CHAPTER ONE
1.INTRODUCTION
1.1DEFINITIONS AND SCOPE OF MATERIALS MANAGEMENT
Materials Management Defined
Materials Management: - is concerned with the inflow of materials
and outflow of finished products through channels of distribution
centers to the end users/beneficiaries.
Materials Management: - can also be defined 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 reasonable cost.
It refers to goods required for either production in the case of
manufacturing enterprises or for resale/consumption in the case of
merchandising enterprises.
Materials Management: - is hence an activity, which involves
planning inputs, equipment, spare parts, tools and accessories and
other indirect materials required for daily operations in the case of
manufacturing enterprise.
Scope of Materials Management
The scope of materials management is derived from the definitions given
above. From these definitions, it is clear that the scope of materials
management is vast and wide can be broadly identified as having the
following functions
Material Planning and Control: - Material planning and control is
done based on the sales forecast and production plan, which involves
estimating the individual requirements of parts, preparing materials budget,
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forecasting the level of inventories, scheduling the orders and monitoring the
performance in relation to production and sales.
Purchasing: purchasing includes selection of sources of supply,
finalization of terms of purchase, placement of purchase orders, follow – up,
maintenance of smooth relations with supplies, approval of payments to
suppliers, evaluating and rating supplies.
Stores And Inventory Control: - Stores and inventory control
involves physical control of materials, preservation of stores, minimization of
obsolescence and damage through timely disposal and efficient handling,
maintenance of stores records, proper location of stocking. Store is also
responsible for the physical verification of stocks and reconciling them with
figures.
The inventory control aspects such as setting inventory levels, ABC analysis,
fixing economical ordering quantities, setting safety stock levels, lead time
analysis and reporting.
Importance of Materials Management
In many organizations, materials form the largest single expenditure item.
An analysis of the financial statements of a large number of private and
public sector organizations indicate that materials account for rarely 60 -65%
of the total expenditure. Therefore the importance of material management
lies in the fact that any significant contribution made by the materials
manager in reducing materials cost in turn improves the profitability and the
rate of return on investment. Such increase in profitability, with no doubt,
can be affected by increasing sales. Generally speaking, profit = TR –TC
Hence either TR or decrease TC the same result will be obtained.
Example: - take an organization with an annual turnover of 20 million where
materials account for 12 million and profit 23 million. If a manager is given
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the work of improving the profitability say by 0.6 million, there will be
probably two ways of achieving the result.
1. To increase the sales turn over by 3% within a specific period of time
such that the overall profit will be 2.6 million.
2. To decrease materials cost by 5% such that the overall profit will be
2.6 million.
Given:
Turn over = 20 million sales
Materials cost = 12 million
Profit = 2 million
Turn over increase by 3%
Required: - find increase of sales to arrive at a profit of 0.6 million 20 million
X S = 6 million profit.
S= 0.6 divided by 20 million which is 0.3 or 3%. Therefore, an increase of 3%
sales will result in 0.6 million additional profit and the total profit will be
2.6%.
Decrease of Materials Cost also Increases Profit, How?
12 million X C = 0.6 million profit
C= 0.6 divided by 12 million which is 0.5 or 5%
Therefore, a decrease in a material cost by 5% is equivalent to that of the
marketing efforts of increasing sales by 3%. However, increase sales calls for
a lot of additional marketing and advertising costs.
Materials form an important part of the current assets of any organization.
The return on investment (ROI) depends on a great deal on the manner of
utilization of materials. Efficient utilization materials lead to high ROI simply
because efficiency refers to the ratio of input to output of a given
organization.
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ROI = Profit/Sales X Sales/Asset
Assets = fixed assets + Current Assets. Fixed asset constitutes capital
already sunk and the only alternative for improving ROI lies in the efficient
management of materials, which constitute the bulk of current assets.
Therefore, the control of materials deserves great importance.
Integrated Concept of Materials Management
Functions served by materials management include:
Materials planning
Purchasing
Receiving store
Inventory control
Scrap and surplus disposal
If some of the functions were to be separately handled, a conflict of interests
occurs.
For example if purchasing department is allowed to operate independently, it
will make decisions, which result in sub –optimization. Under the separate
set –up the purchasing department may treat discount at a very important
factor and buy large quantities to avail of the discount without taking into
account its impact on the warehousing and carrying costs.
In an integrated set-up, the materials manager who is responsible for all
such inter- related functions is in position to exercise control and coordinate
with an overview that insurances proper balance of the conflicting objectives
of the individual functions. Therefore, an integrated materials management
usually enjoys the following advantages:
Better accountability: through centralization of authority and
responsibility for all aspects of materials functions, a clear – cut
accountability is established. Various user departments can direct
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their problems with regard to materials to one central point so that
action can be taken immediately.
Better Coordination: - when a central materials manager is
responsible for all functions, the departments under the materials
manager create an identity that is common. This results in better
support and cooperation in the accomplishment of the materials
functions. The user departments also find that they have to approach
one department for discussing and solving their materials problems.
This creates conducive atmosphere of trust and generally betters
relations between the user departments and the materials
management department.
Better Performance: as all the inter-related functions are integrated
organizationally, greater speed and accuracy results in
communication. Need for materials in immediately brought to notice
by materials planning, purchasing department is fed with stock levels
and order status by stores and inventory control departments. All this
calls for judicious decisions leading to lower costs, better inventory
turnover, reduced stock outs, reduced lead-times and a general
reduction in paper work.
Adaptability to EDP: the centralizations of the materials functions
have made it possible to design data processing systems. All
information with regard to materials functions is centralized under the
integrated materials management functions. This has facilitated the
collection and analysis of data, leading to better decisions. Advanced
and efficient electronic data processing system can be economically
introduced under an integrated set-up.
Other advantage: under a central material manager a team spirit is
inculcated. This results in better morale and cooperation. The
opportunities for growth and development are better in an integrated
set-up.
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In general, this has necessitated professional development of managers in
that they can fulfill the requirements of integrated materials management
functions, which demands an ability to bring together conflicting and yet
inter-related functions.
Organization of Materials Management
As the activities expand, the functions of each individual become more and
more sophisticated. The integrated materials management concept requires
central coordination of all these inter-related activities. Therefore, the
internal structuring of the various functions as well as the relationship of the
materials management divisions such as engineering/technique, finance and
marketing in the overall organization becomes critical. The materials
management functions ought to be headed by a competent professional who
must be a member of the top management team as managing materials is a
critical function. We have seen the need for integrated materials
management and the advantages that go with it. It was also recognized that
materials management is a top management functions.
Organization for Materials Management
Organizing here refers to identifying, classifying, grouping and determining
authority and responsibility of materials management.
Sample organization chart
Managing Director
Director
Director Director
Director Director
Director Director
Director Director
Director
productio
production Marketin
Marketing Material
Materials Finance
Finance Personnel
Personnel
n g s
Traffic Store Inventory
Control
Purchasing Receiving
1. Purchasing: - purchasing involves acquiring the kinds and quantities
of materials to be issued required by different organizational units,
such as production scheduling/planning, inventory control,
engineering, maintenance etc.
2. Traffic: - traffic involves transporting materials from supplies to a
firm’s store and also to user departments.
3. Receiving: receiving involves the following functions
Physical handling of incoming shipments
Identification of materials
Verification of quantities
Preparation of reports and
Routing of materials to sore for final utilization
4. Store: - store is responsible for physical control and maintenance of
all items. It also maintains records to immediately show locations,
damage obsolescence, theft etc.
5. Inventory control: Inventory control involves aggregate planning of
materials requirements to meet production plans. It includes keeping
detailed records of materials, maintenance of physical stocks, issuing
of requisitions to purchasing, checking materials requirements against
inventory records.
Organization of Materials Management
Once the relationship of materials management with regard to other
departments in the overall organization plan is finalized, the next step is to
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finalize the internal structuring of the department. The following alternatives
are available.
1.Organization Based on Commodities
Under this system of organization, items are classified according to their
nature such as raw materials, spare parts, components, finished goods,
imported items, and so on, and they are assigned to individuals.
2.Organization Based on Function
Here the materials management department is structured on the basis of
functions such as stores, transport, receiving, purchasing and so on. Thus:
Stores of different manufacturing divisions will be under one individual
who will report to the materials manager
All purchasing activities will be again under one individual who will
report to materials manager. This system, which permits specialization
in each function, is now followed by many organizations in different
countries.
3.Organization Based on Location
When an organization has several plants located in different parts of the
country, there are two alternatives.
Centralized organization located at the head quarters
Decentralized materials management set-up in each location
Advantages of Centralized organization for Multi-Plant Operation
Combining the requirements of plants and buying in bulk leads to
substantial reduction in costs
Inter – plant transfer of materials in an emergency is possible
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Surplus materials in one plant can be utilized in meeting the
requirements of another plant.
High order of skill can be expected
If decentralized, however, advantages will be:
Minimization of transportation cost and also time on condition that
distance between plants are significant
We can, however, develop systems combining the advantages of
centralization and decentralization. Under this system, control is
exercised at policy level by a central materials management staff
located at the head quarters. Continuous feedback is maintained on
the operation of the decentralized departments.
The head quarters may lay down policies, procedures, and systems for
all plants. A periodic reporting system may be established between the
plants and the head quarters. Organizations having multi-plant
operations would benefit by adopting blend of decentralized set-up
with centralized control
Inter Departmental Relationship
Basically, the materials management will have to work in close coordination
with production, marketing, and finance departments. They should work
towards the total organizational objectives. For instance, production
department will have to keep the materials management department
informed about its plans and schedule so that materials requirement can be
planned in advance. The adjustments in sales forecasting or changes in
schedule must be conveyed to materials management. The materials
management department must keep the production department informed
about the lists of suppliers, availability of new materials and anticipated
delays so that re-scheduling of production could be done costly stock outs
avoided.
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Marketing department will have to give advance information on forecasts
and special requirements so that planning can be done effectively. Materials
management through efficient operations can keep the prices at a
competitive level and thus help the marketing department in its operations.
In many organizations formal committee consisting of executive drawn from
marketing, production, finance and materials management departments are
formed to finalize annual sales targets, production, total budget, materials
budget, etc. formal organizational arrangements help in furthering inter-
departmental relationships.
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