is getting popular for programmed instruction. It combines computer-based
instruction with the use of video.
 Training time is reduced and the trainee learns at his/her own pace but the training and development
content is limited in programmed instruction.

Activity: Assume that you the manager of a small road business firm. Of your 4 drivers 2 are rated
good, 1 excellent and 1 less than satisfactory. You are able to fund one training course at the present
time, and the choice is between:
 a refresher driving course
 an advanced course which teaches the higher driving skills that ensure an excellent driver.
Who would you select for training and on which course? Give reasons
_________________________________________________________________________________
_______________________________________________________________

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1.3.2 Management Development
 Management development is a systematic process of improving managerial effectiveness by imparting
knowledge, increasing skills and changing attitudes. It prepares the management team to handle future
responsibilities.
 Management development is given to managerial employees who supervise the activities of others. It
develops managerial potential by increasing conceptual, interpersonal and decision-making skills. Above all,
it develops managerial capability to manage effectively.
 According to Dale S. Beach: Management development is a systematic process of training and growth by
which individuals gain and apply knowledge, skills, insights and attitudes to manage work organizations
effectively.
 Management development is future-oriented. Their targets are managers. It is predominantly an education
process for developing employee potential. It should be a continuous process.
Managerial Levels and Management Development
Managers need a wide variety of skills. The skills needed could be categorized into technical, human, and
conceptual skills
Technical Skills
 These are the ability to perform a specialized task or function.
 Lower managers need a high degree of technical skills, Examples are accounting skills, production skills,
etc. They are needed for supervision purposes.
Human Skills:
 They are ability to get along with people, get the jobs done through people, and motivate people. They
include skills such as communication, negotiation, bargaining, influencing, motivating, discipline, conflict
management etc.
 Human Skills are needed at all levels of managers. They are critical for getting the best out of people.
Conceptual skills
These are ability to think and see "big picture". They are needed to relate the organization to changing
environmental forces, they reflect ability to organize information and to judge relationships, the skill is most
needed for top managers.

Top Management CONCEPTIUA

L
Middle Management HUMAN

Lower Management TECHNICAL

Degree of skills for various levels of managers

 Different levels of managers have different needs for management development

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Benefits of Management Development
 Increase capability: Managers acquire capabilities to face challenges and handle responsibilities in the
future. They become versatile with broadened outlook.
 Enhance effectiveness: Managerial performance improves through increased conceptual, human and
technical skills.
 Foster teamwork: Management development programs improve managerial communication, which fosters
teamwork.
 Facilitate Environmental Adaptation: Management development equips managers to be proactive as well as
respond to changing environmental forces.
 Improved Decision Making: Management development improves decision-making capabilities and creative
thinking.
 Managerial Succession: Management development facilitates managerial succession to senior level positions
from within. Managers with potential are identified for development to assume greater responsibilities in
future.
 Job Satisfaction: Management development aids job satisfaction to managers by changing their attitudes and
behavior towards jobs.
Management Development Need Assessment
 The steps involved in assessing management development needs are analyzing organization's objectives,
appraising current management resources and assessing development needs.
 Analyzing Organization's Objectives: Objectives tell where the organization is going. They provide a
framework for determining future management development needs. Any program of management
development must contribute to achievement of objectives
 Appraise Current Management Resources: The management inventory developed from HR Inventory
provides information about background and current qualifications and experiences of managers.
 Assess Management Development Needs: Based on organization's objectives and needs identified by HR
plan and succession planning management development needs are ascertained to fulfill future managerial
responsibilities
Methods of Management Development
Methods of management development can be broadly classified into on-the-job methods and off-the-job
methods. Organizations generally use more than one or several methods for management development.
On-the-job Management Development Methods
Management development takes place on the job. It is learning by doing in the context of real work environment.
The most common methods are:
Coaching

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It is actively guiding managers by their immediate supervisors. The coach gives the guidance through direction,
advice, criticism and suggestions. Learners learn as they go along with the coaching.
 If someone other than immediate supervisor does the coaching, it is called mentoring.
Training Positions
 Trainee managers are given staff posts under an experienced manager with a title “assistant to".
 Trainees get a chance to learn the job under outstanding managers. During vacation times, such understudy
managers act as substitutes for the managers.

Job Rotation
It involves shifting managers from position to position. It is generally horizontal or lateral job transfer. It can be:
 Planned Rotation: Managers spend two or three months on a job and are then moved on.
 Situational Rotation: Shifting is done to meet work schedules or to make the job challenging to the
manager.
 Line and staff Rotation: managers can be shifted between line and staff positions.
Off-the-job Management Development Methods
Most management development takes place off the job. Mangers are removed from the stresses and demands of
the workplace. They can focus on learning experience. Management development programs can be in-house
classroom-based instruction or sponsored programs in universities, colleges and organizations specializing in
management development. The methods widely used for off-the-job management development are:
Lecture/Seminar
 Lectures are oral communication of information to managers by instructors. Participants get opportunity to
acquire knowledge and develop their conceptual, analytical and technical abilities.
 Lectures can be tailored to meet the unique management development needs of the organization.
 Seminars are formal presentation of papers by experts to small groups. They are followed by discussions,
which is facilitated by the leader.
 Audio-visual aids like films, video, overhead projector, etc. can be used for making the lectures and seminars
interesting. Videotapes are widely used for supervisory management development.
Simulation Exercises
 Simulation is the duplication of real world situations in the classroom. The participants are placed in
artificial environment that closely resembles the actual work environment. It can be used to practice
decision-making.
 They also receive feedback about their actions or decisions. Learning takes place without risk to equipment
and people.
 The simulation tools popularly used are:

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  Case Study: It involves providing the background description of actual decision problem situation to
participants. The participants in small groups analyze the problem and its causes, identify and evaluate
alternatives for solutions, and select appropriate solution for solving the problem.
 Role-play: It is human interaction involving realistic behavior in imaginary situations. Participants are
provided with a specific situation and act out the role of a specific person facing the situation. They
develop interpersonal skills to understand human behavior.
Evaluating Training Effectiveness
Evaluation is an integral part of the training and development process. It provides feedback on the effectiveness
of training and development activities. The measure of training and development effectiveness is the extent to
which objectives have been achieved. Objectives are desired outcomes. Evaluation helps to control and improve
the quality of programs and to judge their value. It verifies the program's success in terms of learner outcomes
and cost-effectiveness. Evaluation is a systematic and objective process to measure effectiveness in achieving
objectives to improve current activities and future planning. Effectiveness is doing the right things to move
closer to the objectives. It is the extent to which objectives have been achieved. It can be quantified in terms of
costs, changes in knowledge / behavior / performance, and impact of training and development in terms of
results.
Process of Training Evaluation
The process of training evaluation is a cyclical process. Four steps are involved in evaluation of training:
 Setting intended standards: These are the objectives of training. They are intended outcomes and serve as
standards for performance of training. They can be in terms of reaction, learning, job behavior and results.
 Measuring actual outcomes: the actual outcome of a given training activity is measured. Training reports
provide information about performance.
 Finding Deviations: the actual outcome is compared with the intended outcome. The deviations are found.
The causes for deviation are identified and analyzed. The responsibility for devotion is located.
 Corrective actions: Corrective actions are taken to improve the current performance and to plan future
training programs. Objectives may be changed to make them realistic.
Criteria for Evaluating Training Effectiveness
Evaluation must be systematic and objective. It should focus on outcomes. The criteria used for evaluating
training effectiveness can be
 Reaction criteria: It is concerned with the feelings of trainees to the training content, process, methods, etc.
they can be measured after the end of each module or at the end of the activity. Reactions can be based on
impressions, opinions and attitudes. They are subjective.
 Learning criteria: It is concerned with the knowledge, skills and attitudes acquired through the training
experience. Testing can be helpful in evaluating if learning occurred.

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 Behavior criteria: It is concerned with changes in job behavior that result after the training. It also includes
transfer of training to the job.
 Results criteria: It concerned with measurable results or improvements in organizational performance. The
indicators may be higher productivity, better quality, and lower turnover/absenteeism/ accidents.
The evaluation criteria should be clearly laid down in advance for evaluating training effectiveness.
Approaches to Evaluating Training Effectiveness
The most common approaches to evaluating training effectiveness are:
Observation Method
Trained experts closely observe trainees during the delivery of training programs. Changes in knowledge, skills
and attitudes of trainees are assessed by observers.
Test-retest Method
 Participants are given a test to establish their level of knowledge before they enter the human resource
development program. After the program is completed, they retake the test.
 The change in test scores indicates the change in the level of knowledge resulting from training. Generally,
objective tests are used.
Pre-post performance method
 The actual job performance of each participant is evaluated and rated prior to human resource development.
 After the training or management development is completed, participant's job performance is reevaluated.
The change in job performance is attributed to training.
Trainee surveys
 This refers to direct questioning of trainees to know their reactions about training programs. Participants
are asked to fill-up a form after the end of training.
 Questionnaires and interview tools can also be used for evaluating the impact of training.
Cost Effectiveness Analysis
It assesses the total value of human resource development program benefits against total costs of the program. It
measures value for money. The human resource development program training is effective if benefits exceed
costs.

1.3.3 Career Development

Meaning & Stages
Career development means the process of increasing an employee‟s potential for advancement and career
change. Career development is a continuous process where both employees as well as employers have to put
efforts in order to create conducive environment so that they can achieve their objectives at the same time. It has
been defined as the interaction of psychological, sociological, economic, physical, and chance factors that shape
the sequence of jobs, occupations or careers that a person may engage in throughout a lifetime. Career

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development is a major aspect of human development. It includes one's entire life span and concerns the whole
person. Career development involves a person's self-concept, family life, and all aspects of one's environmental
and cultural conditions. A career consists of a sequence of work-related positions occupied by a person during
the course of a life time. Traditionally, careers were judged in terms of advancement and promotion upward in
the organizational hierarchy. Today, they are defined in more holistic ways to include a person's attitudes and
experiences. For example, a person can remain in the same job, acquiring and developing new skills, and have a
successful career without ever getting promoted. Similarly, people may move horizontally through a series of
jobs in different functional areas of the firm. Although they may not be promoted upward in the hierarchy, their
broadened job experiences constitute a successful career. Considerable research has been devoted to
understanding how aging and experience affect people's careers. This research has drawn on the extensive work
done on adult growth and development and has adapted that developmental perspective to work experience.
Results suggest that employee‟s progress through at least four distinct career stages as they mature and gain
experience. Each stage has unique concerns, needs, and challenges.
1) The establishment stage (ages 21-26 years). This phase is the outset of a career when people are generally
uncertain about their competence and potential. They are dependent on others, especially bosses and more
experienced employees, for guidance, support, and feedback. At this stage, people are making initial choices
about committing themselves to a specific career, organization, and job. They are exploring possibilities while
learning about their own capabilities.
2) The advancement stage (ages 26-40 years). During this phase, employees become independent contributors
who are concerned with achieving and advancing in their chosen careers. They have typically learned to perform
autonomously and need less guidance from bosses and closer ties with colleagues. This settling-down period also
is characterized by attempts to clarify the range of long-term career options.
3) The maintenance stage (ages 40-60 years). This phase involves leveling off and holding on to career
successes. Many people at this stage have achieved their greatest advancements and are now concerned with
helping less-experienced subordinates. For those who are dissatisfied with their career progress, this period can
be conflictual and depressing, as characterized by the term "midlife crisis." People often reappraise their
circumstances, search for alternatives, and redirect their career efforts. Success in these endeavors can lead to
com inning growth, whereas failure can lead to early decline.
4) The withdrawal stage (ages 60 years and above). This final stage is concerned with leaving a career. It
involves letting go of organizational attachments and getting ready for greater leisure time and retirement. The
employee's major contributions are imparting knowledge and experience to others. For those people who are
generally satisfied with their careers, this period can result in feelings of fulfillment and a willingness to leave
the career behind.
The different career stages represent a broad developmental perspective on people's jobs. They provide insight
about the personal and career issues that people are likely to face at different career phases. These issues can be

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potential sources of stress. Employees are likely to go through the phases at different rates, and to experience
personal and career issues differently at each stage. For example, one person may experience the maintenance
stage as a positive opportunity to develop less-experienced employees; another person may experience the
maintenance stage as a stressful leveling off of career success.
Career Planning
Career Planning is a sequence of attitudes and behavior associated with the series of job & work related activities
over a person‟s life time. Career Planning evaluate one‟s abilities and interests, considering alternative career
opportunities, establishing career goals and planning practical development activities. It involves identifying the
right potential well in time, for development to take over higher responsibilities. This includes promotion and
planned job rotation under various conditions and environments of challenge. In this process, attention is focused
on individual‟s style of working than his current performance results. Current results can provide reasonable
clues of future potential, but they are not the sole criterion. In other words, current results only could be
misleading in judging one‟s potential. People‟s achievements are invariably affected by the forces outside his
control. Similarly, a person may be highly successful in one situation, but he may not continue to be a high
achiever when transferred to another job or situation.
Steps/ Process in Career Planning
Career planning involves different activities for successful organization cover important following steps:-
Preparing Personal Skills Inventories - The first step is to prepare personal skills inventories, which contains
data or employee‟s skill and career goals. In addition there are required data banks, which provide the following
information.
 The organization structure and the persons managing different positions in the organization their age,
education, experience, goals, authority and responsibility.
 The performance record and ratings, interpersonal abilities of the employees.
 Their preferred location, designs and constraints.
 Future impression of manpower for expansion or diversification of the company or for natural wastages
like death, disability, retirement, discharge and dismissal, resignation etc.
In most of the organizations such information is computerized periodically revise and updated. After preparation
of personal skills inventories & additional data, it is necessary to develop career path for employees.
Developing Career Paths - Career Paths are logical mapping out of jobs, which represent a potential progression
that an employee may follow over time. Such mapping of job progression is done in the firm of career ladders by
clubbing together similar lives of occupations in job families. Job families are group of homogeneous jobs i.e.
jobs with similar characters.
Put the Right Man at the Right Place - The third step in career planning process is to identify suitable
employees who have the ability, potential, willingness to take up higher responsibilities and rise-up the
organization ladder for this most of the organizations have performance appraisal and merit rating system. This

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system enables organizations to compare the performance measures of different individual in terms of job
requirement and helps in identifying training requirement, selecting for promotions providing financial rewards
etc.
Career Development Interventions/Career Management
To sustain a highly committed and motivated workforce, organizations increasingly will have to address the
career needs of employees. They will have to recognize and reward the contributions that workers make to the
organization. Career development helps individuals achieve their career objectives. Career development can be
integrated with people's career needs by linking it to different career stages. As described earlier, employees
progress through distinct career stages, each with unique issues relevant to career planning: establishment,
advancement, maintenance, arid withdrawal. Career development interventions help members implement these
plans. Career development interventions also can serve a variety of purposes, such as helping members identify a
career path or providing feedback on career progress and work effectiveness. They can contribute to different
organizational outcomes such as lowering turnover and costs and enhancing member satisfaction. It follows
closely from career planning and includes organizational practices that help employees implement those plans.
These may include job pathing, performance feedback and coaching, mentoring, skill training, planned job
rotation and challenging assignments to mention few.
Job Pathing
This intervention provides members with a carefully developed sequence of work assignments leading to a career
objective. It helps members in the establishment and advancement stages of their careers. Job pathing helps
employees develop skills, knowledge, and competencies by performing jobs that require new skills and abilities.
Research suggests that employees who receive challenging job assignments early in their careers do better in
later jobs. Career pathing allows for a gradual stretching of people's talents by moving them through selected
jobs of increasing challenge and responsibility. As a person gains experience and demonstrates competence in
the job, she or he moves to another job with more advanced skills and knowledge. Performing well on one job
increases the chance of being assigned to a more demanding job. The keys to effective job pathing are to identify
the skills an employee needs for a certain target job and then to lay out a sequence of interim jobs that will
provide those experiences.
Performance Feedback and Coaching
One of the most effective interventions during the establishment and advancement phases includes feedback
about job performance and coaching to improve performance. Employees need continual feedback about goal
achievement as well as necessary support and coaching to improve their performances. Feedback and coaching
are particularly relevant when employees are establishing careers. They have concerns about how to perform the
work, whether they are performing up to expectations, and whether they are gaining the necessary skills for
advancement. A manager can facilitate career establishment by providing feedback on performance, coaching,

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and on-the-job training. These activities can help employees get the job done while meeting their career
development needs.
Mentoring
One of the most useful ways to help employees advance in their careers is sponsorship. This involves
establishing a close link between a manager or someone more experienced and another organization member
who is less experienced. Mentoring is a powerful intervention that assists members in the establishment,
advancement, and maintenance stages of their careers. For those in the establishment stage, a sponsor or mentor
takes a personal interest in the employee's career and guides and sponsors it. This ensures that a person's hard
work and skill translate into actual opportunities for promotion and advancement. For older employees in the
maintenance stage, mentoring provides opportunities to share knowledge and experience with others who are less
experienced. Older managers may mentor younger employees who are in the establishment and advancement
career stages. Mentors do not have to be the direct supervisors of the younger employees but can be
hierarchically or functionally distant from them.
Developmental Training
This intervention helps employees gain the skills and knowledge for training and coaching others. It may include
workshops and training materials oriented to human relations, communications, active listening, and mentoring.
It can also involve substantial investments in education, such as tuition reimbursement pro-grams that assist
members in achieving advanced degrees. Developmental training interventions generally are aimed at increasing
the organization's reservoir of skills and knowledge. This enhances its capability to implement personal and
organizational strategies.
Job Rotation and Challenging Assignments
The purpose of these interventions is to provide employees with the experience and visibility needed for career
advancement or with the challenge needed to revitalize a stagnant career at the maintenance stage. Unlike job
pathing, which specifies a sequence of jobs to reach a career objective, job rotation and challenging assignments
are less planned and may not be as oriented to promotion opportunities.
Summary
Training is a process directed toward maintaining and improving employee's current job performance, while
development seeks to develop knowledge and or skills of managers at various levels for future managerial
activities. Once the need for change is recognized and the factors that influence intervention are considered, the
process of determining training and development needs begins. Essentially, two questions must be asked: "What
are our needs? And "What do we want to accomplish through our training and development efforts?" After
stating the training and development objectives, management can determine the appropriate methods for
accomplishing them. Various methods and media are available; the selection depends on the nature of the
training and development goals. Naturally, training and development must be continuously evaluated to
facilitate change and accomplish organizational objectives. Training and development methods include coaching,

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mentoring business games, videotapes, in-basket training, internships, role playing case studies, job rotation,
programmed instruction, computer based training, class room programs, on the job training, apprenticeship
training, etc. Training and development programs are evaluated by several measures: participants' opinions,
extent of learning behavioral change, accomplishment of training & development objectives, return on
investment, and benchmarking. The major benefits of training and development include achievement of
improved job performance and productivity, improved product quality and service to customers. There are also
benefits to staff, the major ones are: increased job satisfaction and value of staff in the labor market, and
improved prospects of promotion.

1.4 THE MOTIVATION FUNCTION

Introduction
Motivation is one of the essential elements in human resource management practices. If an organization has a
culture of motivation, it is likely that it leads employees towards productivity that ultimately contributes to the
overall success of the organization. These part presents motivation as an essential component of HRM essentially
focusing on the process, models and implications. In this part the issues of employee performance appraisal will
be addressed briefly by emphasizing on such issues as appraising employee performance management system
and appraisal process methods. Finally, the part will be closed with the discussion on compensation. The purpose
of compensation should be to enhance the effective and efficient utilization and management of an organization's
workforce. The purpose should also contribute to the overall strategic mission of the organization. This part
looks at the basic elements of compensation. It begins by reviewing how compensation affects job performance
and consequently the goals of the organization.
After completing this part, you will be able to:
 Identify processes and models of work motivation.
 Describe performance management system.
 Identify appraisal process methods and tools.
 Describe the important objectives of compensation.
 Recognize employee discipline and counseling guidelines.

1.4.1 Motivational strategies, process, model & implications

Motivation is the inner drive that directs a person's behavior toward goals. Motivation can be defined as a
process which energizes, directs and sustains human behavior. In HRM the term refers to person's desire to do
the best possible job or to exert the maximum effort to perform assigned tasks. An important feature of
motivation is that it is behavior directed towards goal. Workers in any organization need something to keep them
working. Most of the time, the salary of the employee is enough to keep him or her working for an organization.
An employee must be motivated to work for a company or organization. If no motivation is present in an
employee, then that employee‟s quality of work or all work in general will deteriorate. People differ on a

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personality dimension called locus of control. This variable refers to individual's beliefs about the location of the
factors that control their behavior. At one end of the continuum are high internals who believe that opportunity to
control their own behavior rests within themselves. At the other end of the continuum there are high externals
who believe that external forces determine their behavior. Not surprisingly, compared with internals, externals
see the world as an unpredictable, chancy place in which luck, fate, or powerful people control their destinies.
The Motivation Process money
In its simplest form, the motivation process begin with a need, an individual's perception of a deficiency .For
instance, an employee might feel the need for more challenging work, for higher pay, for time off, or for the
respect and admiration of colleagues. These needs lead to thought processes that guide an employee's decision to
satisfy them and to follow a particular course of action. If an employee's chosen course of action results in the
anticipated out come and reward, that person is likely to be motivated by the prospect of a similar reward to act
the same way in the future. However, if the employee's action does not result in the expected reward, he or she is
unlikely to repeat the behavior. Thus, the reward acts as feedback mechanism to help the individual evaluate the
consequences of the behavior when considering futures action.
Core Phases of the Motivational Process
Need Identification: First phase of motivation process is need identification where the employee feels his/her
some unsatisfied need. The motivation process begins with an unsatisfied need, which creates tension and drives
an individual to search for goals that, if attained, will satisfy the need and reduce the tension.
Searching Ways to satisfy needs - Second phase is finding the different alternatives that can be used to satisfy
the needs, which were felt in first stage. These needs lead to thought processes that guide an employee's decision
to satisfy them and to follow a particular course of action
Selecting Goals - Once if the need is assessed and employee is able to find out the way to satisfy the need than
next phase is selection of goals to be performed.
Employee Performance - These needs lead to thought processes that guide an employee's decision to satisfy
them and to follow a particular course of action in form of performance.
Consequences of performance Reward/punishments: If an employee's chosen course of action results in the
anticipated out come and reward, that person is likely to be motivated by the prospect of a similar reward to act
the same way in the future. However, if the employee's action does not result in the expected reward, he or she is
unlikely to repeat the behavior.
Reassessment of Need deficiencies: Once felt need is satisfied through certain rewards in response to
performance than employee reassesses any deficiencies and entire process is repeated again.
Motivational Theories
Motivation theories seek to explain why employees are motivated by and satisfied with one type of work than
another. It is essential that mangers have a basic understanding of work motivation because highly motivated
employees are more likely to produce a superior quality product or service than employee who lack motivation.

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Maslow's Need Hierarchy
Abraham Maslow organized five major types of human needs into a hierarchy. The need hierarchy illustrates
Maslow's conception of people satisfying their needs in a specified order, from bottom to top. The needs, in
ascending order, are: physiological (food, water, and shelter, safety or security (protection against threat and
deprivation), social (friendship, affection, belonging, and love), ego (independence, achievement, freedom,
status, recognition, and self-esteem), and self-actualization (realizing one's full potential; becoming everything
one is capable of being). According to Maslow, people are motivated to satisfy the lower needs before they try to
satisfy the higher need. Also, once a need is satisfied it is no longer a powerful motivator. Maslow's hierarchy,
however, is a simplistic and not altogether accurate theory of human motivation. For example, not everyone
progresses through the five needs in hierarchical order. But Maslow makes three important contributions. First,
he identifies important need categories, which can help managers create effective positive rein forcers. Second, it
is helpful to think of two general levels of needs, in which lower-level needs must be satisfied before higher-
level needs become important. Third, Maslow sensitized managers to the importance of personal growth and
self-actualization. Self-actualization is the best-known concept arising from this theory. According to Maslow,
the average person is only 10 percent self-actualized. In other words, most of us are living our lives and working
at our lives and working at our jobs with a large untapped reservoir of potential. The implication is clear: Create
a work environment that provides training, resources, gives people a chance to use their skills and abilities in
creative ways and allows them to use their skills and abilities kin creative ways and allows them to achieve more
of their full potential.
Existence Relatedness Growth (ERG) Theory
Alderfer focuses on three needs: existence, relatedness, and growth. Existence needs are similar to Maslow's
physiological needs, and to the physical components of Maslow's security needs. Relatedness needs are those
that require interpersonal interaction to satisfy the needs for things like prestige and esteem from others. Growth
needs are similar to Maslow's needs for self-esteem and self-actualization.
McGregor's Theory-X and Theory-Y
McGregor's Theory-X represented the traditional management view that employees are lazy, was uninterested in
work, and needed to be prodded to perform. In contrast his theory Y viewed employees as creative, complex, and
mature individuals interested in meaningful work. McGregor believed that under the right circumstances,
employees would willingly contribute their ingenuity and their talents for the benefits of the organization. He
suggested that the mangers motivate em-0loyees by giving them the opportunity to develop their talents more
fully and by giving them the freedom to choose the methods they would use to achieve organizational goals. In
McGregor's view the mangers role was not to manipulate employees but to align their needs with needs of the
organization so that employees would regulate their own actions and performance. These insights lead researches
to investigate the origins and processes of motivation more closely.
Expectancy Theory

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Expectancy theory states that a person's motivation to exert a certain level of effort is a function of three things:
expectancy (E), instrumentality (I), and valance (V). Motivation = E x I x V. "E" is the person's expectancy that
his or her effort will lead to performance, "I" represents the perceived relationship between successful
performance and obtaining the reward, and "V" refers to the perceived value the person attaches to the reward.
Reinforcement Theory
In 1911, psychologist Edward Thorndike formulated the law effect: Behavior that is followed by positive
consequences probably will be repeated. This powerful law of behavior laid the foundation for country
investigations into the effects of the positive consequences, called rein forcers that motivate behavior.
Organizational behavior modification attempts to people's actions. Four key consequences of behavior either
encourage or discourage people's behavior.
Positive Reinforcement - applying a valued consequence that increases the likelihood that the person will repeat
the behavior that led to it. Examples of positive reinforces include compliments, letters of commendation,
favorable performance evaluations, and pay raises. Equally important, jobs can be positively reinforcing.
Performing well on interesting, challenging, or enriched jobs (discussed later in this chapter) is much more
reinforcing, and therefore motivating, then performing well on jobs that are routine and monotonous.
Negative Reinforcement - removing or withholding an undesirable consequence. For example, a manager takes
an employee (or a school takes a student) off probation because of improved performance. Frequent threatening
memos admonished people to achieve every one of their many performance goals
Punishment - administering an aversive consequence. Examples include criticizing or shouting at an employee,
assigning an unappealing task, and sending a worker home without pay. Negative reinforcement can involve the
threat of punishment, but not delivering it when employees perform satisfactorily. Punishment is the actual
delivery of the aversive consequence.
Extinction - withdrawing or failing or failing to provide a reinforcing consequence. When this occurs motivation
is reduced and the behavior is extinguished, or eliminated. Examples include not giving a compliment for a job
well done, forgetting to say thanks for a favor, or setting impossible performance goals so that the person never
experiences success. The first two consequences, positive and negative reinforcement, are positive for the person
receiving them: The person either gains something or avoids something negative. Therefore, the person who
experiences these consequences will be motivated to behave in the ways that led to the reinforcement. The last
two consequences, punishment and extinction, are negative outcomes for the person receiving them: Motivation
to repeat the behavior that led to the undesirable results will be reduced. Thus, effective managers give positive
reinforcement to their high-performing people and negative reinforcement to low performance. They also punish
or extinguish poor performance and other unwanted behavior.
Herzberg's Two-Factor Approach
Herzberg Two-Factor theory divides Maslow's Hierarchy into a lower-level and a higher-level set of needs, and
suggests that the best way to provide motivation for an employee is to offer to satisfy the person's higher-order

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needs, ego and self-actualization. Herzberg said that lower-order needs, or hygiene factors, are different from
higher-order needs, or motivators. He maintains that adding more hygiene factors to the job is a very bad way to
motivate because lower-order needs are quickly satisfied.
McClelland (Needs for Affiliation, Power, and Achievement) Theory
McClelland agrees with Herzberg that higher-level needs are most important at work. He believes the needs for
affiliation, power, and achievement are most important. He and his associates use the Thematic Apperception
Test to identify a person's needs for achievement, power, and affiliation. People with a high need for
achievement strive for success, are highly motivated to accomplish a challenging task or goal, prefer tasks that
have a reasonable chance for success, and avoid tasks that are either too easy or too difficult. People with a high
need for power enjoy roles requiring persuasion. People with a strong need for affiliations are highly motivated
to maintain strong, warm relationships.
Adam's Equity Theory
Adams's equity theory assumes that people have a need for fairness at work, and therefore, value and seek it.
People are motivated to maintain a balance between what they perceive as their inputs or contributions and their
rewards as compared to others. This theory seems to work when people feel they are underpaid, but inequity due
to overpayment does not seem to have the positive effects on either quantity or quality that Adams's equity
theory would predict.
Methods for Motivating Employees for Employee Satisfaction
Rewards - People behave in ways that they believe are in their best interest, they constantly look for payoffs for
their efforts. They expect good job performance to lead to organizational goal attainment, which in turn leads to
satisfying their individual goals or needs. Organization, then, use rewards to motivate people.
Challenging Jobs - Job design refers to the number and nature of activities in a job. The key issue is whether
jobs should be more specialized or more enriched and non-routine. Job design has been implemented in several
ways.
Job enlargement assigns workers to additional same-level tasks to increase the number of tasks they have to
perform. Job rotation systematically moves workers from job to job. Job enrichment means building motivators
like opportunities for achievement into the job by making it more interesting and challenging. Forming natural
work groups, combining tasks, establishing client relationships, vertically loading the job, and having open
feedback channels may implement Job enrichment.
Using Merit Pay - A merit raise is a salary increase, usually permanent, that is based on the employee's
individual performance. It is a continuing increment rather than a single payment like a bonus. Relying heavily
on merit rewards can be a problem because the reinforcement benefits of merit pay is usually only determined
once per year.

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Using Spot Awards - A spot award is one given to an employee as soon as the laudable performance is observed.
These awards are consistent with principles of motivation because they are contingent on good performance and
are awarded immediately.
Using Skill-Based Pay - With skill-based pay, employees are paid for the range, depth, and types of skills and
knowledge they are capable of using rather than for the job they currently hold. Skill- based pay is consistent
with motivation theory because people have a self-concept in which they seek to fulfill their potential. The
system also appeals to the employee's sense of self-efficacy because the reward is a formal and concrete
recognition that the person can do the more challenging job well.
Using Recognition - Some employees highly value day-to-day recognition from their supervisors, peers and
team members because it is important for their work to be appreciated by others. Recognition helps satisfy the
need people have to achieve and be recognized for their achievement.
Using Job Redesign - Job design refers to the number and nature of activities in a job. The key issue is whether
jobs should be more specialized or more enriched and non-routine. Job design has been implemented in several
ways. Job enlargement assigns workers to additional same-level tasks to increase the number of tasks they have
to perform. Job rotation systematically moves workers from job to job. Job enrichment means building
motivators like opportunities for achievement into the job by making it more interesting and challenging. Job
enrichment may be implemented by forming natural work groups, combining tasks, establishing client
relationships, vertically loading the job, and having open feedback channels.
Using Empowerment - Empowerment means giving employees the authority, tools, and information they need to
do their jobs with greater autonomy, as well as the self-confidence to perform new jobs effectively.
Empowerment boosts employees' feelings of self-efficacy and enables them to use their potential more fully.
Using Goal-Setting Methods - People are strongly motivated to achieve goals they consciously set. Setting goals
with employees can be a very effective way of motivating them. Goals should be clear and specific, measurable
and verifiable, challenging but realistic, and set with participation.
Using Positive Reinforcement - Positive reinforcement programs rely on operant conditioning principles to
supply positive reinforcement and change behavior. Experts claim it is better to focus on improving desirable
behaviors rather than on decreasing undesirable ones. There are a variety of consequences including social
consequences (e.g., peer approval or praise from the boss), intrinsic consequences (e.g., the enjoyment the person
gets from accomplishing challenging tasks), or tangible consequences (e.g., bonuses or merit raises).
Using Lifelong Learning - Lifelong learning can be used to deal with problems of downsizing and employee
commitment, and to counterbalance their negative effects. It provides extensive continuing training and
education, from basic remedial skills to advanced decision-making techniques, throughout the employees'
careers, which provide employees the opportunity to boost their self-efficacy and self- actualization.
Benefits/Implications of Motivation
Motivation is a very important for an organization because of the following benefits it provides:

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Puts human resources into action - every concern requires physical, financial and human resources to
accomplish the goals. It is through motivation that the human resources can be utilized by making full use of it.
This can be done by building willingness in employees to work. This will help the enterprise in securing best
possible utilization of resources.
Improves level of efficiency of employees - The level of a subordinate or a employee does not only depend upon
his qualifications and abilities. For getting best of his work performance, the gap between ability and willingness
has to be filled which helps in improving the level of performance of subordinates. This will result into - increase
in productivity, reducing cost of operations, and improving overall efficiency.
Leads to achievement of organizational goals - The goals of an enterprise can be achieved only when the
following factors take place.
 There is best possible utilization of resources,
 There is a co-operative work environment,
 The employees are goal-directed and they act in a purposive manner,
 Goals can be achieved if co-ordination and co-operation takes place simultaneously which can be
effectively done through motivation.
Builds friendly relationship - Motivation is an important factor which brings employees satisfaction. This can be
done by keeping into mind and framing an incentive plan for the benefit of the employees. This could initiate the
following things including monetary and non-monetary incentives, promotion opportunities for employees, and
disincentives for inefficient employees. In order to build a cordial, friendly atmosphere in a concern, the above
steps should be taken by a manager. This would help in effective co-operation which brings stability, reduces
industrial dispute and unrest in employees, reduces resistance and increase adaptability of employees to change,
provides a smooth and sound concern in which individual interests will coincide with the organizational
interests, and result in profit maximization through increased productivity.
Leads to stability of work force - stability of workforce is very important from the point of view of reputation
and goodwill of a concern. The employees can remain loyal to the enterprise only when they have a feeling of
participation in the management. The skills and efficiency of employees will always be of advantage to
employees as well as employees. This will lead to a good public image in the market which will attract
competent and qualified people into a concern. As it is said, “Old is gold” which suffices with the role of
motivation here, the older the people, more the experience and their adjustment into a concern which can be of
benefit to the enterprise.
We can summarize by saying that motivation is important both to an individual and a business. Motivation is
important to an individual as it will help achieve personal goals, increase job satisfaction, help in self-
development of individual, and help individuals gain by working with a dynamic team. Similarly, motivation is
important to a business as:
 The more motivated the employees are, the more empowered the team is.

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  The more is the team work and individual employee contribution, more profitable and successful is the
business.
 During period of amendments, there will be more adaptability and creativity.
 Motivation will lead to an optimistic and challenging attitude at work place.
Productivity, TQM & Job Designs
Productivity is a measure of the rate at which outputs of goods and services are produced per unit of input. It is
calculated as the ratio of the amount of outputs produced to some measure of the amount of inputs used.
Improving productivity can have connotations of economizing on the use of inputs like adopting efficient
production processes that minimize waste improving productivity to yielding more output. This is possible
through different mechanisms among which TQM tool and having well worked out job design are commonly
mentioned. Total Quality Management is the name given to a variety of management systems designed to
improve organizational quality. W. Edwards Deming, an American statistician, is often credited with its
invention, and his version is influential and widespread. He believed that to improve quality, the following steps
are necessary. These include; 1) Create constancy of purpose for the continuous improvement of product and
service; 2) Break down barriers between departments to build teamwork; 3) Drive fear out of the workplace; 4)
Eliminate quotas on the shop floor; 5) Create conditions that allow employees to have pride in their
workmanship, including abolishing annual performance reviews and merit ratings; and 6) Institute programs of
education and self-improvement. TQM promotes the continuous improvement of procedures in an agency from
the top to the bottom so that clients are satisfied with the agency‟s performance. The organization‟s culture is
changed to focus on establishing and maintaining high performance standards. Unlike traditional management
techniques that emphasize control, in TQM quality is achieved by improving the process, not by blaming
employees. Common practices that deemed harmful to quality improvements include a lack of constancy of
purpose, an emphasis on short-term projects, and individual performance evaluations. Job design is also essential
because the need to harness human resources in innovatory ways to give organizations a competitive advantage
has focused attention on the question of job design. It is defined as the process of combining tasks and
responsibilities to form complete jobs and the relationships of jobs in the organization.
1.4.2 Appraising employee performance
Performance Management System
Performance management represents a relatively new management concept. It was not until the 1980s that it
truly emerged as a standalone concept. In simple terms, performance management is a process that enables
employees to perform their roles to the best of their abilities with the aim of achieving or exceeding established
targets and standards that are directly linked with the organization‟s objectives. Performance management is
posited as a strategic management technique that supports the overall business goals of the firm through linking
each individual‟s work goals to the overall mission of the firm. It is further hypothesized as an integrated system
where management and employees work together in setting objectives, assessing and reviewing how these are

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being met and rewarding good performance. This requires „the ability to interpret the more abstract goals and
objectives at board level into more practical operational goals and objectives at employee level to meet them.
There are four principal normative concerns of performance management. First, is that it aims to improve
performance. Second, it endeavors to develop employees. Third, it seeks to satisfy the expectations of the various
organizational stakeholders. Finally, communication and involvement is imperative due to the ideology of
arriving at jointly agreed goals and objectives. In other words performance management seeks management by
agreement rather than dictation. The effective and strategic use of performance management provides a means
for recognizing good performance, as well as clarifying tasks and providing support in achieving these. It carries
the potential to provide a structured means of directing and guiding individual employees, teams, and
departments towards the pursuit and achievement of corporate objectives.
Appraisal Process Methods
The performance appraisal is essentially a formal mechanism of reviewing individual employee performance. Is
defined as the activities through which organizations seek to assess employees and develop their competence,
enhance performance and distribute rewards. It generally involves line managers appraising their subordinate‟s
performance, often on an annual basis. In terms of the content of appraisals, there is no definite „one best‟
prescribed approach. For example, job performance will nearly always be reviewed, whilst personality and
behavior may or may not. Performance management is often conflated with performance appraisal and vice
versa. Performance appraisals are concerned with individual performance, whereas performance management
looks at individual, team, and organizational performance. The appraisal may be just another HR technique used
by an organization, while performance management attempts to link the appraisal process to the wider values and
objectives of the firm. However, appraisals constitute an integral part of the performance management process.
Traditionally, appraisals concentrated on aspects of personality that were believed to be integral to carrying out
the role, e.g. being an extroverted person for a sales job. However such an approach is blighted by problems.
People may define personality traits differently. This may cause problems if ratings are being used because
appraisers may have different views on what the traits mean. Thus considerable potential for bias exists. Further,
many organizations tend to have common appraisals across staff, meaning that some employees may be
appraised on traits that are irrelevant to their role. Clearly appraisals carry a high potential for subjectivity, bias
and prejudice. Consequently there have been developments to make the process more objective. Typically these
involve establishing measurable objectives which are formally reviewed, normally on an annual basis, to
establish whether they have been met or not. Each employee may have a say in setting their objectives but the
extent of this involvement varies greatly between firms. If objectives are not jointly agreed and/or there is no
shared understanding and acceptance of them, the normative ideals of performance management are
questionable. Furthermore, it is vital that the organization‟s own circumstances and what they are trying to
achieve in appraising various employees are taken into account, rather than adopting the approach used in
another organization, i.e. using an off-the-shelf appraisal may not be wise.

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The Performance Appraisal Process
In order to realize the purpose of performance appraisal, organizations should carefully plan appraisal system.
These could be done through the following steps:
Establishing performance standard – employee job performance standards are established based on the job
description as it forms the broad criteria against which employees‟ performance is measured.
Communicating standards to employees – employees must understand the criteria against which their
performance is measured. Providing the opportunity for employees to clearly understand the performance
standards will enhance their motivation and commitment towards their jobs.
Measuring performance – this is the responsibility of the immediate boss to observe the work performance of
subordinate and evaluate it against the already established job performance standards and requirements.
Comparing performance with standard – after evaluating and measuring employee‟s job performance, it is
necessary to compare it with the set standard to know whether there is deviation or not.
Discussing appraisal with employees – employees must actively involve in the design and development of
performance standards. After the evaluation, the rater must describe work related progress in a manner that is
mutually understandable. The rater must provide appraisal feedback on the results that employee achieved that
meet or exceed performance expectation.
Initiating corrective action – the management has several alternatives after appraising performance and
identifying causes of deviation from job-related standards. The alternatives are: take no action, correct the
deviation, or review the standard.
Performance appraisal could be conducted by the following among others: immediate supervisor, peer –peer
evaluation, self – self-appraisal, subordinate – subordinate evaluation, group-group appraisal, or combinations of
all.
The effectiveness of appraisals
Appraisals are believed to enhance managerial and organizational performance as well as positively contributing
to employee motivation. Conducted effectively, they are credited with a number of positive benefits including:
1) Performance planning and goal setting;
2) Providing feedback and coaching;
3) Employee development; and
4) Linking employee performance to compensation and promotion decisions.
However, there are two schools of thought regarding problems with the effectiveness of performance appraisals
in evaluating employee performance. The first school focuses on performance appraisal as a social process. Since
appraisal generally involves one person rating another‟s performance it is impossible to disentangle the social
influences which are present. Second, performance appraisal has a political dimension. Rather than being an
objective, neutral process, the performance appraisal represents a political process whereby those involved may
pursue personal agendas and strategies. For example, there may be a poor working relationship between

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employee and appraiser. This may result in appraises perceiving the appraisal as unfair. This may de-motivate
employees, possibly resulting in overt and covert outcomes, including poor performance and higher labor
turnover. In addition, the appraiser may not possess enough information to effectively review the employee‟s
performance. This may lead to a situation whereby the appraisee receives incomplete and inaccurate information
on their performance. Some firms have tried to negate such issues by having more than one appraiser, with the
objective of reducing the potential for bias.
The use of inappropriate rating instruments is another source of criticism and a potential weakness in
performance appraisal. Many performance appraisal techniques are criticized for failing to accurately capture
what is involved in different jobs. Often managers may have an overall opinion on how well a person has been
performing but there is a lack of specifics on the employee‟s actual performance. For example, the recency effect
is a common error in the appraisal process. This refers to where the appraiser fails to keep a formal record of
performance since the last appraisal. Consequently, at appraisal time the appraiser realizes s/he can only
remember specific examples of performance within the most recent period.
The appraisal may suffer from trying to achieve too much. For example, performance appraisals may be used to
identify poor, good and exceptional performers, spot high potentials, discover training and development needs,
and decide on appropriate rewards. Appraisals are most commonly used to identify training and development
needs and links to rewards are notably loose. Utilizing appraisals for both developmental needs and for ascribing
rewards is particularly interesting because – to all intents and purposes – they are two conflicting approaches.
Evidences show that often it is the basic fundamentals of the appraisal process that reduce its effectiveness. For
example, over eight in ten respondents suggested that the failure to have clear performance criteria negated the
potential benefits of conducting an appraisal.
Appraisal Methods
Recent decades have witnessed considerable evolution in the spheres of performance appraisal and performance
management. There are various methods of performance appraisal system including: forced distribution, 360-
degree feedback, and balanced scorecard.
Forced distribution - forces the appraiser to rate a certain proportion of employees in different categories. Thus,
a certain number of employees must be in the top grade, and further specific proportions must also be in the
various lower grades.
360-degree feedback - A 360-degree feedback is credited with providing a more holistic and effective source of
feedback on individual performance. Essentially it involves getting feedback from multiple sources, including
peers, supervisors, colleagues and so on. We earlier noted that appraisals typically involve a manager giving
feedback on their subordinate‟s performance – a very one-dimensional view. 360-degree feedback can provide a
unique opportunity for individuals to make an objective comparison of their self-assessment with the
assessments of their peers, managers and customers and other interested parties involved in the process.

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Balanced scorecard - Another important development in performance management is the application of the
balanced scorecard. The balanced scorecard is a strategic planning, management and measurement system used
to align business activities to the organization‟s vision and strategy, improve internal and external
communications, as well as monitor organizational performance against strategic goals. It seeks to integrate the
various functions and translate corporate goals into short-term measurable objectives which are linked to the
achievement of the firm‟s long term objectives. By integrating financial and non-financial data, managers are
provided with a more rounded perspective to make better strategic decisions. Specifically three areas of
measurement are identified in addition to financial measures: customer measures, internal business process
measures and learning and growth measures.
Within the above broad performance measurement methods, there are appraisal methods mentioned most
commonly including: rating scale, critical incident, essay, ranking, work standards, and management by
objectives (MBO).

1.4.3 Compensation & Rewarding performance

Designing Compensation System
The design, implementation, and maintenance of compensation systems are important parts of strategic human
resources management. Decisions about salaries, incentives, benefits, and quality-of-life issues are important in
attracting, retaining, and motivating employees. Strategic decisions about pay levels, pay structures, job
evaluation, and incentive pay systems influence the ability of an organization to compete in the marketplace to
attract the most qualified and competent applicants and to retain its most talented and productive employees.
Compensation is a topic that most employees are concerned with.
From strategic human resources management perspective, employers use compensation to attract, retain, and
motivate employees to achieve organizational goals. Employees expect fair remuneration for the services they
perform. However, what is often lacking is the understanding that compensation is affected by many factors: the
expectations and perception of fairness by employees, competitive labor market wages, the extent of other
benefits provided to employees, the organization‟s ability to pay, and federal and state laws.
Employees are the backbone of the organization. The attainment of organizational objectives largely depends on
when employees are motivated to work. Among other things, employees are motivated to work hard when they
are provided with a fair financial and non-financial compensation for work rendered to the organization.
Compensation is the reward employees receive in exchange for their performance. It is concerned with wages
and salaries, pay raises, and similar monetary exchange for employees‟ performance. Well-designed pay or
compensation system enables the organization: To attract sufficient and qualified employees, to retain and
motivate the existing workforce toward its goal achievement, and to reward employees for their effort and
achievement. On the contrary, if compensation is not tied to work, employees are likely to look for a better
paying job. Moreover, other implications of pay dissatisfaction are illustrated in the figure below. In
organization where employees are dissatisfied with the compensations, their contributions toward goal

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achievement tend to be lower. Pay dissatisfaction may lower performance; cause strikes increase grievances, and
lead to forms of physical or psychological withdrawal ranging from absenteeism and turnover to increased visits
to the dispensary and poor mental health.
The objective of a compensation administration is to establish fair and equitable rewards to the employees, so
that they are motivated to do the job in a better way for the organization. Other specific objectives of
compensation management are to acquire qualified personnel, retain current employees who are satisfactory,
ensure equity, reward desired behavior, control costs, comply with legal regulations, facilitate understanding, and
further administrative efficiency.
Types of Compensation
In general, there are two types of compensation. These are: financial and non-financial
Compensation
Financial Compensation Non-Financial Compensation
Direct Indirect The Job Job Environment
Wages Insurance Plans: Interesting Duties Sound Policies
Salaries Social Assistance Responsibility Competent Supervision
Commissions Employee Services Recognition Congenial Co-Workers
Bonus Paid Absences: Achievement Status Symbols
Advancement Working conditions
Job Sharing
Components of Compensation
Financial Compensation
Financial compensation includes direct compensation, which is paid to employees in the form of wages, salaries,
bonuses, and commission in exchange for their performance and indirect compensation includes all financial
rewards that are not included in direct compensation. It is important here to distinguish wage from other forms of
direct financial compensation. Wages are payments based on the number of units (hours, days) that a person
works for the organization or the number of units produced (piece rate system). It is a payment to manual
workers. Salaries are money paid on monthly or annual basis to employees whose output cannot be easily
quantified. Clerical and administrative staff receives salary. Bonuses, on the other hand, are lump-sum payments
offered to employees in recognition of successful performance, commission is a special form of incentive in
which payments to sales representatives are made on the basis of a percentage of the sales value they generate.
Non-financial Compensation includes any satisfaction, which employees receive from the job, such as the need
for recognition, responsibility, personal growth and the like or from environment in which they work. This job
environment consists of comfortable working conditions, competent supervision, pleasant work companions and
other related physical and social needs of employees. For example, being an accepted member of the work
group results in social satisfaction.

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Determinants of Financial Compensation
Financial compensation system is influenced by a series of internal and external factors. The organization, the
labor market, the job and the employee have an impact on the job pricing and the ultimate determination of
employee‟s financial compensation.

The major parties and issues of concern are:

Parties Main issues of concern
Government Ensure that financial compensation supports the social and economic interests of
the broader society.
Occupational groups Protect members‟ human capital investment
Unions Protect, maintain, and increase the welfare of the worker.
Individual Ensure that a balance is maintained between contributions to work and the
outcomes received from work.
Organization Within budget constraints, attract individuals into the organization, retain
employees, and motivate behavior toward achievement of organizational goals.

Why are organizations interested in compensation?

Organizations view compensation mainly as a means to attract qualified candidates for vacant positions, retain
competent and dedicated employees, facilitate performance, and comply with government employment policies.
Compensation is an expense in the sense that it reflects the cost of labor. Organization often has compensation
policies. As organizations differ in size and purpose, so do in pay levels.
Alternative Pay Strategies
There are three alternative strategies that might be chosen by organizations. These are high, low, and
comparable.
The high-pay-level strategy
In this strategy, the organization chooses to pay higher than the average pay levels. The assumption is that
paying a higher salary or wage will enable organizations attract and retain competent employees and this, in turn
enhance employees' productivity.
The low-pay-level strategy
In this alternative, the organizations pay a minimum salary or wage to employees. This may be because of poor
financial condition or the work does not require highly qualified personnel. The low compensation policy does
not save money; rather it is quite expensive. In addition to being unproductive, low paid workers usually
damage their work instruments because of insufficient knowledge and skill. On the other hand, organizations
using low pay strategy may also have a high labor turnover rate.
The comparable-pay-level strategy

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This strategy requires organizations to follow “equal pay for equal work”. Here employees are paid based on
comparable value of jobs they are performing. The choice of any of the above pay-level strategies may be
affected by factor internal or external to the organization.
Factors Affecting Compensation
The following are some of the major factors that affect compensation decision. These include: quality and
quantity of needed skill, the organization’s current financial position and financial prospects for the coming
year, cost of living index, and employees behavior, such as performance, turnover, absenteeism, unionization
attempts, and sabotage. The profit levels of an organization can also affect employees‟ salaries or wages. This
being the case, who is decision maker related to pay policy? In most organizations, the top-level management
makes pay decisions by considering the above factors.
Labor Markets Influence on Compensation
The number and types of employees indicated in the organizations human resource planning are mainly drawn
from the labor market. Since the market directly affects the pay-levels, analysis of the demand for and supply of
labor is imperative. The demand for human resources largely depends on organization's ability to pay. On the
other hand, the supply focuses on the number of persons of work age; the attractiveness of the job in pay,
benefits, and psychological rewards; the availability of training institutions, and so on. When the supply of
employees exceeds the demand, the initial pay-levels tend to go down. On the contrary, when the demand for
employees exceeds the supply, the initial pay-levels tend to go up.
Job Influence on Compensation
Organizations appear to attribute similar values for similar jobs and different values to different jobs. In other
words, jobs employees are assigned to perform are a major decisive factor of the amount of pay they will in turn
receive. Organizations pay for the value they attach to certain duties, responsibilities, and other job-related
factors. If this is the case, the question of what are the techniques used to determine the value of jobs is an
important one that requires an answer. Compensation techniques used by organizations for determining the
relative value of jobs are job analysis and job evaluation.
Job Analysis
If compensation policy is to be based on the nature of job, a job analysis activity must be conducted to identify
the similarities and differences among the various jobs in the organization.

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 Preparation of Job Analysis

Collection of Job Analysis Data

Job Questionnaire Data

Identification development collection

Application of Job Analysis Information

Job Job Job

Description Specification Standards

As we discussed earlier, job analysis is a systematic process of determining the skill and knowledge required for
performing jobs. Job analysis reveals the major tasks, duties and responsibilities, the relationship of a job to other
jobs, the skill and knowledge required for each job, the outcomes that are expected and working conditions. The
basic premise underlying job analysis is that jobs are more likely to be described, differentiated, and evaluated
consistently if accurate information is available to reward managers. As can be seen in the figure below to
develop job descriptions, job specifications, and job standards, information relevant to the jobs to be analyzed
must be collected through questionnaires, interviews, operation, and other related methods of data collection.
What are job description, specification and standard? If you recall, job description is written document that
describes the duties and responsibilities of a specified job. Job specification is a statement that explains the skill,
knowledge, and experience needed to perform the job. Job standard, on the other hand, is a minimum acceptable
level of performance. It is based on job analysis that organizations assign a financial value to each job. Thus,
unless there is a clear definition of the job and job performance standards it would be difficult to imagine how
pay can be linked to individual performance. It is worth noting that job evaluation is also a means to compare the
relative values of various jobs in an organization. Hence, the next pages briefly examine how it is used to
determine financial compensation.
Job Evaluation
A certain public enterprise may hire a chief administrative officer, accountant, mechanic, engineer, janitor,
economist, and so on. Here it is necessary to get a clear understanding of how compensation is determined for
various jobs in an organization. Compensation within an organization is determined by comparing one job to
other job. This comparison is made possible with job evaluation. Thus, what is job evaluation? Job evaluation
is that part of a compensation system in which an organization determines the relative value of one job in relation
to another. The major reason for job evaluation is to maintain internal pay equity among various jobs in the
organization. Moreover, job evaluation is used to identify the organization’s job structure, bring equity and
order to the relationships among jobs, develop a hierarchy of job value that can be used to create a pay

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structure, and achieve a consensus among managers and employees regarding jobs and pay with in the firm. Job
evaluation rates the job and not the employee performing the job. It is, therefore, a process of analyzing the
worth of a job to that of another, without regard to personalities on the jobs. In this process accurate job
descriptions and job specifications must be available to analyze and assign monetary value to organizational
jobs. The more skills, education and responsibility required in a job, the more it worth. Organizations use four
major types of job evaluation methods. There are job ranking, job grading, factor comparison, and point
system. Let us see these in detail.
Job Ranking Method
The simplest method of job evaluation is ranking. A committee or evaluators review the job descriptions and
rank each job from the simplest to most challenging job in the organization. This job-ranking method is based on
subjective evaluation of relative value. Compensation for each job will be based on the job hierarchy. The
ranking method is more suitable for small organizations having a limited number of employees.
Job Grading Method
The job grading or the classification method works by having each job assigned to a grade by matching standard
descriptions with each job‟s description, as shown below.
A Job classification Schedule for Use with the Job Grading Method
Direction: To determine appropriate job grade, match standard description with job description.
Job grade Standard description
Work is simple and highly repetitive, done under close supervision, requiring minimal
I training and little responsibility or initiative.
Examples: Janitor, file clerk
Work is simple and repetitive, done under close supervision, requiring some training or skill.
II Employee is expected to assume responsibility or exhibit initiative only rarely.
Examples: Clerk-typist I, machine cleaner
Work is simple, with little variation, done under general supervision. Training or skill
III required. Employee has minimum responsibilities and must take some initiative to perform
satisfactorily.
Examples: machine oiler, clerk typist II
Work is moderately complex, with some variation, done under general supervision. High
IV level of skill required. Employee is responsible for equipment or safety; regularly exhibits
initiative.
Examples: Machine operator I
Work is complex, varied, done under general supervision. Advanced skill level required.
V Employee is responsible for equipment and safety; shows high degree of initiative.

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 Examples: Machine operator II, tool specialist.

Here jobs are assigned to grades by comparing the job description with the standard description. The sample
above indicates five grades. Jobs, which might be classified under grade I, are simple and routine. Jobs become
more difficult as the grade level increases. For example, jobs under grade V are believed to be more complex
and require high-level skills. In attaching monetary values to the various jobs, the rater makes pay-level
differentials between jobs, based on their complexity. More challenging jobs in an organization are paid more.
In this non-analytical method “complex jobs are difficult to fit into the system; a job may seem to have the
characteristics of two or more grades
Comparison Method
This method demands a more quantitative analyses of the jobs involved. In this method, each job is broken
down into factors, which are considered common to all types of jobs. The compensable factors used to compare
jobs are skills, mental requirements, physical requirements, responsibilities and working conditions. For each job
in the organization, the factors are “ranked according to their relative importance in each job and then the job
evaluator assigns a monetary value to each factor. For example, a job with worth of Birr 1,200 per month may
have its different contributing factors costed as follows:
Compensable Factors Allotted Birr
Skill Requirements 240
Mental Requirements 360
Responsibility 240
Physical Requirements 192
Working Conditions 168
Total Job Value Birr 1,200/=P.M.

As can be seen above, the monthly salary Birr 1,200 is allocated among the five factors. Its application is
complex in the sense that, each factor has to be costed, the criteria for evaluating job are explicit.
Point Method
The point rating system is the most accurate and widely used method of job evaluation. This system resembles
the factor comparison method in that, in both cases, jobs are broken down into factors like skill, mental effort,
responsibility, physical effort and working conditions. However, unlike the factor comparison where monetary
value is assigned to each job, here points are used to determine the worth of jobs in the organization. In
allocating range of points to each job factor, the following steps may be followed.
 Assign a number (between 1 and 100) to each factor.
 Closely examine each factor in terms of its importance in relation to the other
 Finally, each factor point value is added, to place job in order of importance.
Factor
Job Title Mental Respon- Physical Working Total
Skill effort sibility effort conditions

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 Inspector 20 20 40 5 5 90
Secretary 20 20 35 5 5 85
File clerk 10 5 5 5 5 30
Laborer 5 2 2 17 9 35

As can be seen from the above table, it would mean that the inspector’s salary rate is thrice that of the file clerk.
In this manner, point-rating system would result into a logical monetary job-worth for all jobs in organizations.
Employee Influences on Compensation
The major goals of compensation are to attract, motivate and retain qualified employees to the organization. In
most cases, employees are willing and cooperative to do their jobs to the best of their abilities if they believe that
pay is relatively equitable to performance. Compensation affects employee decision to stay or leave the
organization, to work effectively and to accept additional responsibilities. An effective compensation system is
designed to satisfy employee needs and reinforce job behavior consistent with organizational objective. Recall
from the earlier discussion that organization, labor market, and the job influence compensation system.
Moreover, factors related to employee like performance, seniority, and experience also determine pay levels in
an organization.
Compensation and Performance
Paying for performance is the process of providing a financial reward to an individual, which is linked directly to
his/ her performance. Nothing is more demotivating to productive employees than to be paid equal salary with
less productive employees. Organizations need to practice various methods to improve job performance. The
most common once are piecework, bonus schemes and commission. Piecework (Payment-by-Results) is a
reward system in which rewards are related to the pace of work / effort. That is, the faster an employee works,
the higher the output and the greater the reward. Bonuses are rewards for successful performance and are paid to
employees as lump sum. Commission, on the other hand, is a reward paid on the performance of individual,
typically salaried/sales. The commission earned is a proportion of the total sales and may be added to basic
salary. As discussed above compensation system serves as an incentive for employees to do their jobs to the best
of their abilities and efforts. Therefore, organizations must have a reasonable standard against which
performance can be compared. This, among other things, enables organizations to have a fair determination of
reward. Otherwise, the incentive system may rather demoralize employees if it does not reflect expected
performance levels. A good compensation system should provide for some progression in the job, often by
means of incremental pay increases. These increases may be on annual basis, or dependent upon assessed
performance result. The basis of the payment system can be time and results. Time based systems depend on the
number of hours the employee attends the place of work. Results based systems depend not on the amount of
time the employee spends at work, but on what they achieve whilst they are there. Pay is the result of the result
achieved. Pay may be linked to both the quantity and quality of work produced.

Activity: List the advantages and disadvantages of time-based and result-based pay system.
________________________________________________________________________________
_______________________________________________

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Pay Structures
In the process of considering the values of jobs in an organization, attention must be paid to the job evaluation
results and the pays in the labor market. The relative value of jobs, in the organization, is determined by the job
evaluation whereas its absolute value is determined by the labor market (supply and demand). To set the pay
level the job evaluation and pay survey rates are combined using graph. As shown in the graph below, the
horizontal axis shows job structure originated through job evaluation. All similar jobs are classified in one grade
and they have the same range.
A pay grade is the grouping of similar jobs to simplify the job pricing process. For example, as can be noted
from the graph, key jobs ABC (grade 1) have lower pays and pay range than jobs DEF (grade 2). The pay range
defines the lower and upper limits of pay for jobs in a grade. The range allows organizations to pay according to
seniority and or performance. The vertical axis in the graph represents the pay rates. The midpoint can be
established by the use of pay-survey data from similar jobs. In the graph, on the vertical axis the pay level policy
line has been set to equal the average paid by the organization‟s competitors for each of the jobs: a matching-
competition policy. If the organization wants to lead or lag behind the market rate, the pay policy line can be
shifted up or down. The pay policy line represents an organization‟s pay level in the market and serves as a
reference point around which pay structures are established.
Pay

* * *
External * * ** * * *
Competitiveness * * * *
Key Jobs ABC DEF GHO JKL MNO
Grade/point values Job structure
The construction of pay levels
Non-financial Compensation
So far, we have discussed employee benefits, which cost the organization money either directly or indirectly.
Advocates of motivation claim that employees are not only satisfied with basic needs, but other subsequent needs
such as social, ego, and self-actualization are becoming more important. These higher order needs may be
satisfied through the job or job environment or both. The benefits each employee would value depend on their
personal preferences. In most cases, employees may get personal satisfaction if the job provides them
opportunities for recognition, feeling of achievement, and above all advancement opportunities. Jobs to be
challenging, meaningful, and interesting, organizations must attempt to match the job requirements and

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individual abilities. The selection and placement processes are extremely important in this context. In addition,
organizations must establish the proper working environment so that employees perform their jobs effectively.
By creating a conducive job environment, supervisors should enable their subordinates to do their jobs to the best
of their abilities. Other major factors that are part of job environment include sound policies, congenial co-
workers, appropriate status symbols and comfortable working conditions. These factors, among other things are
hoped to lead to job satisfaction, improve morale and increase employee commitment.

Objectives & Components of Organizational Reward System

Organizational reward systems have a significant impact on employees' level of motivation. Rewards can be
either tangible or intangible. Various forms of pay, such as salary, commissions, bonuses, employee ownership
programs and various types of profit or gain sharing programs, are all important tangible rewards. While fringe
benefits have a positive impact on attraction and retention, their direct impact on motivation and performance is
not well-defined. Salaries play a crucial role in the tangible reward system. They are an important factor in
attracting new talent to an organization as well as retaining talent. Compensating employees well is one way for
an organization to reinforce an employee's value to the organization. If an organization is known for paying their
employees top dollar, then they may develop a positive reputation in the job market as a result. Through
incentive compensation structures, employees can be guided to focus their attention and efforts on certain
organizational goals. The goals that are reinforced through incentive pay should be carefully considered to make
sure they are in alignment with the organizational objectives. If there are multiple rewards programs, it is
important to consider if there might be any conflicting goals. For example, individual and team-based rewards
can sometime work at cross-purposes. Important forms of intangible rewards include praise, recognition and
rewards. Intangible rewards are ones from which an employee does not derive any material gain. Such rewards
have the greatest impact when they soon follow the desired behavior and are closely tied to the performance. If
an organization wants to use praise or other intangible rewards effectively, praise should be offered for a high
level of performance and for things that they employee has control over. Some studies have shown that praise
can be as effective as tangible rewards. Other forms of intangible performance include status symbols, such as a
corner office, and increased autonomy and freedom. Increased autonomy demonstrates trust in an employee, may
decrease stress and improve job satisfaction. Since it may be hard for an employee to achieve a similar level of
trust in new organization, increased autonomy may also help improve retention.
Summary
Motivation is encouragement to discharge duties responsibilities better toward the goal achievement. It is the act
of stimulating employees to obtain desired results. Motivating employees is one of the challenging activities
management is expected to perform. Management can hire a competent individual and still they are not being
assured of getting desired results. It, therefore, becomes imperative for the management to be aware of factors
that motivate the potential of employee to work better. Employees are hired to enable their organization achieve
its objectives. Towards this end, their contributions are periodically appraised. Performance appraisal is a formal

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structured system of measuring and evaluating an employee‟s job related and outcomes to discover how and why
employee is presently performing on the job and how the employee can perform more effectively in the future so
that the employee, organization and society can benefit. Compensation is the HRM activity that deals with every
type of reward that individual receives for performing organizations tasks. Compensation objectives should
contribute to the overall objectives of the organizations. They, therefore, must be tailored to the needs of an
organization and its employees. Employees exchange their labor for financial and non-financial rewards.
Financial compensation is both direct and indirect. Direct financial compensation consists of the pay an
employee receives in the form of wages, salary, bonuses, and commissions. Indirect financial compensation
consists of all the rewards that are not included in direct compensation, such as a vacation time and insurance
coverage. Internal compensation equity refers to payment of employees' according to the relative values of their
jobs within the organization, while external equity refers to payment of employees' at rates comparable to those
paid for similar jobs in other organization. Factors that affect job pricing and determinant of employee financial
compensation include labour market conditions, Government policy, Organization's ability to pay, Cost of living,
and etc. Pay dissatisfaction may lower performance; causes strikes increase grievance and lead to forms of
physical or psychological withdrawal ranging from absenteeism and turnover to increase visits to the dispensary
and poor mental health.

1. 5 THE MAINTENANCE FUNCTION

1.5.1 Designing & Administering Benefits
Employee benefits are among the primary tools used to attract and retain a top-notch staff for any
organization. Creating a plan that balances the goals of both the organization and its employees requires
thorough analysis and review of benefit options and costs. Without the assistance of skilled benefit plan
professionals, creating and managing the plan can consume much time and money. Whether you‟re in
charge of a start-up company or a large enterprise, develop an employee benefits package that will optimize
the best benefits at the lowest cost. Working with the experts at Sikich, you will receive strategic planning
advice, creative benefit design and financial management to help you meet plan objectives and long-term
goals. Specifically, we can help you with:
 Plan design
 Compliance and tax law updates, including audits, terminations, mergers and restatement requirements
 Administration, including preparation of the IRS Form 5500, loans, hardship and distribution processing and
contribution calculators
Benefits (Indirect Compensation)
In addition to financial compensation, employees enjoy other benefits because of their membership in the
organization. What then are benefits?

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Employee benefits are the indirect form of the total compensation; they include paid time away from work,
insurance and health protection, employee services, and retirement income. Recall that direct compensation
such as salaries, wages or bonuses are based on the nature of the jobs and employees performance.
Benefits, however, are indirect compensation that organizations provide to their employees and are not
directly related to performance.
Objectives of Benefit Administration
What do organizations gain from benefits? Benefits enable organizations to retain and attract qualified
personnel. Moreover, employee benefits policies of an organization are to: reduce fatigue, discourage labor
unrest, satisfy employee objectives, aid recruitment, reduce turnover, and minimize overtime costs.
Major Categories of Benefits
Employee benefits can be divided in the following major categories:
Insurance Benefits
The financial risks encountered by employees and their families can be spread by insurance. These risks are
shared when funds are pooled in the form of premiums. Then, when insured risks occur, the covered
employees or their families are compensated. Here organizations can purchase life, health and work related
accident insurance.
Security Benefits
These are non-insurance benefits that provide income protection to employees before and after retirement.
Provision of such benefits is based on earnings and years of services in the organization. The benefits are
effective during separation, retirement, death, and disability.
Time-off Benefits
In this type of benefit employees are paid for time not involved in performance. Time-off benefits include
sick leave, holidays, vocations, maternity leave, education leave and other related leave of absence. Here
employees are provided with an opportunity to rest and refresh their minds.
Employee Services
These services include educational assistance, subsidized food services, financial and social services and the
like.
1.5.2 Designing & Administering Benefits
Safety and Health Management
It attempts to protect organizational members from illness and physical damage. Safety refers to the protection
of the physical well being of people. Its purpose is to prevent work-related injuries and accidents.
On the other hand health refers to the general state of physical, mental and emotional well-being. It includes
physical health, mental health, noise control, stress management, HIV/AIDS, alcoholism, drug abuse and
violence in work place.

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1.6 LABOR -MANAGEMENT RELATION
1.6.1 Labor relation
 Refers to the interrelationships, both formal and informal, between managers and those whom they manage.
 Is concerned with all aspects of the interrelationship between management and employees.
 The contractual obligations between employer and employed; communication policy and practice;
point decision-making; joint problem-solving; collective bargaining; individual grievance and
disciplinary policy and practice; social responsibility; employee development; and employee
welfare.
Industrial/labor Relations are
 Confined to the regulation of the relationship principally by means of collective bargaining.
 Used to denote the collective relationships between management and the workers.
 Concerned with the systems, rules and procedures used by unions and employers
 to determine the reward for effort and other conditions of employment,
 to protect the interests of the employed and their employers, and
 to regulate the ways in which employers treat their employees.
Role of HR Manager in Labor relations
The HR manager
 Plays crucial role in the day-to-day administration of the contract.
 Advises on matters of discipline and works to resolve grievances arising out of the agreement.
 Works, with the line management to establish good working relationship with all employees affected by the
terms and conditions of the agreement.
Objectives of industrial relations
The fundamental objective of industrial relations is to maintain sound relations between employees and
employers.
The other specific objectives are:
 To enhance the economic status of the worker;
 To regulate production by minimizing industrial conflicts;
 To provide an opportunity to the workers to have a say in the management and decision-making;
 To improve workers‟ strength with a view to solve their problems through mutual negotiations and
consultation with the management;
 To encourage and develop trade unions in order to improve the worker‟ collective strength;
 To avoid industrial conflict and their consequences;
 To extend and maintain industrial democracy.
Features of Industrial Relations

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A few notable features pertaining to industrial relations are the following:
 Industrial relations are born out of employment relationship in an industrial setting.
 Without the existence of two parties i.e. labor and management, this relationship cannot exist.
 Industrial relations are characterized by both conflict and co-operation.
 The study of industrial relations also includes vital environmental issues (technology of the workplace, country's
socio-economic and political environment, nation's labor policy, attitude of trade unions, workers and
employers).
 Industrial relations also involve the study of conditions conducive to the labor and management co-operation as
well as the practices and procedures required to elicit the desired co-operation from both parties.
 Industrial relations also study the laws, rules, regulations, agreements, awards of court, customs and traditions, as
well as policy framework laid down by the government for eliciting co-operation between labor and
management.
Trade unions
Are voluntary organizations of workers formed to promote and protect their mutual interests through collective
action.
The most common reasons individuals join unions are: higher wages and benefits, greater job security, influence
work rules, and compulsory membership
Collective Bargaining
It is the process whereby representatives of management and workers negotiate over wages, hours, grievance
procedure and other terms and conditions of employment. It refers to the negotiation, administration and
interpretation of a written agreement between two parties that covers a specific period of time.
The basic objective of collective bargaining is to arrive at an agreement on wages and other conditions of
employment. The underlying idea of collective bargaining is that the employer and employee relations should
not be decided unilaterally or with the intervention of any third party. As to bargaining behavior both the
management and the union have a duty to bargain with each other in “good faith.” The parties are showing good
faith in collective bargaining when:
 Both parties are willing to meet and confer with each other at reasonable time and place.
 Both parties are willing to negotiate over wages, hours, and conditions of employment (the mandatory
bargaining topics).
 The parties sign a written contract that formalizes their agreement and binds them to it.
 Each party gives the other a 60-day notice of termination or modification of the labor agreement before it
expires.
Participants & Process of Collective Bargaining
There are three main parties in industrial relations:

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(i) Workers and their Organizations:
 The personal characteristics of workers, their culture, educational attainments, qualifications, skills, attitude
towards work, etc. play an important role in industrial relations.
 Trade unions which are formed to safeguard the economic and social interests of the workers put pressure on
the management for the achievement of the objectives of the same.
(ii) Employers and their Organization:
 The employers are a very important variable in industrial relations.
 Employers provide employment to workers and try to regulate their behaviour for getting high productivity
from them.
 Employers‟ associations put pressure on the trade unions and the Government.
(iii) Government:
 The Government exerts an important influence on industrial relations through such measures as intervening
in working relationships, and regulating wages, bonus and working conditions through various laws relating
to labour.
 The Government keeps an eye on both the trade unions and employers' organizations to regulate their
behaviors in the interest of the nation.

Collective Bargaining Process

The process of collective bargaining involves five major steps: preparing for negotiations; identifying bargaining
issues; negotiation; teaching and ratifying the agreement; and administration of the agreement.
Preparing for negotiations
Careful advance preparations by employers and employees are necessary because of the complexity of the issue and
the broad range of topics to be discussed during negotiations.
Effective bargaining means presenting an orderly and factual case to each side. This requires much more skill and
sophistication.
The other arrangements to be made are selecting the negotiators from both sides and identifying a suitable site for
negotiation.
Identifying Bargaining Issues
The bargaining topics can be categorized into two: mandatory and permissive.
Mandatory bargaining topics are topics that both union and management consider fundamental to the organization‟s
labor relations.
 Wages (i.e. base pay rates, overtime pay rates, retirement benefits, health benefits, travel pay and pay
incentives, etc.),
 Hours (overtime, holidays, vacation, shifts, flextime, and parental leave, etc.) and

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  Employment conditions (layoff, promotions, seniority provisions, safety rules, work rules, grievance
procedures, union shop and job descriptions, etc.).
Permissive bargaining topics may be discussed during collective bargaining if both parties agree to do so, but neither
party is obliged to bargain on these topics.
Some permissive bargaining topics are provisions for union members to serve on the company‟s board of directors
and benefits for retired union members.
Negotiating
In negotiation phase both parties are likely to take opening positions that favor their goals but leave them some room
to negotiate. For example
 On the topic of pay raises, the union may initially ask for 8 percent but be willing to go as low as 5 percent.
 Management may initially offer the union 2 percent but be willing to go as high as 6 percent.
The party that understands how to use its bargaining power will probably be able to achieve settlement closer to its
initial bargaining position.
Bargaining power is one party‟s ability to get the other party agree to its terms.
Two bargaining tactics are often used to increase bargaining power: distributive bargaining and integrative
bargaining.

Distributive Bargaining:
 It focuses on convincing your counterpart in negotiations that the cost of disagreeing with your terms would be
very high.
Integrative Bargaining:
 It focuses on convincing your counterpart in negotiations that the benefits of agreeing with your terms would be
very high.
 It is similar to a problem-solving session in which both parties are seeking mutually beneficial alternatives.
Settlement and contract agreement
After an initial agreement has been made, the two sides usually return to their respective constituencies to determine
whether what they have informally agreed upon is acceptable.
Union negotiators typically ask the members to vote on the contract. Most unions require a majority of union
members to approve the contract.
Management‟s negotiating team may need approval from the company‟s top executives.
A particularly crucial stage is ratification. This agreement is formalized into a contract.
It is important that the contract must be clear and precise.
Administration of the agreement
Signing the agreement is not the end of the collective bargaining; rather it is the beginning of the process.

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The agreement must be implemented according to the letter and spirit of the provisions of the agreement.
Impasses in Bargaining
Regardless of the structure of the bargaining process, labor and management do not always reach agreement on the
issues. In this case impasse occurs.
If an impasse persists, a strike may result. Before a strike is called, either party may ask a mediator to help resolve
the impasse.
Disputes and their resolution
In practice, disputes mainly relate to the strife between employers and their employees.
The major causes of industrial disputes relate to wages, union rivalry, political interference, unfair labour practices,
multiplicity of labor laws and others.
Various methods are available for resolving disputes. More important of them are: collective bargaining; code of
discipline; grievance procedure; arbitration; conciliation; adjudication and consultative machinery.
Collective bargaining
Collective bargaining has a role in settling disputes. It establishes rules which the management is bound to
implement. Specifically, collective bargaining is: a rule-making or legislative process, an executive process; and a
judicial process. In every collective agreement there is a grievance procedure to settle any dispute concerning the
application of the agreement. After a dispute has erupted, collective bargaining acts as a peace treaty between the two
warring groups. The treaty is invariably a compromise, but helps resolve the conflict nevertheless.
Code of discipline
The code of discipline defines duties and responsibilities of employers and workers.
The objectives of the code are:
 To promote constructive co-operation between the parties concerned at all levels;
 To secure settlement of disputes and grievances by negotiation, conciliation and voluntary arbitration;
 To eliminate all forms of coercion, intimidation, and violence in industrial relations;
 To avoid work stoppages;
 To facilitate the free growth of trade unions; and
 To maintain discipline in industry.
Grievance Procedure
Grievance procedure is another method of resolving disputes.
All labor agreements contain some form of grievance procedure.
And if the procedure is followed strictly, any dispute can easily be resolved.
A grievance may be understood as an employee‟s dissatisfaction or feeling of personal injustice relating to his or her
employment relationship.
Grievance procedures generally establish the following:
 How the grievance will be initiated?

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  The number of steps in the process.
 Who will represent each party?
 The specified number of working days within which the grievance must be taken to the next step in the
hearing.
Arbitration
Arbitration is a procedure in which a neutral third party studies the bargaining situation, listens to both the parties
and gathers information, and then makes recommendations that are binding on the parties.
Arbitration is effective as a means of resolving disputes because it is:
 Established by the parties themselves and the decision is acceptable to them, and
 Relatively expeditious when compared to courts or tribunals. Delays are cut down and settlements are speed
up.
Some of the weaknesses of arbitration are:
 Arbitration is expensive. The expenditure needs to be shared by the labour and the management.
 Judgment becomes arbitrary if there is a mistake in selecting the arbitrator.
 Too much arbitration is not a sign of healthy industrial relations.

Conciliation
Conciliation is a process by which representatives of workers and employers are brought together before a third party
with a view to persuading them to arrive at an agreement by mutual discussion between them.
The third party may be one individual or a group of people. The alternative name for the third party is mediators.
It may be stated that the conciliator has no power to force a settlement.
The role of the conciliator is to:
 explain the position of one party more fully to the opposition,
 point out bases for agreement that may not have been apparent seen by the parties,
 help in the search for solutions, and
 facilitate the reach of an agreement.
In effect, mediators act as communications catalyst, and their effectiveness depends on their impartiality and on their
capacity to win the trust of both parties.
Adjudication
Adjudication means a mandatory settlement of an industrial dispute by a labour court or a tribunal.
Disputes are generally referred to adjudication on the recommendation of the conciliation officer who had dealt with
them earlier.
The system of adjudication is the most significant instrument of resolving disputes.

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It has been criticized because of the delay involved in resolving conflicts.
Continued dependence on adjudication deprives the trade unions of their right to recognize and consolidate their
strength.
Consultative Machinery
The main function of consultative machinery is to bring the parties together for mutual settlement of differences in a
spirit of co-operation and goodwill.
A consultative machinery operates at the plant, industry, state and the national levels.
Employee discipline and Grievance Management
Employee Discipline
Employee discipline may be considered as a force that promotes individuals or groups to observe the rules,
regulations and procedures.
The goal of preventive discipline is to heighten employee awareness of organizational policies and rules. Knowledge
of disciplinary actions may prevent violations.
Counseling by a supervisor in the work unit can have positive effects. Many times people simply need to be made
aware of rules.
Progressive discipline
Progressive discipline incorporates a sequence of steps into the shaping of employee behaviors.
It uses verbal and written reprimands and suspension before resorting to dismissal.
It suggests that actions to modify behavior become progressively more severe as the employee continues to show
improper behavior. Progressive discipline procedures include:
First offence verbal caution
Second offence written reprimands
Third offence suspension
Fourth offence demotion
Dismissal
Effective Discipline
Effective discipline should be aimed at the behavior, not at the employee personality because the reason for
discipline is to improve performance.
Consistent discipline helps to set limits and informs people about what they can and cannot do.
Inconsistent discipline leads to confusion and uncertainty.
Features of effective discipline
 It requires accurate written record keeping and written notification to the employee.
 It requires that people know the rules.
 It is immediate.
 It is handled impersonally.

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The final stage in the discipline process is termination.
If an employee fails, it may be because the manager was not able to create an appropriate working environment.
Perhaps the employee was not adequately trained, or perhaps management failed to establish effective policies.
Managers are responsible for their employees, and to an extent, they share the blame for failure.

Grievance Management
Grievance is a written complaint filed by an employee and claiming unfair treatment.
It is usually more formal in character than a complaint.
A grievance is an alleged misinterpretation, misapplication or violation of a provision in a union-management agreement.
Grievances may be real or imaginary, valid or invalid, genuine and false.
Grievance may relate to wages, the mode of payment, payment of overtime, leave, interpretation of service agreements, transfer,
dismissal or discharge etc.

Objectives of Grievance procedure

The main reasons for which a grievance procedure is required:
 It is a channel by which any aggrieved employee may present his grievance;
 It is a procedure to ensure systematic handling of grievance
Management should be concerned with both complaints and grievances, because complaints are good indicators of potential
problems within the workforce.
Unresolved complaints may turn into grievances in a union environment.

Grievance Procedures
Grievance Procedures are formal communication channels designed to settle a grievance as soon as possible after the problem
arises.
Grievance procedures can vary in the number of steps they include:
Start: Formal expression of dissatisfaction by employee
Step 1: Discussion of problem between employee and supervisor
Step 2: Discussion of written grievance between union steward and supervisor
Step 3: Meeting between chief steward and supervisor‟s manager and /or HR manager
Step 4: Meeting between union committee and unit plant manager or industrial relations representative
Step 5: Meeting between national union representative and company executive or corporate industrial relations officer
Step 6: Arbitration by impartial entity

NB:
Part two of the reader is about Public Financial and Investment Management. On this part, separate PDF materials will
be provided by the respective instructor(s).

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 PART TWO: PUBLIC MATERIALS MANAGEMENT

2.1 An Overview of Materials Management

2.1.1 Definition and Concept of Material Management
The conceptual foundation that gave rise to the management boom during and after World War II, also give birth
to an entirely new approach and idea in the management field of what we understand largely today as materials
management. Although the concept is of recent origin and had its roots in the USA, it has now spread fairly
widely all over the world. Materials management is not clearly understood concept in many organizations.
Materials management department or Materials manager are not common titles. The units given such
responsibilities are usually called store section or purchasing division. In your organization you may notice that
there is no such department or section called materials management which may have equal status with other
departments/ sections. Such responsibility is sometimes given to a property section or some times to
Administration, or Finance. This shows us that there is no clear understanding as to what is meant by materials
management.
Materials management is a subject, a discipline, a body of knowledge, a function/process consisting of two
words, materials and management. Materials are goods or items that can be acquired, purchased, processed,
stored and used for production, consumption or conversion. Materials in manufacturing organizations may
include raw materials, tools, spare parts, semi-finished goods, maintenance and operating supplies. Management
can be defined as the process of planning, organizing, directing and controlling to accomplish organizational
mission and objectives through the coordinated use of resources.
Materials management can, therefore, be defined as the planning, organizing, directing, controlling and
coordinating those activities which are concerned with various material requirements from the point of their
inception to the point of their utilization and disposal. It includes all activities performed by purchasing,
inventory control, stores, transportation and physical distribution.
Different scholars have defined materials management in several ways. The following are some of the
definitions: “ materials management as the function responsible for the coordination of planning, sourcing,
purchasing, moving, storing and controlling materials in an optimum manner so as to provide a pre-decided
service to the customer at a minimum cost”(Gopalakrishman and Sundaiesan, 2002). Materials management is
the planning, organizing and controlling of the flow of materials from their initial purchase through internal
operation to the distribution of finished goods (Monks, 1987). Materials management is the integrated function
of purchasing and allied activities so as to achieve the maximum coordination and optimum expenditure in the
area of materials (Niat, 1990).
Materials management is an idea of integrated management approach to planning, acquisition, conversion, flow
and distribution of production material from raw material state to finished product state (Dobler, 1996). One of

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the most famous definitions of materials management has been given by American Production and Inventory
Society (APIS).
“Materials Management are the management functions related to the complete cycle of material flows from them
purchase and internal control of materials to the planning and control of working process to the warehousing,
shipping, and distribution of the finished product.”(APIS) dictionary 6th ed.1978).
Terms interchangeably used with materials management
Purchasing: is the process of buying the necessary goods and services and includes identifying need, identifying
sources, selecting suppliers, negotiating prices and delivery.
Procurement: is a broader term and includes purchasing, stores, transportation, receiving, inspection and
disposal. Supply management a set of approaches utilized to efficiently integrate supplier, manufacturer,
warehouse and stores so that merchandise is produced and distributed at the right quantities, to the right location
and at the right time, in order to minimize system under costs while satisfying service level requirements (Levi,
2000).
Logistics: has a military connotation. It had its origin in 17th century when a new staff structure was proposed for
the French army “Marechal General Deslogis.” It is the function of obtaining and distributing material and
product in the proper place and proper quantities.
The Importance and Scope of Materials Management
The importance of materials management
The importance of materials management arises mainly from the cost of materials benefit. The following are
some of the importance of materials management:
a) Ensuring the regular supply materials.
b) Minimizes the procurement and transportation costs associated with materials.
c) Efficient stores and stock control minimizes wastage of materials: It reduces the damage of materials
obsolescence problem, etc.
d) Inspection of materials at the time of procurement minimizes the possibility of finished goods being
rejected by customers.
e) It assures better utilization of labor, capital and equipment.
f) Congestion at stores and at different stages of production can be avoided by effective materials
management system.
 Over estimation of inventory causes obsolescence problems, and other inventory costs.
 Underestimation of inventory causes the shortage of materials and interrupts the operation in the
organization.
The Scope of materials management
The scope of materials management covers:
 Planning or anticipating the materials requirement (materials forecast, budget).

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  Identifying the source and acquiring it to the firm (Purchasing).
 Introducing the materials to the organization and control materials as a current asset (Transporting,
storage, inventory control).
The Objectives of Materials Management
The successful operation of any organization depends, to a large extent, on the availability of the goods and
services of the right quality in the right quantity at the right time, from the right sources, at the right price.
These form the classical „five rights’ objectives of materials management that broadly generalizes and sum up
the fundamental elements of the functions of materials management. In fact, these basic requirements can be
suitably amplified and modified by the needs and objectives of the individuals‟ organizations.
The material management objectives may be studied primarily under two major segments:
i. Primary objectives: the primary objects include scientific purchasing, storage, inventor control, quality
standards, operating efficiency etc.
ii. Secondly objectives: the secondary objectives cover such functions as locating new suppliers, vendor
rating, vendor development, purchase research, value analysis, value engineering, variety reductions,
standardization, human resource development etc.
In general some authorities on materials management have given its objectives as are:
1. To provide uninterrupted flow of materials, supplies and services required to operate the organization:
This is the key reason for the existence of materials management department /section. Organizations may
face problems of shortage or stock-out materials. Stock-out or shortage means cost to an organization. It
includes costs of not having inventory such as machine down time costs, personnel down time, and
decreased productivity. Due to interruption of operation, organizations and companies may lose customers.
Materials management should provide continuous supply of materials and services. This objective can be
achieved through effective organizational integration, good planning and good coordination with all
departments/sections. Regular production/ operation process is ensured by avoiding the chances of any
interruption in supply of materials.
2. To keep inventory investment at an optimum and loss at a minimum: A large amount of capital can be tied
up in inventories. Inventories require valued space and consume rents, taxation and insurance charges. This
leads to considerable investment and results in considerable opportunity loss. These capitals invested in
inventories remains idle still items present in stocks are used. On the other hand, it is not possible to work
without keeping some inventories. Costs of having inventories include opportunity costs, storage costs,
handling cost, obsolescence, spoilage, shelf life, taxation and insurance. This objective can be achieved by a
reasonable balance between the level of inventory required to support operations and the cost of carrying out
the inventory. Inventory control and just-in- time production systems can also be used.
3. To maintain adequate quality standard: Quality is one of the most important factors to be considered for
materials acquisition. Reduced quality or materials with sub standard leads to maintenance or replacement

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 costs and lose of customers. Quality must first be defined in terms of relationship to a need, i.e.,
conformance with the stated requirements. This objective can be achieved by coordinated efforts of
purchasers, materials managers, design engineers, users, quality control inspectors in developing materials
specification in which the quality characteristics of the specified materials match closely with the quality
characteristics needed to satisfactorily fulfill the functional requirements and other works.
4. To develop effective and reliable sources of supply: Competent suppliers are invaluable resources of
organizations. Management must identify, investigate, select and develop competent and responsive
suppliers. This is used to obtain alternative sources of supply. Potential suppliers are intangible assets to
organizations. They are also important sources of information regarding quality, market conditions, price
trends, and competition. Development of source is also important substitution, quality improvement and cost
reduction. This objective can be achieved by:
 Searching constantly for new suppliers and evaluate their qualifications,
 Conducting periodic evaluation of suppliers for their performance and
 Monitoring continuously the costs, delivery and quality of purchased materials and services.
5. To obtain the required items and services at the lost possible price: Price is one of the most important
factors on which the final choice may be based. Price information can be obtained from manufacturer‟s
catalogs, current price lists, negotiations and competitive bid.
6. To improve the competitive position of the organization: Maintaining and improving the competitive
position of the organization is necessary to make it profitable and to keep pace with changing technology.
7. To achieve maximum integration with other departments: Harmonious relationships between the materials
management department and other departments are crucial for the success of the above objectives. Materials
managers must understand the user‟s requirement for materials.
Nature of Decision Making in Materials Management
The nature of decision making in materials management includes the following:
1) Make or buy decision: This is one of the decisions to be considered at the top or middle level
management to determine whether an organization should make the required items or buy/outsource/
them from suppliers. It is the responsibility of the materials manager to collect and disseminate
information concerning the factors which may affect the decisions. The factors may include the
organization‟s capability, cost considerations such as direct materials and human resource costs,
inventory costs, administrative costs, capital costs, purchase price, transportation cost, receiving and
inspection costs, and any follow-up costs related quality and time.
2) Supplier selection: Which of the supplier is the most competent and valuable source of materials/
services? This needs proper decision from the materials manager.
3) Optimum level of inventory determination: How much inventory should the organization maintain to
meet requirements?

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 4) Price determination: What factors affect the price of an item, material/service? Is the lowest price the
right price for the organization? Which price is reasonable and fair?
5) Economic order quantity: What should the economic order size be?
6) Mode of transportation: Which mode of transport is appropriate and must be chosen for carrying
materials?
7) Time of delivery: When should the materials be delivered?
Functions of Materials Management: an overview
Materials management consists of functions concerned with materials planning purchasing research, purchasing,
receiving, storage, traffic management, inventory control, value analysis and disposal of unwanted items. It is the
duty and responsibility of the materials management under the department to carry out these functions and
activities. The major functions are materials planning and budgeting, materials and purchasing research,
purchasing, receiving, stores management, transportation and traffic management, inventory control, disposal of
unwanted materials and value analysis.
a. Material Planning and Budgeting
The first activity in materials management is materials planning and budgeting. This is based on
production/operation plan of an organization. The production /operation department must provide the materials
department with production –scheduling and detailed timetable: An engineering department in a manufacturing
enterprise may also prepare a bill of materials. Bill of materials is a document containing a detailed list of all
materials, components, subassemblies and assemblies needed to produce the final product.
The materials manager based on the production plan and bill of materials should prepare a material plan of the
organization. A material planning is the scientific way of determining the requirements of raw materials,
components, spare parts and other supplies that of in to meeting production/operation needs of an overall
planning function of an organization. However, a material planning is not an independent activity. It is part of an
overall planning function of an organization. Materials planning motivate employees towards the coordination of
efforts. It can be used to assess organization requirements for different periods.
Material planning is normally done on a yearly basis. But if it is revised every quarter and even every month, it is
advantageous to determine the shortages, consumptions, and excesses of materials. After material planning is
worked out, materials budget can be prepared which is used to review and control the planning aspect.
b. Materials Purchasing Research
Research is reorganization of the main functions of the materials manager. The material manager should consider
such factors as price trends, the likely sources of supply, the long-term and short-term requirements of materials,
and the expected changes in technology and external environment and market conditions. These all factors can
only be understood by materials and purchasing research. It is a systematic study and investigation to improve
the quality of materials, to identify better sources of supply, to determine price and cost trends, to materials to
identify better sources of supply, to determine price and cost trends, to undertake standardization and

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specification of materials. Gopalakrishnan and Sanderson defined materials research as a systematic, formal and
Continuous analysis of all factors affecting the materials management functions. These authors listed the scope
of materials research as follows:
1. Economic analysis: Factors such as gross national product, economic growth rate, inflation and other
factors can affect the availability of materials and the price level.
2. Market analysis: The markets may be analyzed for supply trends, technological innovations, substitutes,
and evolution of new materials.
3. Supplier analysis: - A checklist of the present and future suppliers is the first step. This should be
followed by the analysis of their financial condition, the expansion plans, and additions to their product
lines.
4. Transportation analysis: Transportation cost forms a good percentage (about 20%) of the cost of
materials purchase in any organization. Analysis of the location of suppliers must be made in relation to
the transportation cost.
5. Price analysis: - Analysis of price increases made by the suppliers should be done on a regular basis and
their impact should be related to the cost of finished products. For this purpose it is essential to have a
detailed analysis of the cost structure of the raw material. For similar groups of materials such price
analysis should be made and compared for various vendors. The causes should be identified so that
various alternatives, such as use of alternative materials, change of suppliers, and so on can be worked
out.
6. Purchase analysis: Advantages and disadvantages of purchasing form manufactures visa- a- vise dealers
should be analyzed.
In order to conduct materials and purchasing research, such areas of research as internal organization structure
and workflow supplier strengths and weaknesses, price trends, availability of materials purchased, economic and
political conditions should be considered.
c. Purchasing
Purchasing is the third phase of materials management. Purchasing is the procurement of goods and services
from some external agencies. The object of a purchase department is to arrange the supply of materials, spare
parts and services or semi-finished goods, required by organizations to produce the desired product, from some
source outside the organization. The purchased items should be of specified quality and in desired quantity
available at the right time and at a competitive price.
d. Receiving
The receiving function of materials management is concerned with the physical handling of incoming shipments.
It is the central place or function where all incoming supplies are received, checked and verified before storage
or use. The receiving function is very important because the purchasing control documents are verified with the
physical materials. Receiving activity can easily identify most problems or errors in purchasing transactions.

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Problems such as quantity, shortage, and incorrect materials loaded, damaged materials can be detected and
corrected during the receiving operation. The receiving functions are:
1. Receive incoming materials: The responsible personnel receive a copy of the purchase order so as to
have an idea of the goods to be expected and the store arrangements to be made.
2. Checking: All incoming materials must be carefully checked by counting, measuring and weighting. The
quantity supplied is verified against the purchase order. All materials received in the receiving section
should be properly marked for easy identification. Various discrepancies such as loss of packages,
damages, shortages, wrong items and excess supply should be identified. Sometimes discrepancy report
may be needed.
3. Inspection: It is a function required to ensure the quality, conformance with the specifications and
standards. It is particularly used for identifying the correctness of raw materials and components that go
into the product. Sometimes goods and items of special nature may be inspected by the user departments
or by an independent inspections department. In certain cases the quality is inspected in the laboratory.
Inspection is also carried out at the suppliers‟ premises if suppliers make it a condition and during the
course of manufacture is being done according to one‟s specification.
4. Preparation of receiving report: After inspection, a receiving report showing date of receipt, name of
carrier, mode of transport, description of the materials, quantity advised, received, accepted, rejected,
etc. should be prepared and distributed to user departments, purchasing and store.
5. Delivery of the materials to the appropriate store: Finally, The materials purchased and accepted shall
be delivered to the appropriate stores.
e. Managing Stores
Stores management is another function of materials management. It is responsible for identification, safety,
physical handling and storage of materials. Storage plays a vital role in serving the organization by properly
keeping items and then by issuing them to user departments on proper requisition. Those items that are not in use
for some specific time are kept in stores. For example, spare parts and raw materials might be kept in stores for
some specific time until being used. The main objectives of stores management are to issue them in the right
quantities, at the right time to the right users. The stores section is responsible to provide the above services at a
lowest cost.
In most organizations stores function is not given its proper position in the organizational setup. Stores are
sometimes located in ill – equipped and poorly ventilated buildings. The personnel of stores management are
generally paid less in comparison to personnel of other departments.
These factors are responsible for mismanagements of stores resulting in loss of items in stock, lack of proper
handling and mistakes in recording. The store‟s manager, however, is the protector of a large group of current
assets and plays a significant role in ensuring smooth production/ operation. “Many decisions in stores
management such as selection of bins, handling equipment, safety practices, codification, training personnel and

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accounting care for considerable skill and an ability to coordinate with other departments as well as with outside
agencies. These aspects should be highlighted and appreciated so that the stores function given due importance.
Other areas in stores, such as records keeping, movement analysis to reduce obsolescence, surplus and damage
are critical to the profitable operation of the firm and the store‟s manager faces a challenge in these areas as
well”(Gopalakrishnan and Sanudaresan, 2002: 153-154).
f. Transportation and Traffic Management
Transportation of materials from different sources to the place of an organization is an integral part of the
materials management function. The importance of transportation and traffic management is signified by the fact
that transpiration cost and other service factors affect the total cost of materials. Transportation cost of materials
account for about 20 percent of the cost of materials purchased. The main objective of transportation and traffic
management is to minimize the overall transportation cost and provide transportation service. This function
includes selection of mode of transport or carriers‟ selection of route, rate verification and auditing, claims
handling, determining transit time, minimize transportation costs. “Transportation services should be purchased
much as any material or service is purchased” ( D.Dobler and N. Burt, 1996. 571)
g. Inventory Control
Inventory control is one of the most important functions of materials management. It is the method of
maintaining stock-keeping items at the desired level. Inventory means all the materials, Parts, supplies, tools,
semi-finished products or finished products recorded on the books by an organization and kept in stocks,
warehouses or plant for a period of time. Every organization has to maintain some inventory. Inventory control
keeps track of inventories. Both shortage and excess of inventory should be avoided.
Shortage of inventory means frequent ordering, loss of quantity discounts, increase in transportation cost, and
stoppage of production / operation and loss of customers. Too much or excess inventory means large amount of
carrying inventories such as storage cost, space cost, insurance, taxes, obsolescence and depreciation. Effective
inventory control helps to make a balance between these discrepancies. Inventory control is, thus, the technique
of maintaining the size of the inventory at some desired level to fulfill the best economic interests of an
organization. Inventory control functions can be achieved by:
1. Purchasing items at economic order quantity.
2. Inventory identification system.
3. Suitable and secured storage location.
4. UP-to date and accurate record keeping
h. Disposal of Scrap, Surplus and obsolete materials
Disposal of unwanted materials is also another function of materials department. One responsibility of materials
department is to keep inventory at a minimum Level. The disposal of unwanted materials is therefore, one part of
this process. Materials management can easily determine these requirements. You will learn about this topic and
other functions in chapter nine.

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i. Value Analysis
Value is one of the most used words and has several meanings. From materials viewpoint, value of an item may
be defined as the ratio of its worth to its cost. Worth may consist of the functions required of the item and
characters that the user (customer) wants and is willing to pay for. The characters needed by the customers from
the item can be safety, durability, style, convenience, easy maintainability etc. If an item lacks these functions
and characteristics, it is worthless redundant and should not be purchased or produced. Value analysis as one of
the functions of materials management can be used to convert material specification into substantial savings. It is
a power tool in controlling material costs. It helps management to identify unnecessary costs. In value analysis,
the function /cost aspects of existing material specifications are systematically investigated.

2.1.2 Organization of Materials Management

In this section we will discuss organizational structure with the aim to show you the proper position of materials
management in the overall organizational setup. While in medium and large size organizations this activity is
organized under the production or manufacturing department, in some organizations it may directly report to the
head of the organization (General Manager, Executive Officer, President) having equal status with other
departments such as production/ operation, marketing, finance and human resource. In other institutions like
government agencies operating under budget control, the materials management reports to Administration and
Finance or to General Services. There are several factors to be considered for an organization‟s materials
management activity. Firstly, we highlight the importance of organizing the materials management department.
Secondly, you will see the basis or factors to be considered for organization. Thirdly, you can see examples of
organizational structures for materials management.
The importance of organization for materials management can be outlined as follows:
1. It helps the organization to achieve its strategic objectives.
2. It cerates integration of all sections, units and departments.
3. It maximizes the efforts of each individual/employee.
4. It facilitates the coordination of efforts towards the common goals.
5. It motivates people to carry out the desired activities.
6. It creates formal relationships in terms of responsibility and authority.
Factors to be considered for organizing materials management department
The main factors that must be considered for organization of materials management may include the type of
materials used, volume of materials, and magnitude of material cost, responsibility and authority to be given to
their functions. A brief description of each factor could help you to understand the issue.
The type of Materials used
There are different types of materials used in any organization. Most large organizations and manufacturing
enterprises use a wide variety of materials. Some small organizations use small number of production materials
such as raw materials, manufactured parts and components and for capital items, installation, accessory and

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equipments. Operating supplies such as maintenance and repair supplies can be also purchased depending on the
functional scope of the organization. The organization of materials management must conform with and facilitate
the type of materials required. may help organizations to identify and determine the typed of organizational
structure needed.
Volume of Materials
If an organization spends a large amount of money for materials and consumes a large volume of materials, the
responsibility of materials control should be given to the top management and the materials manager has to be
considered as one of the members of the management team.
Magnitude of Materials Cost
If the material cost percentage is a significant one, let us say above 60%, much consideration should be given to
it in terms of position of the department/section and competent personnel assigned to the department.
Responsibility and Authority
The materials department can be given different functions and activities to be performed. If much responsibility
and authority is given to the department, it is obvious that it becomes a member of top management team. An
organizational structure for materials management basically reflects the top management‟s attitude towards the
recognition of materials management‟s role.
An integration of materials management functions enables organizations to achieve better accountability, better
coordination, better performance and adaptability to electronics data processing. The integrated materials
management concept requires central coordination of all these interrelated activities. Therefore the internal
structuring of the various functions as well as the relationship of the materials management division with the
other divisions: technical, fiancé and marketing- in the overall organization become critical”(Gopalakrishnan and
Sundaresa, 2001:14). As the functions are crucial to the organization, a competent, professional and skillful
manager who is also a member of the top management team must head the department.
The following chart shows a typical organizational structure of materials management in medium and large
organization:
General Manager

Production Manager Marketing Manager Materials Manager HR Manager Finance Manager

Planning Traffic & Receiving Purchasing Inventory control Store Materials & Research

The above organizational structure shows that of an organization based on functions.

Government agencies that operate under the budget control have a form of the following organizational structure.

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 President

Marketing Procurement and Administration and Project

Research &
Division Supply Division Finance Division Devt.
training
Division
service
Materials Mgt
Division

Data processing & Foreign purchasing Domestic Purchasing Expediting

Ware house
Documentation Department department
department Department

The procurement and supply division: Is a major operational work unit accountable to the General manger, is
concerned mainly with the functions of formulating material and supply strategies identifying the materials,
market sources, and provision of supplies and expediting purchases. The division is responsible for direction,
coordination and control of procurement operations, recommends policies to ensure economy and quality of
purchases, maintains effective working relations with departments.
The data processing and documentation department: Under the supervision of the Materials management that is
accountable for the department of Administration and Finance Division. It is responsible for supervising,
directing and coordinating the work of the units which involves maintaining accurate input data to produce
reliable information to be used by superiors as a tool for making the right decisions pertaining to procurement
activities.
The warehouse department: Is responsible for handling and distribution of materials.
The foreign procurements department: Is responsible for directing, coordinating and controlling the foreign
purchase operation. It carries out activities involving the acquisition of supplies form abroad by handling all the
procedures and processes ranging from receiving purchase requisitions initiated by the users to awarding tenders.
The domestic Procurement department: Deals with domestically available materials and includes
recommending policies to ensure economy and quality of purchasing by conducting study concerning local
markets of materials and pricing conditions.
The expediting department
It is responsible for the handling of letters of credit, banking, shipping, insurance and clearing transactions for
ensuring traits and delivery of goods.
Gopalakrishman and Sundaresan in their book “materials management an integrated approach” explained
organization based on „location‟. According to them, where organizations have several plants located in different

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parts of the country there are two alternatives. One is to have a centralized organization located at the
headquarters. The other is to have a decentralized materials management set up in each location.
Conditions for decentralizing the structure:
i) When distances between the plants are significant, the materials management function is impaired when
controlled from the headquarters, both in terms of cost and time.
ii) When each plant requires many unique materials and materials management section located at the plant is in a
better coordination with the plants‟ operational units.
Conditions for centralizing the structure:
i. When the materials requirement of each plant is similar and bulk in size.
ii. When specialized and standardized materials are required.
iii. When plants are highly geographically disbursed.
In this regard, Dobler and Burt identified the advantages of centralized purchasing as follows:
 Duplication of effort and haphazard purchasing practices are minimized by the central coordination of all
company purchases.
 Greater buying specialization for standardized materials
 Volume discounts are made possible by consolidation many company orders for the same and similar
materials.
 It develops purchasing specialists whose primary concern is purchasing. With training purchasing
specialists inevitably buy more efficiently than less-skilled individuals who view purchasing as secondary
responsibility.
 More effective inventory control is possible because of company wide knowledge of stock levels,
material usage, head time and prices.
 Interplant transfer of materials in an emergency is possible.
 Surplus materials in one plant can be utilized in meeting the requirement of another plant.
Advantages of Decentralization:
 Easier coordination with different operating departments
 Speed of purchasing that reduce bureaucracy
 Effective use of local source of supplier that has an advantage of getting good supplier relation ship and
possibility of reducing transportation cost.
Relation of Materials Management Department with Other Departments
In the previous section you have learned some points about the organizational structure of and the tentative
position or palace of materials management in the overall organizational setup. In this section you will find the
functional relationships of the department activities with other departments such as production/operation,
engineering, marketing and fiancé. This helps you to identify the existing and conflicting interests of each
department towards materials. It also helps you to recognize the need for close cooperation and smooth relation

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ships with other departments. Organizational structure facilitates communication and promotes coordination
between departments.
Materials management department must fulfill the material needs of all departments and units of organization.
All departments expect quality materials to be provided to them. Some units may require much quantity of
materials. If the materials management is not able to serve other departments as they expect, friction and conflict
may arise. Most conflicts may arise because of misunderstanding and lack of cooperation. The description here
under shows the nature of some of interdepartmental relationships such as the following
i. Relation with production department
ii. Relation with engineering
iii. Relation with marketing
iv. Relation with finance
Relation with Production Department
Production/operation department needs timely arrival of materials. It requires uninterrupted flow of materials.
Since the production department is responsible for the output or final product of an organization, it wants to
assure and control inputs that can be procured by materials management. This attitude and action may result in
the creation of excess inventories in stock. For materials department, however, these are substantial costs to an
organization. Insufficient provision of raw materials and other supplies lead to shortages. Due to shortages of
materials, factory or a manufacturing organization may shutdowns its operation.
These problems can easily be solved by information exchange and by cooperation. Effective coordination can
avoid some conflicting objectives and thereby achieving the strategic goals of the organization. It is advisable for
the materials management department and production department to share joint responsibility for the
development of standards and specifications of materials to be procured. Materials management must inform the
production department about the market condition of items, delays, and tentative arrival times, about new
materials, machines and methods. The production department must inform the materials management department
about production plans and schedules, consumption rate and changes in production/operation plan. Both
departments must work closely and communicate with each other with a cooperative sprit.
Relation with Engineering
Engineering department in some manufacturing organizations is responsible for designing and specifications of
the finished product. Engineering department is expected to know about the physical and chemical properties of
the products. The procured materials must contain the desired physical or chemical characters. Engineers most of
the time are inclined to quality, safety design without regard to cost and timing. Reduction of costs and the actual
performance requirements of the materials are very important for materials management department. Mutual
understanding and close cooperation can solve such conflicting interests.
Relation With marketing
Marketing department is responsible for customer satisfaction. It must advise the materials department about the

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need of customers for the finished product. The materials department must provide the materials as per the
requirement to process the final product. It must also help the marketing department by purchasing and supplying
materials with the lowest possible cost so that the organization‟s product may be competitive in the market. The
marketing department must, in turn, communicate to the materials management dept. about the sales
expectations, sale quotas, customers‟ sales forecast, special orders and non-stock finished goods. In
manufacturing enterprises, sales forecast is the basis for production schedule and which in turn is the basis for
materials requirement plan.
Relation with Finance
Finance department is responsible for fund raising, payment settlements, controlling budget and accounting
transactions. The finance dept. must help the materials management department by prompt payment of suppliers.
This creates good supplier relations since organizational resources and substantial discounts are involved, proper
coordination between finance department and materials management department is very essential. In civil service
institutions, the functions of both finance and materials management sometimes called property administration)
are controlled by one unit/department called Administration and Finance Services.

2.2 Materials Demand Forecasting/Planning Function

2.2.1 Meaning and Siginificane of Forcasting

The success of an organization depends on how well the organizations see the future environment, which is full
of risks and uncertainties. In order to make prediction about the future, we must use the past and present data.
The data help in minimizing risks and/or uncertainties about the future. In today‟s business world, planning is a
critical element of the survival. Within the planning function, forecasting is a key ingredient in arriving at an
appropriate course of action. In addition, it is the starting point in the planning process. What is a forecast?
Forecasts are estimates of the occurrence, timing, or magnitude of future events. In this particular case, materials
demand forecasting is the process of estimating the materials requirement (demand) to meet the operation of the
organization.
Siginificance of Forecasting
 It reduces uncertainty
 It helps to make better estimates of what will happen in the future.
 It helps managers to have appropriate level of materials available when needed.

2.2.2 Forcasting Techiniques: Qualitative and Quantitative

There are two major categories of forecasting methods: Qualitative/Judgmental methods and Quantitative
methods. Their primary differences are outlined as follows.

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Qualitative Techiniques Quantitative Techiniques
They do not utilize historical data but they use Data serve as the basis for developing a
expert judgment as raw materials projection
o They do not utilize mathematical The Quantitative methods rely exclusively
formulas. (entirely) on statistical and mathematical
o They are especially useful when expressions in their procedures.
accurate quantitative data is difficult to
obtain.

Useful Forecasting methods

The forecasting method a firm/organization should apply depends on: the time horizon, data availability,
accuracy required, size of forecasting budget, and vailability of qualified personnel
There are two known Techiniques of forecasting: 1) Qualitative Forecasting technique and 2) Quantitative
forecasting technique
1) Qualitative methods
Qualitative method is often used for long range forecasting. It is used for new products/services introduction
where a historical data are not available. Most of the time strategic decisions are made on the basis of qualitative
forecast.
A) The Delphi Method-It is a group process intended to achieve a consensus forecast. A panel of experts from
either within or without the organization provides written comments on the point. In other words, Delphi
technique is a qualitative forecasting in which a panel of experts working separately and not meeting arrives at a
consensus through the summarizing of ideas by a skilled coordinator.
The key to the Delphi technique lies in the coordinator and experts. The experts frequently have diverse
backgrounds. The coordinator must be talented enough to synthesize diverse and wide-ranging statements arrive
at structured set of forecasts.
An advantage of this method is that direct interpersonal relations are avoided. Hence personalities do not
conflict, nor can one strong-willed member dominate the group.
B) Executive committee consultants- People from the top management will be selected and assigned to their
judgment of the demand.
C) Sales force estimation- In this method, sales force members will be asked to estimate the likely sales in their
respective areas. The estimates are then received to ensure that they are realistic. Finally, the estimates are
combined at the district, regional and national level to obtain the over all forecast.
D) Expectation survey/ Anticipatory survey- It involves sampling the purchasers of the product because behavior
and preferences of purchasers of the product shape future market trends. The most frequently monitored groups
are consumers and businesses. For example, in consumer panel survey- consumers are questioned about their
purchase plan.

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2) Quantitative Forecasting Methods
In the quantitative approach, forecasters use statistical methods of examining data to find patterns and
relationships. The quantitative approach has two subcategories-the time series (Naïve) and Causal models.

Naïve (Time series) Quantitative models

These models attempt to predict the future by using historical data. These models make the assumption that what
happens in the future is a function of what has happened in the past. In other words, they look at what has
happened over a period of time and use a series of past data to make a forecast. The purpose of all time series
methods is to examine historical data and isolate the patterns in it. They are popular because:
 They are the least costly of the quantitative forecasting techniques.
 They are also simple and straight forward.
 However, they do not provide any rigorous explanation of the factors that influence the series being
projected.
Let us first see patterns in the data. There can be as many as four patterns within data series: Cyclical, trend,
seasonal, and irregular. A cyclical pattern represents the ups and downs of business activity. They are caused by
business cycles. For example, the sales of company may be high because the levels of economic performance
may be high.
The most familiar pattern is the trend. The trend represents the increasing, decreasing or horizontal course of data
series over a period of time.
The third pattern in a data set is seasonality, the recurring movements within a year that are the result of social
customs, holidays and weather. An irregular pattern reflects unexplained variations in the data. The random
movements may be the result of data collection errors or unexpected circumstance such as strikes or wars.
The most commonly used quantitative methods
Quantitative methods are divided into two main categories depending on the time horizon of forecasting.
1. Naive method/ short term forecasting technique: This method includes the following methods of short-term
forecasting:
A) Simple Average method: A simple average (SA) is the average of the demands occurring in all previous
periods. The demands of all periods are equally weighted.
Example- in ECSU, demand for item “A” was 50 units in the first quarter, 60 units in the second, and 40 units in
the third. What is the forecast for the next (Fourth quarter) using SA method?
SA= (D1+ D2+ D3)
3
= 50+ 60 + 40
3
=50
A forecast for next quarter would be 50 units.

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B) Last value method: the past last value (actual Value) is exactly identical with the forecast data with no any
modification.
C) Simple moving Average – A simple moving average (MA) combines the demand data from several of the
most recent periods, their average being the forecast for the next period. Once the number of past periods to be
used in the calculations has been selected, it is held constant. We may use a 3- period moving average or a 20-
period moving average, but once we decide, we must continue to use the same number of periods. The demands
for all periods are equally weighted. The average “moves” over time, in that, after each period elapses, the
demand for the oldest period is discarded and the demand for the newest period is added for the next calculation,
overcoming the major shortcoming of the simple averaging model.
A simple moving average is calculated as follows:
MA= sum of demands for periods
Chosen number of periods
MA= ∑x
number of periods, where one x value is exchanged each period.
Example- 3F has experienced the following demand for lumber (m3) during the past 7 months.

Month Lumber demanded

1 100
2 120
3 110
4 95
5 115
6 140
7 80
Compute forecast for month 8 using a 3-year and a 2- year moving average.
D) Weighted Moving average (WMA) -- An adjustment to the moving average method allows one to vary the
weights assigned to components of the moving average: in this way, the most recent value can be emphasized.
This model allows uneven weighting of demands. Note that weights can be percentage or any real numbers but
the sum of all weights (in terms of probability) must be equal to one.
Example1 For 3F, a forecast for month 8 using a three period model with the most recent period‟s demand
weighted twice as heavily as each of the previous two periods‟ demand is:
WMA= .25(115) + .25(140) + .50(80)
WMA= 103.75
Example 2- For 3F, if weights of 3:2:1 are assigned to the actual demands of month 7, 6 and 5 respectively, what
will be the demand for month 8?
E) Exponential Smoothing (ES)
ES takes forecast for the preceding period and adds an adjustment to obtain the forecast for the next period. The
adjustment is a portion of the forecast error in the preceding period and is computed by multiplying the forecast

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error in the percentage period by a constant that is between 0 and 1. The constant α is called the smoothing
constant.
The basic exponential smoothing formula can be shown as follows:
New forecast= last period‟s forecast + α (last period‟s forecast error).
Where α is a weight (or smoothing constant) and
Forecast error= Actual demand- Forecasted demand
Example- what will be the forecast for month 8 (by referring the previous “3F” example) using exponential
smoothing? Use α= .2 and use a 2-month moving average to find the last period forecast
Measuring Accuracy of naive methods
Were as companies are graded on their profitability, forecasters are measured by their accuracy. Measurement of
accuracy shows which model has the smallest historical forecasting error. Forecasting error refers to how close
forecasts come to actual data. Because forecasts are made before actual data are known, the accuracy of forecast
can be determined only after the passage of time. If forecasts are very close to the actual data, we say that they
have high accuracy and the forecasting error is low. The popular measurement of forecasting error is mean
absolute deviation/error (MAD). Thus the one with the lowest MAD will be the best forecasting method.
Mathematically, MAD= ∑/error/
n
Where n= the number of periods and Forecast error =demand (actual value) – forecast
Example Determine which method is the best to estimate future demand for inventory?

Time Actual Method 1 Method 2

demand Forecast Absolute deviation Forecast Absolute deviation

1 10 10 0 15 5
2 20 20 0 20 0
3 15 23 8 25 10
Sum: ∑AD=8 Sum: ∑AD=15
MAD=2.7 MAD=5

Since method 1 has the lowest MAD, it is the best method.

Long-term forecasting/Causal Methods

As we have discussed, there are two major categories of forecasting techniques: Quantitative and Qualitative.
Within quantitative approach, there are two further subdivisions: time-series/short-term and long-term/ causal.
So far we have studied a variety of popular time-series methods. These methods examine the patterns in the data
and are used primarily for short term projections. We have found them to be rather straight-forward and simple
to implement.
Now we will begin to examine the second category of quantitative tools-the long-term/ causal method. This
technique develops projections based on the mathematical relationship between the series being examined and

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variables which influence that series. It incorporates the variables or factors that might influence the quantity
being forecasted in to the forecasting model. Time series method describes the action of some variable over time,
as if the variable were a function of time. Although this is often a useful relationship, it is sometimes more
meaningful to relate the variables we are trying to forecast to other variables that are more suggestive of a causal
relationship. The most common quantitative long-term/ causal forecasting model is regression analysis.
Regression and correlation techniques are a means of describing the association between two or more such
variables. They make no claim to establishing cause and effect but instead merely quantify the statistical
dependence or extent to which the two or more variables are related. Regression means “dependence” and
involves estimating the value of a dependent variable, Y, from an independent variable/explanatory variable/, X.
Regression equations can take two forms. The first is the simple regression, which has one dependent and one
independent variable. The second is the multiple regressions, which has more than one independent variable. We
shall limit consideration to simple linear regression, which is often satisfactory for forecasting purpose.
The model is: Y=a + bX
Where Y is the dependent variable
a- is the y-intercept
b- is the slope(regression coefficient) &
X-is the independent
Formula:

b=
 xy  nx y or b= n xy _  x y
 x  nx
2 2
n x _( x ) 2 2

a= y  bx or a=
 x  y _  x xy
2

n x _( x) 2 2

Where x =
 y and y =  y are the means of the independent and dependent variable, respectively, and n
n n
is the number of pairs of observations made.
Note: The b value is the slope of regression line and the most crucial element of the equation. It is called the
regression coefficient, it represents the change in the Y (or dependent) variable that results from a one-unit
change in x, the independent (explanatory) variable.
Correlation is a means of expressing the degree of relationship between two or more variables. The correlation
coefficient r is a number between -1 and +1 and is designated as positive if Y increases with increases in X and
negative if Y decreases with increases in X.
If r=0, this indicates the lack of linear relationship between the two variables.

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 n xy   x y
n x  
r=
2
 ( x ) 2 n y 2  ( y ) 2

The coefficient of Determination

It is the square of coefficient of correlation (r2) which gives the percentage of variation in the dependent variable
that is account for by the independent variable.
Explained variation (r2x100%): is the change in dependent variable that can be explained by change in the
independent variable.
Unexplained variation (1-r2) x100%: is the change in dependent variable due to other factors.
Example
The general manager of a building materials production plant feels the demand for plasterboard shipments may
related to the number of construction permits issued in the country during the previous quarter. The manager has
collected the data shown in the accompanying table.
Construction permits Plasterboard shipments
15 6
9 4
40 16
20 6
25 13
25 9
15 10
35 16

A) Develop regression equation for predicting the level of demand

B) Determine for plasterboard shipments when the number of permits is 30.
C) Determine how closely shipments is related the number of permits?
D) What percentage of the change in Plasterboard shipments is due to change in a construction permits?

2.3 Purchasing Function of Materials Management

Purchasing: It is the process of acquiring materials (goods), services that can be used in the operation of an
organization in exchange for funds. Purchasing responsibilities extend beyond the limited “buying” of a product.
Purchasing department responsibilities include:
Identify and develop sources of supply.
Select suppliers and negotiate contracts.
Maintain working relations and control vendor performance
Evaluate supply-demand economies and initiate cost and make-or buy studies
Maintain supply system database

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2.3.1 Principles, Steps and Models of Purchasing
The basic principles of purchasing regarded as the provision of the required materials:
1. In the Right Quality
2. In the Right Quantity
3. In the Right Time
4. At the Right Price
5. From the Right Supplier
The Right Quality
The right quality is concerned with determining what is the required and why it is needed. If it is suitable for the
desired purpose, then it is the right quality. Right quality implies conformability with our requirement. It is
related to the material description and specifications. The material to be purchased may be considered of low
quality but if it is suitable for the intended purpose, it is the right quality. The right quality can be measured by:
durability, composition, performance, physical tests, chemical analysis, and grade. Material specifications: tell
the supplier exactly what the purchaser wants to buy. Specifications may be prepared by considering several
factors such as design consideration of function, production consideration of requirements, marketing
consideration of customer needs, and purchasing consideration of markets, materials availability, materials
substitute, supplier capability and cost.
The Right Quantity
Right quantity implies that the amount of materials required should be determined. The right quantity does not
mean acquisition of excess materials. At the same it does not mean shortage of materials. The right quantity
means not less or not more than the requirement. Several factors may affect the right quantity. If the items are
purchased for manufacturing process, bill of materials may be prepared. The right quantity depends up on the bill
of materials prepared by production department. If the items purchased are maintenance, repairs, and operating
supplies, it is essential to consider such factors such as hazard, space, and shelf-life characteristics of the items.
For example, items as gasoline, lubricants, packing materials, paints, chemicals, cement, and batteries require
large amount of space and tend to deteriorate or involve fire hazard in their storage. Other factors to be
considered for determination of right quantity may include price structure, discounts, availability of materials
and emergency needs. Concepts such as economic order quantity, re-order level, safety stock and fixed quantity
system should also be considered to determine the right quantity.
The Right Supplier
The right supplier is a supplier that can provide uniform quality materials and that is punctual in delivery time.
The right supplier is a supplier that supports organizational operations by providing the required goods and
services with additional services. Suppliers are invaluable resources to the organizations. The right supplier must
be reliable in terms of financial resources. It must possess the necessary organization to handle the commitments
of providing the required quality items. Technical ability, including inspection and quality control methods, is

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also important for a supplier. Suppliers that are consistent with the delivery schedule and production time table
are considered to be the right suppliers. The right suppliers are the ones, which are located at the convenient site
for the purchaser. As far as possible the firm‟s suppliers should be located with in a few kilometers of the
purchasing plant. Nearness will help organizations to avoid delivery delays. It will also reduce transportation
costs. Location also facilitates personal contact between the purchaser and the supplier. The right supplier should
be free from strikes and slow-downs. Right modes of transportation have to be identified as this form a critical
element in the overall costs of an item. Packing also forms an important aspect in the cost of an item. After-sales
services such as maintenance service, installation service, training on how to perform the equipment, warranty
service and others may affect the determination of the right suppliers.
The Right Time
Right time implies prior determination of delivery date and delivery schedule for each type of materials. The
right time of regularly used items may be when the level of stock reaches the minimum. This can be determined
by the stock control person. Delivery of materials much earlier than the required delivery time or after the
stoppage of operation is not the right time. Early delivery, sometimes, means over-stocking, and blocking of
money, while delay in delivery means loss of production or services. To determine the right time, the lead time
information for all items should be known by purchasing people. Lead time is the entire duration of the materials
cycle from the recognition of the need of an item to the time of arrival. Emergency situations should also be
considered for determining the right time.
The Right Price
The right price is the one that brings the best ultimate value to an organization. The right price is not necessarily
the lowest price. It is the fair and reasonable price determined through negotiation. The right price in most cases
is dependent on the cost of an item. The lowest price may not provide the quality and service needed by the
organization. If the low price is offered as a result of strategy on the part of the supplier and the quality and
service are likely to be excellent, it may be regarded as the right price. The right price should there fore, be
determined in combination with other factors such as: quality and quantity required, urgency of requirement,
demand and supply of the materials in the market, rate of demand, after-sales services, and product cost
structure. Purchasers can get price information from different sources. Some of the sources are:

Steps in purchasing system

Properly designed purchasing steps and procedures enable a purchasing department to carry out its activities
clearly and with out problems. The objectives of properly designed procedures, among others are:
 To provide the direction for accomplishing the materials management activities effectively and
efficiently.
 To communicate and coordinate the efforts of one work group with another.
 To accomplish each task satisfactorily with a minimum time, effort and paper work.
 To minimize overlapping of efforts and group conflicts by designating responsibility for each step of the
procedure.

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 To make the top management free from routine activities and make them to focus on exceptional
matters.
The major steps in purchasing systems are:
1) Origination of purchase requisition
2) Verification of purchase required and budget
3) Determination of request for bids(quotation)
4) Preparation of bid documents
5) Invitation to bid
6) Evaluation and selection of suppliers
7) Purchase order
8) Follow-up and expediting
9) Receiving and inspecting
10) Maintenance of records and files
Step 1: Origination of Purchase Requisition
The purchasing cycle begins with the recognition of needs for materials from the users that can be units,
individuals, or stores. The requisition process may vary from organization to organization. Organizations may
have policies on how to originate purchase requisitions. For example, they classify materials in to stock items
and non-stock items. Stock items are items that are held in the stores and non-stock items are items that are not
held in the stores. As a policy, purchase requisition for stock items can be made by stores only. Users of the
materials may request by filling in a material requisition form and submitting to the store. If the materials are
available in the stores, it will issue to users but if materials are not available in the stores and when the materials
reach a pre-determined re-order level, the store requests for purchases. For non-stock items, the user can fill in a
purchase requisition and directly forward in to the purchase department.
Different types of forms may be used for requisition. Two important forms for requisition are material requisition
(MR) and purchase requisition (PR). Material Requisition form: is usually filled by the using department and
presented to the store. If the required materials are available, then the store section issues the material to the
using department. A typical MR form is as follow.
Date: No.
To:
S/N Description Specification Purpose Unit Quantity Required Remarks

Requisitioned by: Authorized by:

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Purchase Requisition form: does the store or the user department fills a form to request purchase of items. If
there is a central store, this form should be filled by the store section and be forwarded to purchasing. In most
organizations, particularly government agencies in our country, purchase requisition is filled by the user
department / unit itself in order to control that specific unit is requesting according to the approved program and
the budget allocation. Usually a PR contains the following items: date of request, identification number, the
department/section that originates the request, the budget to be charged, Item number/code, description of item,
specification, the purpose for which the material is required, unit measurement, quantity proposed, quantity
approved, and signatures
A typical purchase requisition form
Name of the Organization
Purchase Requisition Form
P.R.No.
Date:
Department Requiring: Budget account:

Item Description Specification Reason Unit of Quantity

No. Measurement Proposed Approved remarks

Required: Verified: Authorized by:

The purchase requisition can be prepared in five copies and the distribution may be in one of the following ways:
- Original copy /white to purchasing
- Yellow copy to finance/account
- Blue copy to stock control
- Pink copy to store
- Green copy remain in the requesting (user) department
Step 2: Verification of purchase requisition and Budget
The purchasing department after receiving the requisition has to confirm whether appropriate authorized person
has approved the purchasing before it begins processing.
The purchase requisition must be authorized by an officer appropriately delegated by the head of the
organization. He may the head of the user department. Purchasing department should also see that the materials
required are with in the budget allotment of the user concerned. Civil service organizations are operating under
budget control. For each purchase they are required to have prior approved budget. Budget verification is also an
important activity of purchasing before the purchase process takes place.

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Step3. Determination of Request for Quotation or Bids
After verification of purchase requisition, the purchase unit determines whether request for quotation (bids) is
required. Some types of materials which are purchased quite frequently and have known supplier and whose
purchase value is small may not require request for quotation, direct purchase order can be made. Some materials
which are not purchased frequently or repeatedly and whose suppliers are not known and require large amount of
purchase in terms of value will require quotations or bids. If request for quotation (bid) is required another
decision issue that is important to the purchasers is whether to have an open bid or closed (limited) bid. Open bid
is inviting all possible suppliers to compete to supply the materials. The invitation can be made through mass
media such as magazine, radio, etc. Closed (limited) bid is inviting a limited number of suppliers which can be
made through telephone calls, letters and Performa invoices. Both open bids and closed bids have advantages
and disadvantages. Fore example, one of the advantages of open bid is that it will give sufficient amount of
choices among suppliers, which encourage competition. But open bid processing is highly costly. Early
screening of suppliers with less cost is possible in closed bid, but it may not provide enough choice.
Step 4: Preparation of bid Documents
Bidding is the process of offering potential suppliers to participate in provision of materials and services through
competition. Bidding process requires the complete preparation of documents. The bid documents should be
clear, logical and as simple as possible and that they should produce the desired results.
The purpose of Bid Document is:
 Instruct bidders on the procedures for the submission of bids;
 Describe type of materials and services to be purchased;
 Inform the bidder of the criteria for evaluation;
 Define conditions of contact and
 Make the process of bidding transparent.
Basic policy information, instructions on bid evaluation factors are important points to be included in the bid
document. The document would be referred to in all invitations and would express to reserve the right of the
justification to waive any defect, irregularity, or informality in a bid, reject or cancel any or all bids, re-issue a
bid invitation, purchase any item by other methods and increase or decrease the quantity specified in a bid
invitation. There exists a variation in bid document forms utilized by different organizations. There is no similar
set of forms for all types of organizations. A comprehensive bid document used by many government units may
consist of the following sections:
 Invitation for bid
 Instruction to bidders
 Conditions of contract
 Schedule of requirements
 Technical specification/ Terms of Reference-(TOR.

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  Sample forms
Invitation for Bids
The purpose of this section of the bid document is to provide information that enables potential bidders to decide
whether to participate in the bid process or not. The invitation for bids is usually issued as an advertisement in
newspapers, magazines, letters or radios. It should indicate any important bid evaluation criteria or qualification
requirement. The invitation for bids should be incorporated in to the bidding documents.
Instructions to Bidders
This part of the bidding documents provides information necessary for bidders to prepare responsive bids in
accordance with the requirements of the purchaser. It also provides information on bid submission, opening,
evaluation, and on the award of contract. Matters governing the performance of the suppliers, payments under
contract, or matters affecting the risks, rights, and obligations of them parties are not included in this part.
Instructions give clarity to every bidding process. They are not part of a contract.
Instructions to bidders provide information on:
- General introduction
- The bidding documents
- Preparation of bids
- Submission of bids
- Opening and evaluation of bids
- Award of contract
The content or bidding documents should be described to bidders clearly. The bidder is expected to examine all
instructions, forms, terms, and specifications in the bidding documents. Failure to furnish all information
required by the bidding documents or to submit a bid not responsive to the bidding documents may result in the
rejection of bids. A prospective bidder requiring any clarification of the bidding documents may notify the
purchaser in writing or by cable at the purchaser‟s address indicated in the document. Bidders should also be
notified about the need of amendment of bidding documents. At any time prior to the deadline for submission of
bids, the purchaser, for any reason, whether at its own initiative or in response to a clarification requested by a
prospective bidder, may modify the bidding documents by amendment.
Bidders must be instructed how to prepare the bids. Clear instructions must be given to the bidders on:
o Language of bid;
o Documents constituting the bid;
o How to complete the bid form;
o Bid prices;
o Bid currencies;
o Documents establishing bidder eligibility and qualification;
o Documents establishing materials/goods eligibility; and information to bidding documents;

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 o Bid security/bond; and
o Format and signing of bid.
Another component to be included in the instruction to bidders is submission of bids. Information such as sealing
and marking of bids, deadline for submission of bids, late bids, modification and withdrawal of bids must be
included. The bidders may be required to seal the original and each copy of the bid in separate envelopes, duly
marking the envelopes as “ORIGINAL” and “COPY”. The inner and outer envelopes should be addressed to the
purchaser at the address given in the document. The purchaser must receive bids at the deadline specified in the
instruction. Instruction to bidders must also contain information to bidders about the process of opening and
evaluating of bids. The bidders name, gives bid modifications or withdrawals, bid prices, discounts, and the
presence of requisite bid bond and other details may be announced at the opening. Matters related to opening and
evaluation of bids may include:
 Preparation of minutes
 Clarification of bids
 Preliminary examination
 Conversion to single currency
 Criteria for evaluation
 Comparison of bids
 Contacting the supplier
Instruction to bidders must also indicate the process of the contract award such as:
 Post qualification
 Award criteria
 Purchaser‟s right to vary quantitative at time of award
 Purchaser‟s right to accept any bid and to reject any or all bids. notification of award
 Signing of contract
 Performance security and
 Corrupt or fraudulent practices
Section 3: Conditions of Contract
Conditions of contract are a complete document expressing all the rights and obligations of the purchaser and the
supplier. It includes the following points:
Definition: Terms such as “the contract”, “the contract price”, the materials, the services, the supplier, the
purchaser, should be stated and interpreted.
Application: the condition may apply to the extent that they are not superseded by the provisions of other parts
of the document.
Country of origin: It means the place where the goods are mined, grown or produced or from which the services
are supplied.

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Standards: It may be required that the goods/ materials supplied should conform to the standards indicated in
the technical specifications, and when no applicable standard is mentioned, to the standards approved by
standard Authority.
Use of the contract documents: The supplier may be required not to disclose the contract, or any specification,
plan, sample, or information furnished by the purchaser to any person with out prior written consent from the
purchaser.
Patent rights: the supplier may be required to indemnify the purchaser against all third party claims of patent,
trade mark, or industrial design rights arising from use of materials.
Performance security: after the notification of award, the successful bidder is required to furnish to the
purchaser some guarantee through financial institutions.
There are also other conditions of contract such as inspection and tests, packing, delivery, insurance,
transportations, incidental services, warranty, payment terms, change orders, contract amendments, assignment,
delays in supplier‟s performance, termination of contract, settlement of disputes, limitation of liability, applicable
laws, notices, and taxes and duties.
Section 4: Schedule of requirements
The schedule of requirement should be included in the bid documents by the purchaser and shall cover, at a
minimum, a description of goods and services to be supplied and the delivery schedule.
Section 5: Technical Specifications
Specifications are the most detailed method of describing requirements. Specifications tell the suppliers exactly
what the purchaser wants to buy. Specifications are clear and accurate descriptions of the requirements for
supplies, equipment, materials or services. Specifications are prepared not only for goods, materials or
equipment, but also for services. Technical specifications for services are called Terms of Reference (TOR).
Terms of reference should at least consist of:
 Background of the service
 Objectives of the service
 Scope of the service
 Methodology
 Result or outcome expected from the service.

Section 6: Sample forms

There are different forms to be used by bidders and these forms should be included in the bid document. The
purchaser must prepare sample forms and the bidders are required to complete and submit with their bid in
accordance with the requirements included in the bid documents.
Important sample forms to be incorporated in the documents are:
 Bid form
 Price schedule

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  Bid security form
 Contract form
 Performance security form
Step 5: Invitation to Bid
Bid invitation is the act of advertising to qualified potential bidders to participate in the bid process. Every
reasonable means should be utilized in purchasing the request for bids. It is made through mass media for open
bid and through other means of contacts for closed bids.
Step 6: Evaluation and selection of suppliers
Evaluation and selection of suppliers is one of the most important parts of purchasing since it involves the
process of locating suppliers and evaluating the dependability and capability of suppliers to deliver the materials
required on time.
Suppliers are evaluated on the criteria set for their evaluation on:
Quality factors
Delivery factors
Service factors
Price factors
Step 7 Preparing and Issuing Purchase Order
After the right supplier has been selected, purchasing departments must prepare the purchase order. Purchase
order once acceptable, becomes a binding contract between the supplier and purchaser. A purchase order (PO) is
the commitment by a purchaser to pay for a materials ordered and the supplier‟s authority to charge the paying
organization for them. It is a legal document or contract between the supplier and the purchaser. Every purchase
order must be made by writing. Some times if there is an urgent need for materials, an order can be made by
using telephone or telegram. But it must be confirmed by a written order later.
Any purchase order form should contain identification number, date of issue, and the name of the supplier,
description of materials, quantity, date of delivery required, price, payment and shipping instructions.
Purchase order must be signed by only those authorized to do so. In order to exercise organizational
responsibilities, the person signing the order must make it clear that he/she is acting on behalf of his/her
organization. In addition, for internal purposes, the budget allocation, the user of the materials and the place to
which the receiving section should send the materials may be shown on the order in codified forms.
Purchase order should be prepared in printed form and should be serially numbered. Numbering the PO can be
done either by giving an independent order number such as 001,002 and so on by suffixing the order number to
the purchase requisition number such as 110/001, 122/002 and so on where 110 and 122 are PR numbers. When
purchase files are arranged according to purchase requisition numbers, the later method helps elimination of the
cross index which is other wise necessary to trace the file numbers. It is also advantageous to number local and

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foreign purchase orders in different services. This will enable growing of copies of all foreign purchase orders
together in a separate file, which will facilitate follow-up action.
Some organizations with well organized purchasing function may also maintain separate purchase order registers
for identifying materials. The register may provide additional columns for analysis of the expenditure that enable
collection of data required for monthly report to the management or for statistical figures such as value of capital
equipment, tools, general stores, stationery and production materials ordered during the months.
An example of Purchase Order (PO) form:
PO
P.O.Box:_______ Requisitioned: __________
Tel: _________ P.R.No._______________
To: ______ Communicate Minutes No.____
P.O.No.---------------------------
Please deliver the following Date: ---------------------------
Terms of Payment: --------------
S.N Description unit quantity Unit price Total Price
Birr Cent Birr Cent

Sum
Remarks: ------------------
Total: ----------------------
Prepared by: ---------------- Approved by: ------------------ Authorized by: ------

Step8-Follow up and Expediting

After the purchase order is made, the purchaser may not need to wait until the purchase items are delivered. The
process may require following up and expediting. Follow up is checking whether the supplier is working to
supply the materials as per agreed up on where as expediting is the act of accelerating the process or progress.
Obtaining delivery on time can be a difficult problem. Therefore, regular communication with suppliers is
essential. To meet delivery time, insisting the suppliers is very important. It should not be supposed that once an
order has been placed, the purchasing department has no further responsibilities. Follow up actions with
suppliers may be done by means of printed forms, correspondence letter, telegrams, telephone, fax, mailing or
personal contact.
Step9 Receiving and inspection of goods and effect payment:
It is the responsibility of the purchasing department to ensure that the right quantity and quality of materials are
received. The quantity delivered is received by the store or by the receiving section. The quantity and
specifications are then verified against the purchase order by counting, measuring and weighing. Such

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discrepancy as loss of packages, damages, shortages, wrong items, defective items and excess supply should be
identified. Materials should also be inspected to ensure the quality, conformance with the specifications and
standards.
After receiving and inspection, goods receiving report (GRR) is prepared by the store or receiving section. The
GRR contains the following information.
 Date of receipt
 P.O number
 Name of carrier
 Mode of transport
 Description of the materials
 Quantity ordered
 Quantity received
 Quantity rejected
 Quantity damaged
 Quantity accepted
 Shortages
 Excess
 Name of supplier
 Prices
 Remarks

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The Receiving report form is visually prepared in four copies and the distribution is that
 First copy- to purchasing department to close out the working file
 Second copy- to accounting for final payment
 Third copy- to user department
 Fourth copy- remains to store of receiving section.
After the store (receiving) section confirms the receipt of items, it is the accounting department that
effects payments. Checking invoices and ensuring receipts is one of the functions of purchasing
department. After setting all the justifications for payment, the accounting section makes prompt
payment by taking in to account the advantages that the organization may get from discounting or
establishing good relation ship with supplier.
Step10. Maintenance of Records and Files
The final step of purchasing system is to maintain various records and files related with the process. All
files such as document files, inventory files and supplier files need to be recorded and kept properly for
further usage. All documents such as:
- Material requisition
- Purchase requisition
- Purchase orders
- Acknowledgements
- Receiving reports
- Inspection reports
- Follow-up notes/letters
Should be consolidated and a summary record must be made.
Recording and keeping purchasing and inventory data has the following major objectives.
- To control the material flow with in an organization
- To make post purchase evaluations and decisions
- To prepare purchasing reports to management
- To fulfill the above objectives, records related to purchasing must be well organized in a manner
which makes them readily accessible. A proper filing system should be established to facilitate
efficient operation of the purchasing department. All necessary information must be kept properly.
The following basic records are essential for effective and smooth operation of the purchasing activities:
 Materials record
 Supplier record
 Blue print and specification record
 Contract record
 Printed forms record
  Open order record
 Closed order record
 Other documents record
The materials record: is maintained to indicate each purchase that shows the orders place, receipts and
disbursement of all items. For each major material and service purchased repetitively, a record card or a
computer file may be maintained. Each card or file may contain complete description of the material or
services, list of suppliers and the price schedule, purchase history of the item, purchase quantity, price
and delivery performance. The supplier record: is maintained to indicate a list of all suppliers and their
complete address. Blue print and specifications: are maintained to be used for reference and for sending
to the supplier. Some specifications often are very detailed and reproducing on the purchase order may
be difficult.
Contract record: is maintained to indicate all long term contract documents. All contracts can be
consolidated in a separate file. Printed forms record: is maintained to indicate all printed forms that are
in use by the purchasing department. The printed forms record is usually kept in a loose-leaf binder and
includes a sample and description of each form used by department. The following forms are usually
maintained by a purchasing department of an organization.
 Material Requisition (MR) form is an internal document filled by users department to request
goods or items from the store.
 Purchase Requisition (PR) form is an internal document filled by user departments or the store
to request purchase of items.
 Purchase Order (PO) form is an external document filled by the purchase department and sent
to a supplier. It is a commitment by a buyer to pay for goods ordered.
 Purchase contract forms is a form coessential and legal clauses and statement of agreement, and
filled by both the purchaser and supplier.
 Follow-up form is a form used for routine follow-up and post cards may be used.
 Receiving report (RR) form is a document filled by the receiving section for all incoming
materials and includes such information as date of receipt, description of the items, quantity,
price, purchase order number, shortages, etc.
 Inspection report (IR) form: is a document filled by the inspection department for checking the
materials received against the specification.
Open orders record: is maintained to follow-up purchases and to identify the status of each order.
Closed orders record: is maintained to keep historical record of all completed purchases. It is used to
prepare summary reports. It can also be used as reference when questions arise about past orders.
Purchase order journal: is maintained to indicate all purchase orders placed during the time on daily
basis. It is an ongoing record in numerical sequence of all purchase orders issued. The record should
contain the purchase order, the supplier name, a brief description of the material purchased, and the total
value of the order. The record is also used to prepare reports on the activity of the purchasing
department.

2.3.3 Foreign/International Purchasing

The modern world has become a small village due to the advancement in transportation and
communication technology. As a result business has passed the national boundary and has become a
global operation. There are two important words used in international purchasing and selling. The first
word is import when a country or a business n this country purchases from a business firm in another
country. The second word s export when a firm in one country sells its products to a person living or a
business firm operating in another country. For example there are business firms in Ethiopia that import
different types of machinery and electronics and there are business firms in Ethiopia that export coffee,
hides and skins or other agricultural products.
The balance of trade of any country is affected by the amount of import and export it makes with
business organisations in another nation. The following table shows he amount of imported items and
the amount of exported items in Birr for the five years period between 1991/92 to 1995/6 Ethiopian
fiscal year.
Import and export of Ethiopia between the
Year 1991/92 to 1995/96 in thousand of Birr1
Year Export Import
1991/92 279,026 1,810,900
192/93 800,814 3,618,800
1993/94 1,238,729 4,740,300
1994/95 2,731,754 6,546,300
1995/96 2,538,752 7,708,300
This indicates how import (foreign purchase) of Ethiopia is increasing from year to year.
Reasons for Making Foreign Purcase2
As we can see from the above table, foreign purchase and foreign sale is increasing from yea to year.
Therefore, we will discuss the reason why a business firm or a government agency makes foreign
purchase.

a) Price: - A foreign supplier can sell its products at a lower price than the domestic supplier because
of one of the following reasons.
 Labour cost of production could be lower in producing country than the domestic country. Most
developed countries import electronics from Far East countries like Singapore and Malaysia
because labour is relatively cheaper n those countries than in Europe or USA.
 The exchange rate existing at particular time affects the purchasing and selling behaviours or a
business. For example as U.S. dollar becomes stronger in relation to Japanese Yen a firm in
Japan can sell is products cheaper in USA than the same product produced in USA.
 The efficiency of the technology and the method of production used by a foreign firm may
 enable it to sell its products cheaper than the domestic supplier.
 The way of pricing that a foreign supplier makes in order to make is products cheaper than he
domestic producer does. A few years ago Japanese cars inundated he American markets. As a
result the Americans were complaining ha Japanese firms were unfairly under pricing their
products so that to win American manufacturers in the American market. This practice of under
pricing a product in order to compete in a foreign market is called dumping practice.
b) Quality: - A purchaser can be interested to buy from a foreign supplier if this supplier shows that he
has better equipment, or better quality control systems with he objective of zero defects.
c) Unavailability of domestic products: If the items or products are not available domestically an
individual purchaser, whether a business firm or a government agency, is forced to look for a foreign
supplier. For example Ethiopian air Lines purchases air planes from an air plane manufacturer in USA
because EAL does not have the capacity and the technology to manufacture air planes n Ethiopia.
Business firms in USA import commodities, which are not available in USA, from Japan or Africa.
d) Technology: - As firms specialise in a specific line of product, their technological know how
increases in that specific area. If foreign suppliers have advanced technology than their counter parts in
Ethiopia, they can sell her products cheaply in Ethiopia and local manufacturers may not be able to
compete and sell their products in the Ethiopian markets. Sometimes a government may allow a foreign
supplier to sell its products in the domestic market with the intention of encouraging competition and
pressuring the domestic supplier to increase is efficiency.
Problems of Foreign Purchasing
There are a lot of factors that stand against foreign purchase. When conducting foreign purchase, the
purchaser should consider the following main problems.
a) The problem of evaluating and selecting a foreign supplier: - The principles used to select the
domestic supplier are the same of foreign suppliers. However obtaining the necessary data needed for
evaluation of foreign suppliers is expensive and time consuming for the reason that the suppliers are
usually found thousands of kilo meters away. The most important factor in the evaluation and selection
of domestic supplier, i.e., on-site visit, is virtually difficult to conduct on the site of foreign supplier
because it is expensive in terms of cost and there is no time to make frequent visits to the supplier‟s
country. However, if the purchase amount is million of dollars, it is very essential to make a detailed
plan ahead.
b) The length of delivery time – Delivery lead-time is the time between initiating the purchase process
ad the arrival of the items ordered. If items are transported by airfreight, the delivery time is very short.
But large volumes of items purchased from international market are usually transported using ships,
which makes the delivery time very long. This requires long run purchasing plan and requires
organisation to have a large amount of safely stock to use it during lead-time.
c) Follow-up of purchasing is difficult, if the foreign supplier’s personnel are not responsive: -
Care must be taken to assure the personnel are reasonable or to look for a local agency of the supplier
who can assist in follow-up of purchasing.
d) Political and labour problems existing in vendor’s country: - This may hamper the production
process of the purchaser. Governmental changes, labour strikes, social disorder and others are the major
factors in delaying delivery and increase the risk of losing the order.
e) Currency problem: - One of the major problems is the currency fluctuation existing between the
purchaser‟s country and the supplier‟s country. The buyer has to consider or to decide whether to pay in
local currency or supplier‟s country currency. However in developing countries dollar is being used as a
medium of exchange for international purchase. For this reason as dollar appreciates from time to time,
a purchaser in developing country is going to pay higher prices than previously budgeted if the
agreement between the buyer and the seller is to settle the debt after the buyer receives the items. For
example, in Ethiopia, there is weekly sale of dollar to commercial banks. As seen from past experience
dollar is appreciating every week against Ethiopian Birr. Therefore, a purchaser importing items from a
foreign supplier is to incur unexpected cost of appreciated dollar, if he has not studied the trend and
calculated his dollar cost accordingly at the time of payment. This can be substantiated by the following
example. Assume purchaser A in Ethiopia plans to import electronics with the amount of Birr 2,000,000
from supplier B in USA. Purchaser A and supplier B have an agreement that payment would be effected
when the supplier loads the ordered electronics to a ship. Purchaser A made order on September 20,
1999 for the dollar amount equivalent to Birr 2,000,000. On September 20, 1999 a dollar was exchanged
for Birr 8.00. Three weeks after purchaser A made the order, supplier B loaded all the ordered items to
Ethiopian ship and notified the purchaser to transfer payment. When purchaser went to one of the
commercial banks to convert his Birr to Dollar, he discovered that a dollar was exchanged for Birr 8.10.
Then he needed Birr 2,025,000 (8.10/8.00 x 2,000,000) to pay for the amount he purchase which is Birr
25,000 more than originally thought. Therefore it is important to evaluate the trends of currency
exchange and to plan ahead for the change of value of imported items.
f) Payment method: - This is also another aspect to consider when making foreign purchase. Some
suppliers may insist payment be made in cash with the order. Another method is called, a Bill of
Exchange (draft) of which the supplier insists that title to goods should not pass until the purchaser
makes the payment. The purchaser to pay a sum of money on a given date to the drawer writes a bill of
exchange. The payment method may be through letter of credits by which the buyer‟s banker guarantees
a payment of a specified amount, by the request of the buyer, when a specified conditions and
satisfactory delivery has been completed.
g) The government policy on imported goods: - This is another aspect to consider when making
foreign purchase. For example a government may impose high tariffs on some imported commodities so
as to protect the local suppliers from external competition. The purchaser should have the knowledge
which tariff schedule is applicable to his commodities and to arrange the contract accordingly with the
foreign supplier.
h) The legal and court systems by which the purchaser and the supplier to be judged are another
problem areas that are t be taken into account when considering foreign purchase. It must be specifically
stated in the contract which legal system, either the buyer‟s country or the seller‟s country, to use when
dispute arises between he two parties.
i) Transportation methods: - is another major area of problem in foreign purchasing. Transportation
includes the consideration of cost of freight, time and place for transfer of title, coverage of insurance
premium, or decision on who should bear the risk etc. The governing conventions for any foreign
purchase or sale contain a reference approved by the International Chamber of Commerce. These
conventions have assisted business in standardising and simplifying the international trading practices.
The following are few of the terms used international trading.
(a) FAS (Free Alongside Ship): - A contract where the supplier of goods is responsible for their
delivery to the ship‟s side but the buyer is responsible for the cost of taking them on board ship.
(b) FOB (free on board) - Under this contract the seller pays the cost of transporting the goods to the
port of shipment and loading charges, plus all insurance cover up to this point. From then on it is the
buyer who bears the cost of transporting, and insuring the gods to its final destination.
(c) C & F (cost & freight) – Under this contract the seller pays the cost of transporting the good to the
port of shipment, the loading charges and the freight charges to the port of destination. From then on the
buyer bears the cost of unloading and transporting he good to its final destination. The buyer pays all the
insurance costs incurred.
(d) CIF (cost, insurance and freight) – Under this contract the seller pays the cost of transporting good
to the port of shipment, the loading charges, and the freight charges to the port of destination, plus all
insurance cover up to this point. From then on the buyer bears the cost of unloading, transporting and
insuring the good to its final destination.
(e) FOR/FOT (free on rail/truck): - A contract where the seller or the supplier of goods is responsible
for the cost and administration of delivering them to the railway for transportatin.8
(f) EXS (ex ship) – In a contract to supply goods by sea, this term means the buyer has to meet the cost
of taking the goods from the ship.
(g) DDP (delivered duty paid): - A contract where the exporter pays all charges on a DDP consignment
until final delivery, including documentation , duty and taxes.10
(h) Language and cultural difference: - Another barriers in foreign purchases are language and cultural
difference that is existing between the buyer and the seller. Even if two countries are speaking the same
language. For example United Kingdom and Australia, words can mean different things in different
countries. Imagine the communication gap that will exist when two persons having two completely
different languages are trying to communicate with each other through the assistance of a translator.
Coupled with language differences is the cultural difference that exists between the foreign supplier and
the purchaser. Therefore the buyer must adjust himself with the cultures and customers of the foreign
supplier if he wants to communicate and negotiate effectively.

2.3.4 Public Purchasing in Ethiopia

So far students have been familiarised with the major concepts and principles of purchasing with special
emphasis on the private sector. This is important because the students can develop their knowledge
about basic principles of commercial purchasing for two major reasons. The first is, as development
administrators, they can have the chance to adopt these principles in public organisations whenever the
need arises. The second is, as public policy makers; they can understand the basic motives for private
purchasing so as to incorporate this motive when they are making policy. Public purchasing includes
purchasing activity done by the federal government, through regional to a Kebele level.
What is public procurement?
Public procurement is the process of obtaining goods and services for public purpose, following
procedures implemented to protect public funds from being expended extravagantly. Another name for
public purchasing is government purchasing.
Characteristics of Public Purchasing
Basically, the objectives of government purchasing do not differ from the objectives of business
purchasing. Like business organisation, government also needs to get the maximum value out of the
items or services for the amount of public money spent to purchase them. Government organisations
should also look for ways and means of purchasing with the objective of assurance of continuity of
supply, obtaining the right material with minimum cost consistent with quality, performance and
delivery requirements.
The motive of public purchasing differs from the motive of business purchasing. The motive of business
purchasing is that of maximising profit where as the motive of public purchasing is to give maximum
service to the society. Any public purchasing is restricted by budget limitations. A Federal Government
can promulgate purchasing law not only to protect the public funds but also to fulfil other missions.
These missions can be fulfilling the objectives of encouraging small business, non-discrimination in
employment, research and the national defence, the sale of locally made products, provide opportunities
of minority owned firms, and favouring areas with labour surplus. The following are the major
characteristics of public purchasing.
Source of Authority: - The authority of public purchase is established by law and regulation. The
purchasing capacity of a Federal Government and regional state depend on the amount of tax collected
from the public. Thus the public purchaser is expected to observe the laws declared by the legislative
body and has to know that he is responsible to this body purchasing is conducted by following certain
purchasing procedures, rules and regulations set by a government agent, that is responsible to control the
operational expenses of government organisations. Contrary to this, the business buyer is responsible to
the administrative supervisor or to the owner of the business only.
Budgetary Restrictions: It is the legislative body that finally approves the budget for public purchasing.
Every year, the legislative body approves the budget necessary to be used next year by each sector in the
economic system. If conditions in the budget year were to change and create stress in the budget
allocated, then it will be difficult for the public purchaser to adjust the budget by itself unless it is revised
and approved by the legislative body. Where as in private sector the purchaser can adjust and respond to
the changes in the environment or when the assumption under which the budget was made to undergo
change. As a result, a business purchaser can react and purchase the required item immediately when the
prices of needed commodities tend to increase. But the public purchaser will find it impossible to take
advantage of spot buying large quantities even if he gets at advantageous prices.
External Pressure: Before making purchases, the government has to collect taxes from the public.
Business firms, in their economic activity, contribute to government revenue in the form of taxes. Thus
large business organisations, which are contributing the lion share of taxes, will try to influence
government agencies to make major purchases from them.
Favouring disadvantaged segment of the population: - With the aim of creating equity, a government
may give advantages, in purchasing, to groups or minorities, which are believed to be unfairly treated or
discriminated against in their economic activity in the past. Contrary to this, a business organisation will
not make purchases for the only purpose of favouring disadvantaged group.
Absence of Interest cost: - In manufacturing organisation one of the considerations in determining
inventory level is the amount of capital tied-up in the inventory and cost of handling inventory. Any
business organisation, in order to maximise its profit, usually considers the amount of interest that it will
earn had the amount of capital tied-up in the inventory been invested in a bank or in some other business
activity. For this reason, it considers the options of the different inventory level that can be maintained
with minimum cost of handling. Contrary to the intention of commercial organisations, government
organisations are not interested in determining the optimal inventory level that minimise tied-up capital
inventory or cost of handling inventory. Therefore interest on capital tied-up in inventory is not taken
into account in government purchasing.
Difficulty of modifying organisational structure:- Changing organisational structure is more difficult in
public purchasing than in business purchasing. For example, addition of a position, redefinition of duties
and responsibilities in the structure of public purchasing takes much longer time than in manufacturing
firms. This is because redefining a position requires public hearing and must undergo many levels
before the change is accepted and approved by the legislative body. Difficulty of modifying
organisation structure in a very short time has an advantage of stability in public purchasing. In
industrial organisations, it is easier to make frequent changes and definitions of positions because the
managers or owners can pass decisions without taking much time if they believe the change is important.
Implementing purchasing decision is faster in business organisation because:
1. Managers of business organisation are relatively free to make purchasing decisions compatible with
external changes.
2. The levels through which decisions pass are shorter in business organisations than in public
organisations.
3. Unlike managers in public organisations, managers in business organisations are not subject to
public hearing and open criticisms for their actions.
Difference in Salary Level: -The salary earned by officers in public purchasing is much lower than that
earned by employees in industrial organisations. Particularly higher officials of purchasing department
in government offices are not well paid when compared with officers in business organisations.
Open Bidding: - Any public purchasing is done on open bidding. Suppliers are invited openly through
the bid process. The procedure on how to conduct a bid is clearly stated in the bid document. For this
reason, there will not be any secret information between the public buyer and the seller to deal at the
backdoor, because all information about prices submitted by the supplier at the time of the bid process
and the final price paid to the supplier are officially known to any suppler who participated in the bid.
Another important point is that any public purchaser is not allowed to make special order from a single
supplier. However, any industrial firm can make special arrangement and can make a contract with a
single supplier with out going through any bid process.
Clear Specification of Items: Since all public purchases are done through open bidding any,
government agency should clearly and accurately specify the items it wants to purchase. This allows
many suppliers to understand the items required and to participate in the competition. Otherwise an
ambiguity created in the specifications may cause a legal action by any supplier and this in turn may
cause delay in the delivery of the items.
Public Purchasing Practice in Ethiopia
The foundations for the FDRE public procurement are the following:
Proclamation no.430/2005, determining procedures of public procurement and establishing its
supervisory agency; The implementing directives issued by the Ministry of finance and Economic
Development and, Standards set by Public Procurement Supervisory Agency which are outlined as a
separate standard bid document (SBD) document for goods, consultancy services and works
Types of the Ethiopian Government Purchases
In public procurement of goods and services to be purchased by a government agency are divided as;-
goods, works, consultancy service and services.
Goods include raw materials, products and equipment and commodities in solid, liquid or gaseous form,
and electricity, as well as installation, transport, maintenance or similar obligation related to the supply
of the goods if their value does not exceed that of the goods themselves.
Consultancy service means a service of an intellectual and advisory nature provided by consultants
using their professional skills to study, design a organize specific projects advise clients, conduct
training and transfer knowledge;
Works means all work associated with the construction, reconstruction, demolition, repair or renovation
of a building, rood, or structure, such as site preparation, excavation, installation or equipment and
materials, decoration, as well as services incidental to works, if the value of those services does not
exceed that of the woks themselves and includes build, own operate and build own operate transfer
contracts;
Services: Services mean any thing acquired other than works, goods, and consultancy services.
Financial Sources of Public Purchasing
There are three sources of finance for public purchasing in Ethiopia.
(a) Tax collected from the citizens - each year the Federal Government allocates budget to different
government agencies to enable them to cover their operational expenses in a budget year. These
government agencies use part of this allocated money to purchase goods or service. Therefore, the main
source of this budget is tax collected from the citizens by the Federal Government.
(b) Aid - Different international Organisations, NGOs, or donor organisations assist the government
when it undertakes projects with the aim of alleviating different social problems. These projects need to
acquire goods or services for their operation. Thus international and donor organisations may participate
or may extend their assistance in effecting foreign or domestic purchase.
(c) Loan - The Federal Government can borrow money from other governments or international banking
institutions such as African development Bank, or World Bank with the aim of financing major social
projects. It is obvious that part of the loan will be spent on purchasing computers, vehicles, machinery
or other items, which need to be imported or to be purchased from domestic market.
Therefore whatever source a government agency may use for purchase, it is restricted to follow, or
comply with, the provisions and regulations of the government on maters related to purchases of goods
or services.
Responsibility of Procuring Entity
A procuring entity is a public body, which is partly or wholly financed by federal government budget.
The overall responsibility for the procurement process rests on the procuring entity (i.e. the government
agency that buys goods and services). As per article 7 of proclamation no.430/2005 the procuring entity
is specifically responsible for:
 Establishing a procurement unit staffed an appropriate level,
  Establishing a tender committee and appointing its members. The tender committee will have
five members including the chair person and the secretary. The tender committee members shall
have knowledge and experience in purchasing activities, ethical and have no disciplinary
measures records before. The responsibility of the tender committee is mainly advisory. Typical
responsibilities are:
o to advice the procurement unit on selecting the methods of procurement ,
o to evaluate suppliers proposals and forward recommendation for decision making,
o to recommend bid extension date ,
o to disqualify bidders who fail to comply with the public procurement proclamations and
regulations and,
o to reject the bid when it finds beneficial to the organization.
 Advertising bid opportunities;
 Communicating award decision; the award decision is to be informed at the same time to all
participated in the bid including the unsuccessful bid
 Certifying the availability of funds to support the procurement activity before signing a contract;
 Signing contracts for procurement activities;
 Investigating complaints by bidders; and rendering decisions thereon;
 Submitting a copy of any complaints and reports of the findings and decision to the Agency;
 Ensuring that the implementation of awarded contract is in accordance with the terms and
conditions of the award.
 Outsource procurement activities to third parties, if necessary.
The head of any procurement entity is also responsible for:-
 Ensuring to get value from goods and services for the money expended on them,
 To examine and decide on the recommendation of the tender committee,
 To keep confidential information of trade secrets of bidders undisclosed,
 To prepare and submit procurement reports to the procurement supervisory agency.
Basic Procurement Rules
The basic procurement rules are the following.
 records of procurement
 non-discrimination
 form of communication
 qualification of candidates
 technical specification
 rejection of all bids, proposals and quotations
 inducement from candidates
Records of procurement:-procuring entitles must maintain records and documents for a period of ten
years from the date of concluding any procurement proceeding. The record should contain
 A brief description of the goods, works or services to be procured;
 The invitation to bid
 The names and addresses of suppliers that submitted bids, proposals or quotations, and the name
and address of the winning suppliers;
 The evaluation criteria stipulated and applied and a summary of the evaluation and comparison
of bids, proposals and quotations received;
 Information on any decision to suspend or cancel proceedings after having been -initiated and
 The grounds for using procurement, procedure other than open bidding.
Non-discrimination: candidates shall never be excluded from participation 'n public procurement on the
basis of nationality, race or any other criterion not having to-do with their qualifications A preference
margin of a) up to 15% for goods produced in Ethiopia; and up to 7.5% for works carried out by
Ethiopian nationals; Any good to which more than 20% of the value added occurs in Ethiopia shall be
defined as one, which is produced in Ethiopia. A work is considered to be carried out by Ethiopian
nationals if the company is established under Ethiopian law and head office is in Ethiopia, if major share
holders are Ethiopians, substantial number of board of director are Ethiopians, and if majority of the
skilled work force are Ethiopians.
Form of Communications: communications between candidates and procuring entities shall be in
writing. Communications in any other form shall be referred to and confirmed in writing.
Qualification of candidates: In order to participate in public procurement candidates must qualify by
meeting the following criteria and such other criteria, as the procuring entity considers appropriate under
the circumstance.
 that they possess the necessary professional and technical qualifications and competence,
 financial resources, equipment and other physical facilities
 managerial capability experience in the goods, service, and works to be procured
 reputation, and the personnel to perform the contract;
 that they have the legal capacity to enter into the contract;
 that they are not insolvent, in receivership, bankrupt or being wound up, their business activities
have not been suspended, and they are not the subject of legal proceedings for any of the
foregoing;
 that they have fulfilled their obligations to pay taxes according to Ethiopian tax laws;
The procuring entity may require candidates to provide such appropriate documentary evidence or other
information it may deem useful to satisfy it that the candidates are qualified in accordance with the
criteria. Any requirement criteria established should be set forth in the bid documents or other
documents for solicitation of proposals, and shall apply equally to all candidates. The procuring entity
shall evaluate the qualifications of candidates in accordance with the criteria and procedures set forth in
the documents referred. The procuring entity shall disqualify a candidate who submits a document
containing basic error for purposes of qualification; it may disqualify candidate if it finds at any time that
the information submitted concerning the qualifications of the candidates was materially inaccurate or
materially incomplete.
Technical Specification;-Technical specifications and descriptions laying down the characteristics of
the goods, works or services to be procured shall be prepared f or the purpose of giving a correct and
complete description of the object of procurement, and for the purpose of creating conditions of fair and
open competition between all candidates. The technical specifications shall clearly describe the
procuring entity's requirements with respect to quality, performance, safety and dimensions, symbols,
terminology, packaging, marking and labelling or the processes and methods for production and
requirements relating to conformity assessment procedures. Technical specification prescribed by
procuring entities shall, where appropriate: be in terms' of performance rather' than design or descriptive
characteristics: and be based on national standards, where such exist, or otherwise on internationally
recognized standards or construction codes.
There shall be no requirement or reference in the technical specifications to a particular trademark or
name, patent, design or type, specific original, producer or service provider unless there is no sufficiently
precise or intelligible way of describing the procurement requirements and provided that words such as”
or equivalent" are included in the specifications.
Rejection of all bids, proposals and quotations;-the procuring entity may reject all bids, proposals or
quotations at any time prior to their acceptance. The procuring entity shall upon request communicate to
any candidate the grounds for rejecting all bids, but is not required to justify those grounds.
The procuring entity shall incur no liability towards candidates solely by virtue of its rejection. Notice of
the rejection shall be given promptly to all participating candidates.
If the decision to reject all bids is taken before the closing date, bids received shall be returned
unopened to the bids submitting them.
Inducements from Candidates:-The procuring entity shall reject a bid, proposal or quotation if the
candidate that submitted it gives or promises to give, directly or indirectly to any officer or employee of
the procuring entity or other governmental authority a gratuity in any form, an employment or any
other thing or service of value, as an inducement with respect to an act or decision of, or procedure
followed by the procuring entity in connection with the procurement proceedings. Such rejection of an
offer and the reasons therefore shall be recorded in the record of the procurement proceedings and
promptly communicated to the candidate concerned.
Methods of procurement
According to part IV of proclamation no 430/2005 the following methods of procurement are
possible.
- Open bidding
- two stage bidding (request for proposal)
- Restricted tendering
- Direct procurement
- request for quotation

Open bidding
The preferred method of procurement by any procuring entity is open bidding. Other procedure of
procurement is applied if the open bidding method is impossible.
Open bidding requires more time in order to prepare different tender documents. The typical
documents are the invitation to bid and the bidding documents. The standard bidding documents (SBD)
consists of the invitation to bid, the bid data sheet, the evaluation and qualification criteria, the bidding
forms, the eligible countries, the statement of contract and the contract forms.
The invitation to bid is floated for 30 and 45 days for national and international bids respectively. The
invitation to bid will contain,
 The name and address of the procuring entity,
 A brief description of the goods, works or services to be obtained, and the desire time of
completion,
 The place, and conditions for obtaining the bid document,
 The place and deadline for submission of bids,
 The place and time for opening bids.
The bid documents should contain sufficient information to enable competition among the bids to take
place on the basis of complete, neutral and objective terms. The bid document must include:-
 Instruction for the preparation and submission of bids,
 Information on the final date for receipt of bids, the address to which bids must sent, the date,
hour and place of opening,
 Bid forms, and bid security to be provided,
 The number of copies to be submitted with the original bid,
 Specification of requirements, including time limit for delivery or completion,
 Evidence to be provided by the bidder to demonstrate its qualification, financial position, and
registration in the suppliers list,
 The period during which the bid must remain valid,
  The criteria and the points given to each criterion for evaluation of bids and award of the
contract,
 A reservation to the effect that the procuring entity may reject all bids at any time prior to the
acceptance of the bid; and

Two stage Bidding/Request for Proposals

Government offices can use the method of two stage bidding when it is difficult for them or when it is
beyond their capacity to specify or to explain the item or service they require (Article 8). Two-stage
bidding is similar to request for proposal.
Procuring entities may engage in procurement by means of two-stage bidding:
 When it is not feasible for the procuring entity to formulate detailed specifications for the goods
or works or in the case of services to identify their characteristics and, in order to obtain the most
satisfactory solution to its procurement need;
 it seeks bids, proposals or offers as to various possible means of meeting its needs; or
 because of the technical character of the goods or works, or because of the nature of its services it
is necessary for the public body to negotiate with the suppliers.
 When the procuring entity seeks to enter into a contract for the purpose of research, experiment,
study or development except where the contract includes the production of goods in quantities
sufficient to establish their commercial viability or to recover research and development costs.
 When bid proceeding have been engaged in but no bids where submitted or all bids were rejected
by the procuring entity, and when in the judgment of the procuring entity, engaging in new bid
proceedings would be unlikely to result in a procurement contract.
Under this method bidders are invited two times. First to propose only on technical matters without a
tender price. Those who qualified are invited final tender with price. Procuring entities may modify, add
or delete the technical specification, and the criteria for evaluating and comparing of bids during the t
second stage of the bid.
Restricted/ limited tendering
Restricted tender is procuring goods and services from a limited number of suppliers. This method is
appropriate when:
 the goods, works or services, by reason of the highly complex or specialized nature, are
available only from a limited number of suppliers; or
 the time and cost required to examine and evaluate a large number of bids would be
disproportionate to the value of the goods, works or services to be procured.
As per article 6 of the current directives restricted tender is possible if the value of the goods and service
is below certain threshold level. This value for works is birr 1,000; 000and for goods and services is birr
250,000.
This method is very similar to open bidding using almost identical bidding documents. The major
differences include that No advertising the tender. Potential bidders are invited by direct invitation.
Direct procurement
Direct procurement is buying goods and services from one supplier. This method is not resorted to with a
view to avoiding possible competition or in a manner, which would constitute a means of discrimination
among candidates:
Direct procurement is appropriate when the following conditions are met.
 When in absence of competition for technical reasons the goods, works or services can be
supplied or provided only by one candidate;
 within limits defined in the procurement directives, for additional deliveries of goods by the
original supplier which are intended either as parts replacement for existing supplies, services or
installations or as the extension of existing supplies, services or installations where a change of
supplier would compel the procuring entity to procure equipment or services not meeting
requirements of interchange ability with already existing equipment or services;
 within limits defined in the procurement directives, when additional works which were not
included in the initial contract have through unforeseeable circumstances become necessary sine
the separation of the additional works form the initial contract would be difficult for technical or
economic reasons;
 within limits defined in the procurement directives, for new works consisting of the repetition of
similar works which conform to a basic project of which an initial contract was awarded on the
basis of open or restricted bidding. The limit stated in the current directive includes cost and
time. The cost of the good should not exceed 25% of the original cost and the time should not
exceed 6months after the contract period expired.
 for purchase of goods made under exceptionally advantageous conditions which only arise in the
very short term. This provision is intended to cover unusual disposals by firms, which are not
normally suppliers. It is not intended to cover routine purchases from regular suppliers.
 the head of the procuring entity has determined that the need is one of pressing emergency in
which delay would create serious problems and therefore injurious to the performance of that
procuring entity.
 The procuring entity may also use direct procurement when the contract price does not exceed
an amount stated in the procurement directives.
The existing directive article 9 states that under special conditions, the procuring entity can buy goods
and services do not included in the procurement plan directly from any supplier if the value is not above
birr 100.The total value of such goods should not exceed birr 4000 per budget year. In case the good or
service is not available from suppliers registered in the supplier list or in case of unexpected travel
purchases ,from any supplier if the value does not exceed birr 500,provided the total value of such
purchase should not exceed birr 6000 per budget year.
Request for Quotations
The procuring entity may engage in procurement by means of request for quotations in for the purchase
of readily available goods or for procurement of works or services for which there is an established
market, so long s the estimated value of the contract does not exceed an amount stated in the
procurement directives.
The amount indicated in the current directive is:
 For the value goods and service below birr 5000 with out passing through the tender committee
when approved by the head of the organization.
 For the value of good sand service between birr 5001and 40000 after the recommendation of the
bidding committee, when approved by the head of the organization.
This method only requires quotations to be solicited from at three different suppliers, which can be
made either in writing, orally or on the phone. The selected company is based on the Performa Invoices
received. Normally a written contract is not required, but again it is good procurement practice to issue
a written purchase order to the company who has been selected as making the best offer.
The cardinal rule is that the need (goods, package, and lots) should never be split to avoid using a less
competitive method.
International procurement
International competitive bidding shall be used whenever in open bidding; an effective competition can
not be obtained unless foreign firms are invited to bid. The threshold above which international
procurement is allowed is indicated in the directive as follows.
 For works above birr20million
 For goods abovebirr5million
 For consultancy services above birr1million
 For other services above birr 3million.
In international procurement tender shall be openly advertised and all eligible bidders shall be allowed
to submit bids. The bidding period should not be less than 45 days from the date of advertisement. The
advertisement shall be made in the international press of wide circulation, additionally; the advert may
be placed in international language, technical specification of the goods and services be based on
international standards, general and special condition of contract shall be of a kind generally used in
international trade, the currency presented by candidate should be in Ethiopian birr or currency widely
used in international trade.
Bid security and contract security
Every bidder is required to accompany the bid documents with a bid security. The purpose of the bid
security is to discourage bidders not to leave the bidding process. The limit for bid security as per article
13 of the directive is as follows.
 For goods and services, estimated value is between birr 40001and 500000 between birr 3000and
5000
 For goods and services, estimated value is between birr 500001and 1000000 between birr
5001and 10000
 For goods and services, estimated value is between birr 1000001and 5000000 between birr
10001and 50000
 For goods and services, estimated value is above birr 5000000between birr 50001and 100000.
The bid security should be in cash or bank guarantee. Bid securities shall be returned to unsuccessful
bidders immediately after signing the contract with the winner. Bid security will be forfeited if a bidder
withdraws his bid within the validity period.
The contract security is produced by the successful bidder. The contract security is used to compensate
for any default by the supplier. The amount of the contract security is 10%of the price of the good in the
contract. The winner shall produce the contract security within 15 days after notification of the winner of
the bid. A winner, failing to produce contract security will forfeit his bid security.
Problems in Ethiopian public purchasing
The following are the major problems of public purchasing in Ethiopia:
I) Highly controlled systems
The purchasing procedures in public organizations are highly bureaucratic because request for
purchasing passes through many steps and offices before purchasing of goods and services effected. For
example, a requirement may originate from a certain department of an organization. This requirement,
before its fulfillment has to pass through administration, purchasing tender committee, the executive
office, and finance, purchasing and store sections before it reaches to the user department.
II) The feeling of indifference to committee work
The tender committee in public organizations is established by assigning members from different
department of the organization. Every member assigned in to the committee her/his on primary duty for
which he/she is paid salary. As a result a committee member in the purchasing committee may feel that
her/his assignment in the committee is his/her secondary duty. As a result committee members may not
be serious in their committee work or may feel indifferent towards corrupt behaviors of purchasing.
III) Back door dealings and corruption
There is no any mechanism that prevents public purchases from making back-door dealings with
suppliers. Even there are rumors that public purchase can obtain three quotations from single supplier in
stead of collecting them from different suppliers. The ability of purchasers to collect three quotations
from a single supplier means that the purchaser can deal with the supplier that charges inflated prices and
share the excess amount. This activity makes the public to fare disadvantageously and weakens the
government objective of economical purchasing to save government funds.
IV) Additional costs are incurred for inviting bidders and collecting quotations
Specifically during collecting quotations, purchasers use public vehicles to wander from supplier to
supplier. Therefore, there are additional costs that are incurred in the form of depreciation of vehicle,
consumption of fuels, lubricants and spare parts.
V) Professional time spent on tender committee meetings
It is mentioned above that members of the tender committee are picked from their assigned jobs.
Sometimes, the committee may consume much time in discussing different issues before it reaches a
decision. Therefore, the time consumed in tender committee meetings delays jobs expected to be
performed by officers in their departments. All The problems of group decision making are reflected by
the activities of tender committee in any public organization.
VI) Lack of purchasing plan
There is no plan as to when and what to buy ahead of time. In most public purchasing there is reactive
purchasing, i.e. purchasing activity after crisis. Large volumes of public purchases are usually made as
the end of a budget year.
VII) Unskilled workers assigned to purchasing activities
Non- existence of incentives for the work done by tender committee is common in public purchasing.

2.4 Transportation and Tfficing Function of MM

2.4.1 Methods/Modes of Transportation
There are five basic modes of transportation. These are: rail way, high way, water, pipe- line and air.
Rail-way network: In general rail way is more suited for raw materials transportation than finished
goods and rail freight rates are lower than truck rates for long distance, but usually higher than water and
pipe line transport. Railroad incurs high fixed costs because of expensive equipment, right of –way (rail
roads must maintain their own track), switching yards and terminals. However, rail experiences
relatively low variable operating costs.
High Way/ Motor carriers: Motor carriers have flexibility because they are able to operate to all types
of roadways. In comparison to railways, they have relatively fixed investments in terminal facilities and
operate on publicly maintained high ways. The variables cost per mile for motor carriers is high because
of a separate power unit and driver are required for each trailer or combination of tandem trailers.
Water transport: It is the oldest mode of transportation. The main advantage of water transportation is
the capacity to move extremely large shipments. Its main disadvantage is the limited range of operation
and speed.
 Air Transport: It is the newest but least utilized mode of transport. Its significant advantage lies in the
speed with which a shipment can be transported. A coast- to-coast shipment by air requires only a few
hours contrasted to days with other modes of transportation. One prohibitive aspect of air transport is the
high cost.
Pipe-lines: operates on twenty four hours basis, seven days per week, and are limited only by
commodity change over and maintenance. Pipe lines have the highest fixed cost and lowest variable cost
among transport modes. High fixed costs result from the right –of way, construction and requirements
for control stations, and pumping capacity. Since pipe lines are not labor intensive, the variable operating
cost is extremely low once the pipe line has been constructed. An obvious disadvantage is that pipe lines
are not flexible and are limited with respect tom commodities that can be transported. Only product in
the form of gas, liquid, or slurry can be handled.

2.5 Inventory Functions of Materials Management

2.5.1 Typology and classifications of inventory items
A major type of control system found inmost organisations is inventory control or inventory management.
Inventory is a stock of material that is used to facilitate production or to satisfy customer demand. There are
three major types of inventory: raw materials, work in process, and finished goods.
Raw materials inventory
It is the stock of parts, ingredients, and other basic inputs to a production or service process. For example,
McDonald‟s uses raw materials inventory such as hamburgers, cheese slices, buns, potatoes, and soft drink
syrup, while a bicycle factory uses such items as chains, sprockets, handlebars, and seats.
Work-in-process inventory
It is the stock of items currently being transformed into a final product or service. For McDonald‟s, work-in-
process inventory includes the hamburgers being assembled, the salads being made, and the syrup and water
being mixed to make a soft drink, while a bicycle frame with only the handlebars and seat attached would be
work-in-process at a bicycle factory
Finished-goods inventory
It is the sock of items that have been produced and are awaiting sale or transit to a customer. At McDonald‟s,
finished-goods inventory includes the hamburgers waiting on the warmer and the salads in the refrigerated case,
while bicycles constitute the finished –goods inventory at a bicycle factory. Organisations that provide
services, rather than products, such as hospitals, beauty salons, or accounting firms, do not have finished-goods
inventory, since they are not able to stockpile finished goods (e.g., kidney operations, haircuts, and audits).
Significance of Inventory
Inventory serves several major purposes in organisations. For one thing, inventory helps deal with uncertainties
in supply and demand. For example, having extra raw materials inventory may preclude shortages that hold up
a production process. Having extra finished-goods inventory also makes it possible to serve customers better.
Worlds of Wonder, the California-based toy maker, ended up going into bankruptcy partly because it used
advertising generate enormous demands for items such as Laser Tag and then could not fill orders because of
insufficient inventory. Another purpose of inventory is to facilitate more economic purchases, since it
sometimes is more economical to purchase large amounts of materials at one time. As pointed out earlier, Food
Lion buys huge amounts of products during supplier promotions. Finally, inventory may be a useful means of
dealing with anticipated changes in demand or supply, such as seasonal fluctuations or an expected shortage.
Caution must be exercised in predicting changes. During the summer of 1988, Apple Computer, Inc., got
burned badly when it paid high prices to stockpile memory chips worth hundreds of millions of dollars in
anticipation of a continued shortage. Instead, the shortage eased and prices of the chips fell. When the
company tried to raise computer prices to cover the costs of its high-prices chips, sales fell and quarterly profits
plungers almost 43 percent.
Costs of Inventory
Inventory is important to organisations because it represents considerable costs. For one thing, there is item
cost the price of an inventory item itself (the cost of the handlebars or seats). Then there is the ordering cost the
expenses involved in placing an order (such as paperwork, postage, and time). There also is the carrying, or
holding, cost, the expenses associated with keeping an item on hand (such as storage, insurance, pilferage,
breakage). Finally, there is stock out cost the economic consequences of running out of stock. Stock out costs
include the loss of customer goodwill and possibly sales because an item requested by customers is not
available. Inventory control aims to minimise the costs of inventory (including considerations of stock out
costs). One approach to minimising such costs is the use of an inventory method called the economic order
quantity. Indicated below are the explanations of the various cost concepts. These costs are discussed here:
Ordering Costs
Every time materials are acquired, certain costs of ordering are incurred. These costs make it more economical
to buy in large quantities. In case of purchase of materials, ordering costs include the costs of preparing and
placing the purchase order. Specifically, these costs pertain to clerical time, stationery, postage, transportations,
handling, inspecting and accounting. Except the administrative costs of clerical and accounting staff, all others
costs of ordering are direct costs. As such most of the ordering costs vary inversely with the number of orders.
In other words, if purchases are made in large quantities, the number of orders will be smaller and direct costs
of inventories will be lower.
Costs of Carrying
Carrying inventories in the warehouses and stores also involve costs.
Cost of Investment
All kinds of inventories including materials, purchased parts, suppliers, work-in-process and finished products
involve investment of funds. Money invested n inventories has interest costs in case of borrowed funds, and
costs of lost business opportunities in case of owned funds. Thus, a company incurs costs in terms of interest or
loss of profitable opportunities when it invests its funds in inventories. Larger the size of inventories, higher
will be the cost of inventories.

Storage
Inventories occupy space in the stores, which has its costs. These costs are those of space, heat, light, and
repairs and maintenance. These costs also increase as inventories increase.
Insurance
All inventories are to be insured against risks of fire and theft. This involves cost of premium, which varies,
directly with the value of inventories.
Taxes
In some countries, inventories are treated as company‟s property of purposes of taxation. In such cases, higher
the value of inventories, higher is the amount of tax to be paid by the company.
Depreciation Costs
Like all physical assets, inventories are also subject to depreciation. Thus, while money in the bank grows with
the passage of time, that invested in inventories declines due to depreciation. Higher the value of inventories
more is the depreciation.
Determination and Obsolescence Costs
Inventories in stock are subject to deterioration. It is a cost of the company because the items concerned may
have to be scrapped, reworked or sold at a lower price. For example, many metals ruse with the passage of time
and may have to be processed before use. Materials and finished products also become obsolete while staying
in company‟s stores.
Stock out Costs
A Company incurs stock-out costs when an inventory item is not available when needed. Thus, if a purchased
part of material runs out of stock, it may cause interruption in production. Such interruptions cause huge loss in
case of continuous processing industries. In other cases also, these interruptions cause losses in terms of idle
workers and machines. Stock of finished goods involves cost in terms of lost sales, loss of customers, and even
loss of goodwill.
These stock-out costs can be minimised by carrying large inventories of materials and finished products. Large
inventories result into high carrying costs but low stock out costs.
2.5.2 Economic Order Quantity (EOQ)
We have seen in the above discussion that ordering costs of inventories vary inversely with the size of
inventory. If a company maintains small inventories, it will have to place a larger number of purchase orders,
which will result in higher ordering cost. For example, if it requires 60,000 bolts in a year, and decides to
purchase one month‟s requirement at a time, then assuming that the rate of usage is constant throughout the
year, it will have to place 12 orders. On the other hand, if it decides to buy the whole year‟s requirement at a
time, it will have to place only one order. The smaller the amount of inventory purchased in one lot, the larger
the number of orders, and higher is the total cost of ordering. On the other hand, carrying costs of inventories
including cost of investment, storage, depreciation, deterioration, obsolescence, insurance, and taxes vary
directly with the size of inventories. In other words, smaller the size of inventories lowers the carrying
costs.This relationship between inventory size and ordering cost on the one hand, and carrying cost on the other,
is shown in Fig. 1A Curve OC represent the ordering costs, and curve CC

CC

C
TC
o
s
t
OC

Ordering quantity (Q) Q

Carrying cost, Ordering Cost and Economic Order Quantity

When order quantity is OQ, ordering cost is MQ and carrying cost is SQ. When order quantity is larger at OR,
ordering cost is less at LR, and carrying cost is more at TR. Thus ordering cost and carrying cost move in
opposite directions. Economic order quantity is that quantity for which the total of ordering and carrying costs is
minimum. As shown in Fig. 1B, this is also the point at which ordering cost is equal to carrying cost. Optimum
inventory, the point at which the total cost (TC) is minimum is OQ. As mentioned earlier, total cost is the sum
of annual ordering cost (OC) and annual carrying cost (CC). Algebraically,
TC = OC + CC
Economic order quantity can also be determined mathematically by using the following formula:
EOQ = 2RS
C
Where R = annual demand of inventory of any item
S = ordering cost per order
C = cost of carrying per unit of inventory per year.
Let us take an example to illustrate the determination of EOQ by the above formula. A Company purchases
50,000 valves in a year. The relevant data are as follows:
R = Annual requirement of valves = 50,000 units per year
P = Purchase price = Birr 5 per unit
S = Ordering cost = Birr. 0.20 per order
C = Carrying cost = Birr. 0.50 per unit per year.
Substituting these data in the above formula, we get:
EOQ = 2(50,000)(Birr 20) = 2,000 units
0.50
In the above illustration, the EOQ formula has been used for a purchased item but it can also be used for
determining the lot size f a manufactured item. In that case, instead of ordering costs, fixed costs of
manufacturing a lot, such as set-up costs, handling costs and production control costs per lot, are used.
Assumptions
The underlying assumptions of the economic order quantity are as follows:
 The demand for the purchased or manufactured item is at a uniform rate.
 Carrying cost of inventory per nit per year is constant.
 Unit cost of the item is constant.
 Lead-time or procurement time is constant and the rate of delivery or the rate of manufacturing can be
predicted with a fair degree of accuracy.
 Quantity discounts are ignored.
 Minimum inventory or safety stock is assumed to be zero.
Limitations of EOQ
Limitations on EOQ are imposed by its underlying assumptions as discussed above. The EOQ can be
determined in the above manner only, if the assumed conditions are in operation. But in real-life situations,
none of these conditions are found to be operating. Lead times vary; rate of usage; unit price and carrying costs
are never constant. Moreover, companies often find it profitable to take advantage of quantity discounts.
Finally, safety stocks are needed to prevent the occurrence of stock out contingencies due to delayed deliveries
as well as higher than assumed rate of usage. The use of EOQ is also limited by the difficulty of estimating
ordering and carrying costs. Nevertheless, the model serves a useful purpose as an approximation of real-life
situations. Understanding of the mechanics of the model and its limitations also helps in determining economic
lot size of manufactured as well as purchased items in real-life situations.
Re-order Point
We have discussed above economic order quantity or the optimum quantity of inventory at which its total cost
of ordering as well as carrying is minimum. The next question to be considered is the timing of the reorder, or
the time when the next order should be placed. Under conditions of certainty when the lead-time or
procurement time is constant and known, and rate of usage of inventory item is also constant, the re order time
(OP) can be easily determined. ROP is the point in time when the inventory in hand will be exactly equal to the
total usage of inventory during the procurement time. This can be determined by the following formula:
ROP = U x Lt
Where ROP = reorder point
U = consumption rate of inventory during procurement or lead time
Lt = lead time
Suppose, a manufacturer of radios has a daily consumption of valves at the constant rate of 200 units, and lead-
time is 8 days, the reorder point will be:
200 x 8 = 1,600 units
He will thus reorder valves when he has 1600 units of valves in his stock which will be just finished when the
next consignment is received.
3.5.3 Safety Stocks (Buffer Stocks)
The above models of optimum inventory level and reorder point are based on the assumption of conditions of
certainty, viz., (I) demand for manufactured items is constant; (ii) it is the same as the forecasted demand; (iii)
procurement time is known; and (iv) it is constant. But in real-life situations, conditions of certainty do not
exist. The firm operates under conditions of uncertainty relative both to demand as well as procurement time.
Not only the demand may vary from day to day and month to month but also total annual demand may be more
or less than the forecasted demand. Similarly, actual procurement time may vary from the estimated time.
These variations in demand or procurement time or both make the above EOQ and ROP models not operational,
and, therefore, need to be adapted to real life situations. In order to minimise the effect of uncertainty in
demand and/or lead-time, a firm uses safety stocks. Safety or buffer stocks are additional inventory held
against unforeseen events such as an increase in demand or a delay in the arrival of items ordered. Safety stock
is an addition to the optimum level determined by EOQ. As a result safety stock increases carrying costs of
inventory, has little or no turnover. Thus safety stocks are similar to fixed assets because capital invested in
them stays for a long period of time without circulating. Safety stocks or minimum stock is in the nature of
reserve stock to be drawn upon during periods of unexpected increases in demand or delays in supplies. Safety
stock is thus an addition to the optimum inventory level determined by EOQ. It thus increases the average stock
of inventory carried by the company. Safety stock has little or no turnover. They are thus in the nature of fixed
assets as the investment tied up in them is committed over a long period of time. Safety stocks result in increase
in some costs, and decrease in other costs. Increase in costs of inventories results from carrying costs of safety
stocks. On the other hand, safety stocks diminish the probability of occurrence of stock-out, which cause
interruptions in production and loss of sales. They thus reduce the costs of stock-outs. Optimum safety stock is
that inventory level at which the total of its carrying costs and stock-out costs are minimum. Since safety stock
is not likely to be used most of time, it will be fairly reasonable to assume that it will remain fixed throughout
the accounting period.
Just-in-Time Inventory Control
Just-in-time (JIT) inventory control is an approach to inventory control that emphasises having materials just as
they are needed in the production process. The JIT approach to inventory is actually part of a broader JIT
philosophy of manufacturing that attempts to eliminate all sources of waste, including any activities that do not
add value, by focusing on having the right part at the right place at exactly the right time. By having materials
arrive only as required, rather than holding backup parts in inventory for a period of time, the JIT approach as
applied to inventory allows an organisation to minimise holding costs. The JIT approach also saves space that
is usually taken up by inventory waiting in the production area. The JIT philosophy was popularised by the
Toyota Motor Company in Japan during the mid-1970s and was transferred to the United States at Kawasaki‟s
Lincoln, Nebraska, plant around 1980. One report indicates that a Japanese plant designed to produce 1000 cars
per day requires 1 million square feet and a just-in-time inventory of $150 per car. In contrast, a U.S. car
manufacturer producing the same number of cars per day without using a just-in-time system requires 2 million
square feet and a conventional inventory of $775 per car. With such potential savings, it is not surprising that
the JIT inventory approach has been adopted by most forward-looking and successful (e.g. Fortune 1000 largest
industrial establishments) companies. In its focus on eliminating waste, the JIT philosophy also calls for
utilising the full capabilities of workers, giving them greater responsibilities for the production process, and
involving them in continual efforts at improving the production process.
2.5.4 ABC Analysis
What is ABC Analysis?
ABC Analysis is a basic analytical management tool, which enables top management to place the effort where
the results will be greatest. This technique, popularly known as Always Better Control or the alphabetical
approach, has universal applications in many areas of human endeavour. The technique tries to analyse the
distribution of any characteristic by money value of importance in order to determine its priority. In materials
management, this technique has been applied in areas needing selective control, such as inventory, criticality of
items, obsolete stocks, purchasing orders, receipt of materials, inspection, store-keeping, and verification of
bills. The annual consumption analysis 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 75 per cent of the total
consumption value, and these few vital items are called „A” items which need careful attention of the materials
manager. Similarly, a large number of „bottom‟ items – over 70 per cent of the consumption value, and are
known as the „C‟ class. The items that lie between the top and bottom are called the „B‟ category items.
Advantages of ABC Analysis
This approach helps the materials manager to exercise selective control ad focus his attention only on a few
items when he is confronted with lack of stores items. By concentrating on „A‟ class item, the materials
manager is able to control inventories and show „visible‟ results in a short space of time. By controlling the „A‟
items, and doing a proper inventory analysis, obsolete stocks are automatically pinpointed. Many organisations
have claimed that ABC analysis has helped in reducing the clerical costs and resulted in better planning and
improved inventory turnover. ABC analysis has to be resorted to because equal attention of „A‟, „B‟ and „C‟
items will not be worthwhile and would be very expensive. Concentrating on all the items is likely to have a
diffused effect on all the times, irrespective of the priorities.
Mechanics of ABC Analysis
The mechanics of classifying the items into „A‟, „B‟ and „C‟ categories is described in the following steps:
 Calculate Birr annual issues for each item in inventory by multiplying the unit cost by the number of
units issued in a year. It is assumed that the issues and consumption are the same.
 Sort all items by Birr annual issues in descending sequence.
  Prepare a list from these ranked items showing item no., unit cost, annual units issued and annual Birr
value of units issued.
 Starting at the top of the list, compute a running total, item-by-item issue value and the Birr
consumption value.
 Compute and print for each item the cumulative percentages for the item count and cumulative annual
issue value.
The normal items in most organisations show the following pattern:
 5 per cent to 10 per cent of the top number of items account for about 70 per cent of the total
consumption value. These items are called „A‟ items.
 15 per cent to 20 per cent of the number of items account for 20 per cent of the total consumption
value. These items are called „B‟ items.
 The remaining number of items account for he balance 15 per cent of the total issue value. These
items are called „C‟ items.

(A) Items High consumption (B) Items Moderate (C) Items Low Consumption
value value Value
 Very strict control  Moderate control  Loose control
 No safety stocks (or very low)  Low safety stocks  High safety stocks
 Frequent ordering or weekly  Once in three months  Bulk ordering once in 6 months
deliveries  Monthly control reports  Quarterly control reports
 Weekly control statements  Periodic follow-up  Follow-up and expediting in
 Maximum follow-up and  Moderate value analysis exceptional cases
expediting  Two or more reliable  Minimum value analysis
 Rigorous value analysis sources  Two reliable sources for each
 As many sources as possible for  Estimates based on past item
each item data on present plans  Rough estimates for planning
 Accurate forecasts in materials  Quarterly control over  Annual review over surplus and
planning surplus and obsolete items obsolete material
 Minimisation of waste, obsolete  Small group postings  Group postings
and surplus( review ever 15 days)  Combination purchasing  Decentralised purchasing
 Individual postings  Moderate  Minimum clerical efforts
 Central purchasing and storage  Can be handled by middle  Can be fully delegated
 Maximum efforts to reduce lead management
time
 Must be handled by senior officers

Colour coding can be used to identify A, B and C category in stores. Usually red is used for „A‟ items, pink for
„B‟ items and blue for „C‟ items. „A‟ items merit a tightly controlled inventory system with constant attention
by the purchase and stores management. A large effort per tem on only a few items can cost only moderately,
but the effort can result in large savings. „B‟ items merit a formalised inventory system with periodic attention
by the purchase and stores management. „C‟ items use a simpler system designed to cause the least trouble for
the purchase and stores department, perhaps even at the cost of a little extra inventory cost. It is also common
to further subdivide „A‟ items as A1 and A2 and A+ and A- and similarly categories for „B‟ and „C‟ items exist
for exercising better control.
Objective of ABC Analysis
As discussed earlier, the ABC analysis enables the materials manager to exercise selective control when he is
confronted with a large number of items. Tighter and accurate procedures are essential for „A‟ value items
relating to materials planning, forecasts, ordering, review, records, postings, revisions, lead time analysis, safety
stock, materials consumption control, purchase budget, delivery schedule, value analysis, follow-up, clerical
efforts, physical stock verification, receipts, issues, stores accounting and inspection. The degree of control
should be rigorous for „A‟ items and should be minimum for „C‟ items. ABC analysis is also helpful to
rationalise the number of orders and reduce the overall inventory.
2.5.6 Public inventory Administration in Ethiopia
Objectives of Inventory Administration in Ethiopia
When discussing about public purchasing, we saw that the major characteristics of public buying are source of
authority, budget limitation, outside pressures, support of public service programmes, absence of interest costs,
the difficulty to modify the structure, emphasis on the bid process, importance of specification, etc. Any public
organisation requires different types of items for its operation. As a result it is responsible to establish an
effective inventory administration system with the following major aims (art 5).
a) To protect public properties from wastage and fraud.
b) To have an effective and efficient control system that enables the organisation to handle inventories
properly, to control the flow of material so that they can be used for the purpose they are purchased
for.
c) To have an effective inventory recording system for reporting and follow-up
d) To increase the efficiency and effectiveness of a public organisation in discharging its responsibilities.
Classification of Inventories
Inventories in public organisation can be classified in to two major categories. They are consumable items and
non-consumable items.
a) Consumable items: - These items are short-lived items that are used and consumed during the operation of
the organisation. For example, consumable items such as office supplies (papers, pencils, pens, etc) are
consumed when employees of an organisation keep record, write reports of communicate with other
organisations. Consumable items include spare parts, fuels and lubricants. These items, once he are issued
from he sore, the responsibility falls on the shoulder of the nit head to control and assure their proper usage.
b) Non-consumable items: - Non-consumable items are items, which have a service life of more than one
year and a value of greater than birr 200. Non-consumable items are used to facilitate work and they are given
to the concerned worker on the basis of loan. The responsibility of controlling non-consumable items shoulders
on the store section and o the using department. The store division checks once in every three month, semi-
annually or annually whether the non-consumable items are available in the organisation; where as the using
department is responsible to control whether these items are being properly used for the relevant work
assignment. The storekeeper is responsible to register non-consumable items in register books. Registration
includes assigning code to each item and description of each item by type, model number, manufacturers name
and by other relevant information. (Refer stock register form under stock control forms)
Classification of Non-consumable items
According to directive no 6, 1991, any non-consumable items owned by government agency can be classified
into the following groups.
1) Buildings: - This includes office buildings, warehouses, garage, extension of buildings such as sewerage
canals, irrigation canals, telecommunication and electric lines, etc.
2) Plants and machines: - This includes laundry machines, refrigerators, electric generators, drilling
machines, centrifugal pump, lifting machines, mixers vibrator, welding machines, etc.
3) Vehicles: - This includes tractors, combine harvester, buses, trucks, rollers, bulldozer, forklifts ad
automobiles (small cars).
4) Office equipment: - This includes computers, printers, typewriters, video camera, photocopiers, duplicating
machines, tape recorders, overhead projects, televisions, editing machines, microfilm camera, binders, adding
machines and fax machines.
5) Office furniture: - This includes safe boxes, mats, filing cabinets, book shelves, office tables, chairs,
drawing tables, office sofa, etc.
Others: This group includes other items such as sewing machines, utensils, musical instruments and vacuums
cleaners, which cannot be included in the above groupings.

2.6 The Storing Function of Materials Management

2.6.1 Importance, Location and Layout of Stores
Stores play a vital role n the operations of a company. It is in direct touch with the user departments in its day-
to-day activities. The most important purpose served by the stores is to provide uninterrupted service to the
manufacturing divisions. Further, stores are often equated directly with money, as money is locked up in the
stores. The functions of stores can be classified as follows:
 To receive raw materials, components, tools, equipments and other items and account for them.
 To provide adequate and proper storage and preservation to the various items,
 To meet the demands of the consuming departments by proper issues and account for the consumption.
 To minimise obsolescence, surplus and scrap through proper codification, preservation and handling.
 To highlight stock accumulation discrepancies and abnormal consumption and effect control measures.
 To ensure good house keeping so that material handling, material preservation, stocking, receipt and issue
 can be done adequately.
 To assist in verification and provide supporting information for effective purchase action.
More often than not, in the matter of locating the stores, materials management is rarely consulted. The normal
practice is to locate the stores near the consuming departments. This minimises handling and ensures timely
despatch. In stores layout, the governing criteria are easy movement of materials, good housekeeping,
sufficient space for men and material handling equipment‟s, optimum utilisation of storage space, judicious use
of storage equipment‟s, such as shelves, racks, pallets and proper preservation from rain, light and other such
elements. These problems are more important in the case of items that have a limited shelf life. Other
important factors governing the location are the number of end-users and their location, the volume and the
variety of goods to be handled, the location of the central receiving section and accessibility to modes of
transportation such as rail or road. Since stores have to be nearest to the user, large organisations usually have
stores attached to each consuming department, whereas receiving is done centrally. Items of common usage are
stocked in the Central Stores so that inventory is kept at an optimum level. These factors are considered at the
planning level of layout. In the case of warehouses stocking finished goods, factors such as proximity to ports,
railway lines, quality of roads, availability of power, etc., become quite important. It is also important that the
stores are constructed with a futuristic orientation, so that sufficient flexibility for expansion needs is in built.
The activities of receiving the goods, stocking in appropriate locations, material handling the issues must be
done swiftly and economically. The stores building must have adequate facilities for preservation of stores.
Sometimes facilities, such as cold storage, heating equipment‟s, air-conditioning and similar facilities may be
required. These should be planned in advance. Comfortable working conditions must be provided to the stores
personnel to get maximum efficiency and morale. The important factors in the design of stores building can be
summarised as follows:
(1) Lighting: clear and adequate lighting is a must for a proper work-environment. Lighting effects can be
accentuated through a judicious choice of colours for the walls. For stores personnel who work day in and day
out in the stores receiving, checking, stocking, handling an discussing goods, a leasing environment goes a long
way in reducing monotony. Any attempt to reduce these facilities will prove to be false economising in the long
run.
(2) Safety: this factor is perhaps the most important aspect. In stores a large volume of goods are handled ever
day. Accidents considerably reduce the morale and effectiveness of the system. The following measures are
necessary if accidents are to be checked:
 Safety consciousness should be instilled in the minds of stores personnel through training programmes,
visual aids and literature.
 Safety appliances, such as goggles, hand gloves, etc., must be provided and their use must be encouraged.
 Good housekeeping is essential. This means that gangways must be clean, adequately wide so that
movement of forklifts, trolleys and industrial tractors is smooth. Stocking must be in appropriate
 locations so that handling cost is minimum.
 All stores equipment must be kept in good order. This includes adequate maintenance practices with
regard to forklifts, overhead cranes, trolleys, conveyors, etc. Operators must be trained in safety aspects
so that safety precautions are not overlooked.
 Healthy competition can be stimulated by installing „safety awards‟ and cash prizes which bring
recognition to the concerned stores personnel for safety practices. This also motivates others to practise
safety.
 Provision of fire fighting facilities is necessary especially where inflammable materials are stored and
handled. In point of fact, large organisations have a well-maintained fire fighting equipment with the
stores in preparedness. This has I he long run reduced losses and reduced insurance expenses. Fire
extinguishes, fire escapes, alarms and sprinklers must be available and personnel should be familiar in
handling them.
 Other factors which merit attention include provision of toilets, routine maintenance equipment‟s, safe
electrical wirings, etc.
2.6.2 Cost Aspects and Productivity
It is erroneously averred that every cubit meter of space must be utilised by stocks of high efficiency. Very
often such stocking may drastically cut down the speed of material movement and cerate bottlenecks apart from
affecting overall safety. Therefore manoeuvring needs for handling equipment‟s and for minimising the time
required for receipt, stocking and issue, must be borne in mind at the planning stage in order to ensure real
efficiency.
Costs involved in stores can be analysed under two heads, viz., fixed and variable. Fixed costs are to be
incurred irrespective of the utilisation of the space of the stores. They include money spent on land and
buildings, rent, interest, repairs, maintenance, insurance, etc. Variable costs vary with the volume of throughput
(items processed). They consist of handling costs, damages, deterioration, obsolescence, etc. Obviously, when
the throughput or the volume of goods handled is high, the total cost per ton is low. This should be the aim of
the Stores Manager in order to optimise the costs in stores.
Problems and Developments
It is an unfortunate fact that Stores Management has been regarded as a clerical function. In the gamut of
materials management, stores are considered as the least glamorous and it never attracts talent. It is forgotten
that the Stores Manager is probably the custodian of the single largest group of current assets and plays a
pivotal role in ensuring smooth production, besides assisting purchase activities through timely support. This is
the major problem and challenge that faces the stores manager today. Many decisions in stores management,
such as selection of racks, bins, handling equipment, safety practices, and codification, training personnel and
accounting, call for considerable, skill and ability to co-ordinate with other departments as well as with outside
agencies. These aspects should be highlighted and appreciated so that the stores function is given due
importance. Other areas in stores, such as records keeping, movement analysis to reduce obsolescence, surplus
and damage are critical to the profitable operation of the firm and the stores manager faces a challenge in these
areas as well. In many organisations, the scrap yard also comes under the control of the stores manager. This is
an entirely new responsibility calling for the ability to maximise returns n the disposal of scrap. The Chief
Stores Officer has under him separate officers for the functions of receipt, issue, and sub-stores. Besides
coming into contact with the production, purchase, maintenance, inspection and finance departments within his
organisation, he has t come in contact with outsiders such as suppliers, transport carriers and bankers. In order
to meet such challenges, the importance of the stores function should gradually gain momentum and qualified
engineers should be posted as Chief Stores Officers reporting to the materials manager.
2.6.3 Stock control and challenges of store management
Effective stock control is achieved if the following two basic conditions are satisfied simultaneously. The first
is the existence of reliable forms used for appropriate recording of the movements of items within an
organisation. The second is the existence of clear delineation of authorities and responsibilities between the
staffs working in the store department and between the different departments which have relationship in
purchasing and issuance of inventories. The stocks; in public organisations, include office supplies and spare
parts that are consumed in the operational activities of the organisation and large size machines that are kept in
warehouse before they are issued for services. Therefore, any public organisation can effectively control its
stock if it uses different kinds of formal records for receiving incoming items, issuing outgoing records and
showing balances of inventories in stock.
Stock Control Forms Used in Public Organisations
Stock control forms, in general, show what items are purchased, at what quantities, with what amount and
when; and what quantities of items are withdrawn by which department and the time when the materials are
withdrawn for use (art 8 and 9). Forms are used: -
 When new stocks arrive and received by the store man. Items can arrive to the organisation through
purchasing or borrowing or getting gift from other organisation or when employees return items after
using it.
 To record the movements and balances of inventories.
 When items are issued to the user department.

2.6.4 Forms for receiving goods and maintaining internal records

Forms for Receiving of Goods
We have discussed that the purchase requisition can be initiated by the concerned department or store section.
Therefore the person responsible for receiving the purchased items, usually the chief store man, checks whether
the arrived items meet the specifications in the purchase order. After inspecting, the store man uses the
following steps are related forms for receiving the items art 15).
Procedures for Receipt of New Inventories
If items are purchased by a government organisation, the store man should follow the following procedures
when receiving the items.
 Comparing the list of items in the purchase order with the items arrived and confirming that the items and
quantities are according to the specification in the purchase order.
 The store man records all the arrived items in the receiving form. The form used to record any incoming
items into the store. The store man signs on the form to confirm that the received items are the specified
items. Finally, he detaches two copes from the pad and give the first copy to the purchaser or to the
individual who brings the items to the store, the second copy to the stock clerk to maintain stock card, and
one copy remains with the pad.
 The store man assigns code to each item, if it is non-consumable items, and places the arrived items in
their proper shelves.
 If the items are returned from employees with in the organisation, the store man has to check and confirm
that the returned items are the items issued previously to the department in which the employee is
working.
Forms for Maintaining Internal Records
After issuing the copies of the receiving forms to the concerned departments, the store clerk has to update the
stock cards. Updating is an activity that includes relating the serial number of the receiving form with the stock
card, recording the received or issued items and maintaining balances of inventory in the stock. When receiving
the purchased items, the storekeeper has to categorise the items into consumable and non-consumable items
before he shelves them in the store. According to directive No. 6, 1991, any government agency is expected to
have two types of forms useful for recording non-consumable items. The first is a register book to record the
whereabouts of non-consumable items and the second form is a stock card to record the detailed description of
each non-consumable item (art 5, sub art 5, 6 and 7). In addition, the property administration section is
responsible to assign codes to each non-consumable item to identify one from the other.
2.6.5 Distribution of goods within the organisation
Distribution, in most government organisation refers to the issuing of items to different units within an
organisation to facilitate their operation. Issuing of items to the concerned unit in the organisation is effected
using he following procedure (art 16).
Procedures for stock issuing
 Checking the warehouse requisition whether it contains the name of the user department, the name of the
employee and signature of proper authorisation. Warehouse requisition is a form used to fill the details of
item required by the user department. If the items are recently purchased by the request of the concerned
department, the store man confirms the purchase requisition only and issues the items without making the
receiver department to fill a warehouse requisition (art 17).
  After checking, the store man fills an issuing form, called and issues the items to the requesting
department. The form printed by the ministry of Finance and is usually used to issue items by government
organisations. This issuing form contains columns for item description, quantity, and name of user
department, requisition number, the name and signature of the employee withdrawing the item.
 After recording the issued items and making the receiver department sign on the issuing form in three
copies, the store man detaches two copies from the pad and gives one copy to the concerned department,
one copy to the pad with the store man. The stock clerk updates the stock cards and balances the
inventory after the store man transfers to him one copy of the issue form.
 According to the regulation number 6, 1991, he store man should issue items using FIFO (first in Firs out)
method (art 18, sub art III).

2.7 The Disposal Function of Materials Management

2.7.1 Disposal of Scrap, Surplus, and Obsolete Material
Managers are concerned on how to handle the disposal of the following three types of inventories.
Scrap: A scrap is an item or equipment, which becomes salvage after giving service for ample period of time.
The organisation is willing to sell such types of items at cheaper price if they can get anything for it or is willing
to pay somebody to take away them.
Surplus Value: This refers to the existence of items in excess of the requirement of the organisation. This
problem arises due to poor planning of material requirement, or failure in demand because of unforeseen events
or when completion of a project leaves some materials unused. Unless the excess material is needed in the
future or if it is perishable material, it is advisable to dispose excess materials through transferring to other
plants, or selling in the open market.
Obsolete material or equipment: Materials or equipment become obsolete as a result of change in the
production method and technology. Obsolescence should not be confused with the age of the equipment. A
machine installed last week can become obsolete without giving sufficient service if a new type of efficient
machine is available in the sufficient service if a new type of efficient machine is available in the market today.
Consumable items can also become obsolete as a result of technological change in the equipment they are used
with. For example, high inventory of typewriter ribbons, which are in stock, can become obsolete if an
organisation shifts from using typewriter to computers, in all of its offices. Organisations dispose their obsolete
equipment when they buy new efficient and productive equipment. Public organisations may have items,
particularly non-consumable items that are no more useful in the organisation. Organisations may not need
leftover items for further operation because of one or a combination of the following reasons.
 The organisation might have purchased items in excess of its requirement.
 The organisation might have completed its purpose of using the items; and when the items are
considered that they can give more services in some other places or the items might not have finished
 their useful value. This means that the items have given service partially but not worn out completely to
be abandoned totally.
 The items might be too old and when they are believed to be of no service in the organisation in any
form. This means the items are totally depreciated.
2.7.2 Identification and method of disposing
According to regulation of administration of public property, there are three ways of disposing public goods (art
25). They are: transferring to another sister organisation, selling the public, and Throwing away the item as a
junk. Any government office is required to establish a committee that can identify disposable materials. The
committee is responsible to inspect and evaluate the condition of the materials and to assess the possibility of
using the material for another purpose. Based on the recommendation of the committee, an item can be
disposed in one of the following method s (art 24).
1) Transferring the item to another government agency: - If the material is a surplus, or if the material is in
good condition but no more needed for any activity, the public organisation has to consider transferring the
material to another government agency that may need the material for its operation in order to effect the
transfer. After evaluating and determining the value of the material, the concerned organisation reports the list
of materials to a department called “Government Procurement and Materials Management Control Department”
in the Ministry of Finance. Based on the report, the department in the Ministry of Finance issues circulars to
inform all government organisations about the materials and inquiring any interested organisation to contact the
organisation, which has disposable materials. Then the government agency transfers the material if there is
another agency, which is ready to take the disposable material to use. The budget implication of this
transaction, on both transferee and transferor government agencies, is that the estimated value of the disposable
material will now be added to the budget of the transferor organisation; where as the amount of the material is
deducted from the budget of the transferee organisation – the organisation receiving the material (art 26).
2) To dispose the material by means of selling in auction, tender or other means to the public if there is no any
other government agency willing to receive the material (art 27, 28 and 29).
3) Discarding the material, if the organisation assumed that the disposable items have no value, or if it is
difficult to modify or reshape the items. Discarding of material can be effected only if the material is too old to
be used, modified or shaped and when the opinion of a committee to throw away the material gets the approval
of the organisation head (art 30).