Materials Management- An Overview

N.K.Agarwal

Materials Management (MM)

The integrated functioning of purchasing and allied activities so as to achieve the maximum coordination and optimum expenditure in the area of materials Importance of MM to any enterprise
Purchasing accounts for nearly 50% of its annual expenditure Nearly 80% of its working capital is tied up in inventory Inventory carrying cost is almost 25-30% per annum Materials represent 40-60% of the sale price Materials represent about 60-80% of the production cost of a product That even a 5% saving in material cost will substantially increase the profit margin of the enterprise

Materials Management (MM)

Activities generally included in MM
Stock control or Inventory control Planning and maintaining stocks of raw materials, tools, general supplies etc. Handling classification, codification, analysis etc Purchasing Developing sources of supply, finalising prices,placing orders, obtaining materials in the right time, contributing to standardisation, value analysis etc. Disposal of surplus, reclaimed, waste and scrap materials Storekeeping Receiving, storing, issuing etc. Material handling within the stores

Materials Management (MM)

Traffic or C & F Clearing incoming materials, both inland and foreign Dispatching finished goods

In addition, following functions also need close attention

Coordination among above major activities Liaison between designing, engineering, manufacturing and/or production Cost reduction and value analysis and liaison with marketing

Total Materials Management

Underlying principle is to provide effectiveness to a function that must start from the planning stage and will end when the finished product is finally distributed to meet the common goals of organisation
Planning sets the goal and indicates the available resources of finance Scheduling specifies the requirements, the quantum and the delivery schedules Purchasing and Procurement select and retain vendors and contracts with them Inspection and Quality Control conduct test checks for conformance to specifications Stores and Inventory Control determine inventory status, undertake maintenance and upkeep Materials Handling and Distribution Logistics control physical movement, flow and distribution and finally traffic, shipment and dispatch conclude with the final delivery

Materials Management (MM)

Combined Materials departments- Stores and Purchase: Advantages
Procurement at the right time Combined setup brings about greater coordination and increased sense of responsibility with regard to getting the right materials at the right time Lead time and stock control Variation occurring due to late delivery time, effect on production, necessity for adjusting maximum and minimum levels on stock control cards etc. better appreciated by a common department Cost reduction and productivity Objective of material management to increase productivity (or profit) through standardisation, reduction in procurement cost through bulk purchasing, avoiding obsolescence etc. can be more effective in a common department

Materials Management- Interfaces

Interfaces of MM are many A rational approach has a direct bearing on the cost-economics within a firm or industry MM has interfaces of two kinds
Internal, and External

Internal interfaces
Market forecasting Forecasting attempts to visualise what future would look like and most organisations forecast future demands for their products Forecast is used to determine production on the basis of existing or expanded resources including materials Short term forecasts are made for determining input-output levels Long term forecasts serve as links between the companys internal controllable factors and the external environment

Materials Management- Interfaces

Production Flow- process starts before the actual production and continues throughout the production and even after production Production demands uninterrupted flow of materials Finance MM is closely tied up with the availability of finance which is a scare resource for any company operation When financial difficulty arises, everybody becomes conscious of reducing costs, including material costs and services Affecting the materials budget

Materials Management- Interfaces

Inventory control Function of inventory control is to balance set-up costs of procurement with inventory carrying costs in order to see that total cost is kept to a minimum Inspection and Quality control Inspection and quality control starts even at the design stage when product quality is featured and has to be ensured throughout It often stretches beyond and even after sales Materials handling, traffic and physical distribution logistics MM must ensure that materials are physically distributed at the right time with the minimum handling and maintaining the physical flow of materials in a continuous fashion

Materials Management- Interfaces

Engineering Engineering is responsible for preparing the technical specifications for a companys products and the materials that go into them Prices paid for production materials and the costs to fabricate them are intimately related to their specifications

Materials Management-Interfaces
Marketing

Engineering

Matl Control

Timing Quantities

Purchasing
Make or buy

Source approval Inspection

Quality

Manufacturing
Distribution

Marketing

Materials Management- Organisation

MM provides an integrated systems approach to the coordination of materials activities and the control of the total material costs Several models have been in use in the industry Main purpose behind the object of structuring is to promote efficiency and economy of operations of the total organisation Organisational approach
Primarily concerned with the functional integration under one Chief Executive who may be held responsible for achieving all the materials objectives, deriving his power and authority from the top management

Materials Management- Organisation

Divisional approach
Modern approach is conventional approach where decision making rests with the top functionaries Routine works are assigned to various operating staff who are responsible for the implementation of the policies and programmes under the control and supervision of top and middle level managerial staff

Sub divisions are possible either by

Function, Location, Product,or Process or the stage of manufacturing

President
Executive Vice President

Manager F&A

Manager Materials

Manager Marketing

Purchasing

Traffic

Stores & Receiving

Inventory Control

Production Control

General organisation structure using MM Concept

Materials Management- Organisation

Organisation by Function
Functional division is a very common feature which allows for the efficient use of specialist skills in each of the phases of MM such as purchasing and procurement,receiving and inspection,stores and inventory control, traffic and warehousing etc.

Organisation by location
Particularly suitable in the case of multi-plant organisation which need a materials organisation of their own for efficient operations

Organisation by products
Has the advantage of using functional specialisation with product specialisation

Organisation by Process or stage of manufacture

Means a MM department for each process or stage of manufacture and is rarely met within practice

Multi-plant MM organisation
The extent to which purchasing activity be centralised at the corporate level is an additional problem for such organisations
Some firms centralise the activity almost completely buying materials for all plants at a central headquarters office Some others decentralise the function entirely giving each plant full authority to conduct all its purchasing activities However, majority of firms develop an orgnisation somewhere between these two extremes

Advantages of Centralisation
Greater specialisation Permits greater technical specialisation among buyers Leads to the development of more knowledgeable and more highly skilled buying personnel

Multi-plant MM organisation
Consolidation of requirements Facilitates consolidation at the corporate level for all plants Consolidation leads to larger purchases from a smaller number of suppliers, yielding more favorable prices and increased supplier service Increased purchase volumes also permit the negotiation of highly profitable long-term contracts for many production materials Easier Purchasing Coordination and Control Consolidation permits more direct administration and control of such important policies as those affecting supplier selection procedures, supplier relations, purchasing ethics, budget compliance, and the consistency of general purchasing practices among the various buyer groups

Multi-plant MM organisation
Effective Staff Planning Provides the concentrated staff know-how to improve purchasing research work All purchasing planning needs can be conducted in more depth with greater efficiency for all purchasing operations throughout the corporation

Decentralisation- Advantages
Advantages of Decentralisation in a multi-plant organisation
Easier coordination with operating departments Facilitates coordination of purchasing activities with the user departments within each plant Buyers can personally discuss purchase requirements with using supervisors any time they wish Develops closer working relationship between suppliers representative, buyers and plant users Speed of operation Purchasing department can respond more quickly to the users needs Better suited to handle emergency requirements from users

Decentralisation- Advantages
Effective use of local resources Helps in reducing material transportation costs by the effective use of local suppliers Plant autonomy Decentralisation of purchasing gives a plant manager full authority to handle this responsibility and as such the purchasing activity is highly cost effective

Centralisation - Factors
Similarity of material usage in each of the multiplants
Similarity of types of materials or markets facilitates the specialisation of buyers for the purchases Most firms find that their plants do use a number of the same classification of materials even though they may not exactly the same item

Plant department size

Centralisation is more advantageous when a firms individual plant purchasing departments are not large enough

Geographic dispersion of the plants

Closer a firms plants are situated geographically, the more feasible centralisation becomes

Materials Management Concept

MM concept has evolved to meet the following needs of the firms
Coordination of responsibilities of materials oriented department with the other interrelated departments Effective identification and control of total materials costs

MM provides
An integrated systems approach to the coordination of materials activities, and Control of total materials costs

MM concept
Advocates assigning to a single operating department all major activities which contribute to the cost of materials Objective is to optimise performance of the materials system as opposed to suboptimising the performance of individual operating units that are major parts of the materials system

Materials Management Concept

In practice, based on studies in U.S.A.
In 53% of the firms, materials manager reports to a general management executive President or General Manager, the executive vicepresident or the vice-president for administration In 43% of the firms, the materials manager reports to the manager of manufacturing In these firms, the materials function is a second-level activity

Materials Management Concept

Strength of the concept
Evidence supports the claim that a materials management type of organisation improves coordination and control of the activities that contribute to the material costs Operating effectiveness depends heavily upon the policies and performance of other materials activities Under MM concept, these matters become the responsibility of one top level executive If inventory levels or material costs are out of line, top management can immediately pinpoint the weak link in the materials chain Eliminates the buck passing possibilities prevalent in an organisation that divides the responsibility for the total material costs

President
Executive Vice President

Manager F&A

Manager Materials

Manager Marketing

Purchasing

Traffic

Stores & Receiving

Inventory Control

Production Control

General organisation structure using MM Concept

Materials Management- Profit Center

For the average firm, MM is responsible to spend over 50% of what the firm receives More amount is spent for purchase of materials and services than for all other expenses together Composite industry average for the cost of materials is around 57%
Differs from industry to industry

This highlights the profit making possibilities of the purchasing

Every rupee saved in materials is equivalent to a new rupee of profit An additional rupee from sales however is not a new rupee of profit Applicable expenses must be deducted from the sales to determine the net profit

Materials Management- Profit Center

Cost of materials can vary 10-15% depending upon the skill with which the purchasing function is organised and operated Also additional profit from purchase savings can normally be made without increases in expenditure
On the other hand, additional profit from increased sales normally entail both increases in expenses and increases in risk of capital

American Management Association has suggested 2% savings of the annual purchasing costs

Purchasing expense as a percentage of sales income Industry Food industry Textile industry Petroleum and coal products Primary metal industries Fabricated metal products Electric and electronic equip. Instruments & related products All industries Matl to Sales ratio 71.3 60 84.1 63.3 51 44.5 36.3 57.6

Materials Management
Prime objective of Materials Management is to reduce total costs associated with the acquisition and management of materials Effective control over costs can be obtained only when a firm is analysed and controlled as a total operating system Goal of materials management is
To obtain materials at the lowest possible price consistent with both quality and continuity of supply To maintain minimum inventory of materials so as to free working capital for other useful purposes, and All activities should be carried out at a minimum of cost

References
Materials Management: A.K.Datta Purchasing & Materials Management: D.W.Dobler / Lamar Lee / David N. Burt Purchasing & Materials Management: N.K.Nair

Thank You