Materials

Management
Introduction
 Every organization, big or small, private or public, depends on
materials and services from other organizations. These materials
and services are obtained through exchange of money.

 Various materials such as raw materials, consumables and spare

parts are required to be purchased and made available to the
shops / users when needed to ensure uninterrupted production.

 Therefore, efficient management of input materials is of

paramount importance in a business organization for maximizing
materials productivity, which ultimately adds to the profitability of
the organization.
Meaning of Materials Management
 Materials management can be defined as the planning,
organizing and controlling of several important activities, such
as, purchasing, storage, inventory management, and material
handling, among others to ensure that the right quality and
quantity of materials are obtained from the right supplier, at
the right price and are available when needed to avoid
uninterrupted production.
 Scope or Functions of Materials Management
 The scope or functions of materials management can be
explained below:
1) Materials planning and control: This involves making decision
in advance regarding what materials to purchase, when to
purchase, how much to purchase, where to purchase, how to
purchase and ensuring that each decision is implemented
according to the original plan. Materials planning and control is
realized based on the sales estimate and production plans.

2) Purchasing: This involves selection of the right suppliers of

materials, establishing price and terms, placing order,
inspecting and receiving order, approval and payment to the
supplier, performance review, and maintenance of cordial
Scope or Functions of Materials Management
3) Stores management: This involves physical control of
materials, preservation of stores, minimization of waste and
damage, maintenance of stores records, proper location and
stocking. A store is also responsible for the physical
verification of stocks and reconciling them with book figures.

4) Inventory control: Inventories represent those items, which

are either stocked for sale or they are in the process of
manufacturing or they are in the form of materials, which are
yet to be utilized. An effective control on inventory is a must to
ensure uninterrupted production.
Scope or Functions of Materials Management
5) Standardization: Standardization means producing maximum
variety of products from the minimum variety of materials,
parts, tools and processes. It is the process of establishing
standards or units of measure by which extent, quality,
quantity, value, performance etc. may be compared and
measured.
6) Simplification: The concept of simplification is closely related
to standardization. Simplification is the process of reducing
the variety of products manufactured. Simplification is
concerned with the reduction of product range, assemblies,
parts, materials and design.
Scope or Functions of Materials Management
7) Specifications: It refers to a precise statement that reflects
customer’s requirements. It may be related to a product,
process or a service. Example of specifications for a HP
laptop are: Windows 10 Home 64; 8th Generation Intel Core
i7 processor, 16 GB memory; 1 TB HDD, etc.

8) Value analysis: Value analysis is concerned with the costs

added due to inefficient or unnecessary specifications and
features. Therefore, value analysis is a technique adopted to
reduce the cost of materials before placing the order. The aim
of value analysis is to reduce the cost of materials without
compromising the required standard.
Scope or Functions of Materials Management
9) Ergonomics (Human Engineering): This is concerned with
designing and arranging human tasks, workspaces, man-
machine systems, equipment, and materials so that the users
can interact with them efficiently and safely.
Factors influencing the activities of material planning

 There are many factors, which influence the activities of

material planning. These factors can be classified as macro
and micro systems.
1) Macro factors: Some of the micro factors which affect
material planning, are price trends, business cycles
government policy, etc.

2) Micro factors: Some of the micro factors that affect material

planning are plant capacity utilization, rejection rates, lead
times, inventory levels, working capital, delegation of
powers and communication.
Techniques of Material Planning
 The undermentioned two techniques are usually used for
materials planning, namely: (i) Bill of materials technique, and
(ii) Past consumption analysis technique.

Bill of materials technique

 A bill of material indicates the name, part number, and usage
of each component and assembly in which it is to be used.

 Each product has a bill of materials since each the product has
its own requirements dependent on its design and according
to the engineering design and the components consisting of
standard parts needed for a particular product to be
manufactures.
Techniques of Material Planning
 If a chair is to be prepared it can be split into (i) legs, (ii)
arms, (iii) scat, and (iv) back rest. Each of the parts of the
chair will have separate specifications and naturally each
may have its own manufacturing design.

 According to the specifications and design the bill will be

drawn on such a composite information for the product-the
chair is this case. In a bill of materials a product, the
components required are listed with their complete
specification so that the materials required may be
procured according to the specifications.
Techniques of Material Planning
 When any of the organisation receives a word order or a
production programme is finalized, the concerned foreman
prepares a list of all the materials required for the execution
of the order or manufacturing of the product as per
production programme.

 This list of materials so prepared is known as known as a

Bill of Materials which includes all the details as regards to
quality, quantity, code number, drawing number and other
necessary specification, etc.
Techniques of Material Planning
 When any of the organisation receives a word order or a
production programme is finalized, the concerned foreman
prepares a list of all the materials required for the execution
of the order or manufacturing of the product as per
production programme.

 This list of materials so prepared is known as known as a

Bill of Materials which includes all the details about quality,
quantity, code number, drawing number and other
necessary specification, etc. Once the production
programme Is finalized each product is exploded (split) into
its basic requirements with the help of its bill of materials.
Techniques of Material Planning
 The number required per item is multiplied to be number to
be produced in order to arrive at the total requirement.

 This is very effectively done with the help "of demand

forecasts" because the very basis for materials planning is
the forecast of demand for the end-products.

Past consumption analysis technique

 Where materials are consumed on continuous basis, the
technique oi past consumption analysis for materials
planning is conveniently used by the organisation.
Techniques of Material Planning
 According to this technique Projection of required materials is
made based on the past consumption data, which is analysed
taking into account the past as well as projected production
plans.

 Statistical tools like mean, median, mode and standard

deviation are used in analyzing the past consumption,
projecting the future and tackling mild as well as wild
fluctuations in consumption.

 This technique can be successfully used in process industries,

such as food, beverages, chemicals, pharmaceuticals,
petroleum, textiles, and paper products, etc.
Techniques of Material Planning
 This technique can be fruitfully used for materials being used
on continuous basis and also for those materials which are
either used directly or indirectly in the production process.
Objectives of purchasing
 The basic objective of the purchasing function is to ensure
continuity of supply of raw materials, sub-contracted items and
spare parts and to reduce the ultimate cost of the final product.

 The objectives of the purchasing can be outlined as under the

following:
1) To materials, suppliers and equipments available at the
minimum possible costs: The minimization of the input cost
increases the productivity as well as the profitability of the
operations.
2) To ensure the continuous flow of production through
continuous supply of raw materials, components, tools etc.
with repair and maintenance service.
Objectives of purchasing
3) To increase the asset turnover: The investment in the
inventories should be kept minimum in relation to the volume
of sales. This will increase the turnover of the assets and thus
the profitability of the company.
4) To develop an alternative source of supply: Exploration of
alternative sources of supply of materials increases the
bargaining ability of the buyer, minimization of cost of
materials and increases the ability to meet the emergencies.
5) To establish and maintain the good relations with the
suppliers: Maintenance of good relations with the supplier
helps in evolving a favourable image in the business circles.
Such relations are beneficial to the buyer in terms of getting
reasonable price, preferential allocation of material etc.
Objectives of purchasing
6) To achieve maximum integration with other department of the
company: The purchase function is related with production
department for specifications and flow of material, engineering
department for the purchase of tools, equipments and
machines, marketing department for the forecasts of sales
finance department for the purpose of maintaining levels of
materials and estimating the working capital required,
personnel department in order to manage and develop the
personnel of purchase department.
7) To train and develop the personnel: Purchasing department is
equipped with different types of personnel. The company
should try to enhance employee commitment and
performance force through training and development.
Objectives of purchasing
8) Efficient record keeping and management reporting: Paper
processing is an important aspect of purchase function. Such
paper processing should be standardized so that record
keeping can be facilitated. Periodic reporting to the
management about the purchase activities justifies the
independent existence of the department..
Parameters of purchasing
 The success of any manufacturing activity is largely
dependent on the procurement of raw materials of right
quality, in the right quantities, from right source, at the right
time and at right price popularly known as ten ‘R’s’ of the art of
efficient purchasing.

 They are described as the basic principles of purchasing.

There are other well known parameters such as right
contractual terms, right material, right place, right mode of
transportation and right attitude are also considered for
purchasing.
Parameters of purchasing (Cont’d)
1) Right price: It is the primary concern of any manufacturing
organization to get an item at the right price. But right price
need not be the lowest price. One of the best way to
determine the right price is through ‘tender system’. The
‘tender system’ of buying is normally used in public sector
organizations and it is aimed at identifying the lowest bidder.
Price negotiation also helps to determine the right prices.

2) Right quality: In order to determine the right quality of a

product, sampling schemes should be useful. The right quality
is determined by the cost of materials and the technical
characteristics.
Parameters of purchasing (Cont’d)
3) Right time: To determine the right time, the purchase manager
should have lead time information for all products and analyze
its components for reducing the same. Lead time is the total
time elapsed between the recognition of the need of an item
till the item arrives and is provided for use.

This consists of pre-contractual administrative lead time,

manufacturing and transporting lead time and inspection lead
time. Since the inventory increases with higher lead time, it is
desirable to analyze each component of the lead time so as to
reduce the first and third components which are
controllable.
Parameters of purchasing (Cont’d)
4) Right Source: The source from which the material is procured
should be dependable and capable of supplying items of
uniform quality. The buyer has to decide which item should be
directly obtained from the manufacturer. Source selection and
vendor rating play an important role in buyer-seller
relationships.
5) Right quantity: The right quantity is the most important
parameter in buying. Concepts, such as, economic order
quantity and economic purchase quantity will serve as broad
guidelines. But the buyer has to use his knowledge,
experience and common sense to determine the quantity after
considering factors such as price, discounts, availability of the
item, etc.
Parameters of purchasing (Cont’d)
6) Right attitude: Developing the right attitude is also essential
consideration in purchasing. The purchase manager should
be innovative and his long-term objective should be to
minimise the cost of the ultimate product.
7) Right contracts: The buyer has to adopt separate policies and
procedures for capital and consumer items. He should be able
to distinguish between indigenous and international
purchasing procedures. He should be aware of the legal and
contractual aspects in international practices.
8) Right material: Right type of material required for the
production is an important parameter in purchasing.
Techniques, such as, value analysis will enable the buyer to
locate the right material.
Parameters of purchasing (Cont’d)
9) Right transportation: Right mode of transportation have to be
identified as this forms a critical segment in the cost profile of
an item. It is an established fact that the cost of the shipping of
sand, cement etc., is normally more than the cost of the item
itself.
10)Right place of delivery: Determining the right place of delivery,
like head office or works, would often minimize the handling
and transportation cost.
Special purchasing systems
 The following are some of the important purchasing systems:
1) Forward buying: Forward buying is also called forward
committing. It is a purchasing system where materials are
purchased by an organization in quantity excess to demand to
counter future price rise. This is practiced by manufacturing
organizations when they find suppliers selling the materials at
a discounted price, which makes them to purchase the items
bulk. However, this depends largely on several factors, such
as storage facilities, nature of materials and financial policies,
etc.
Special purchasing systems
2) Tender buying: In simple terms, tender buying means
selecting a supplier out of many sources available. This
system is applied in both private and public sector
organisations in which many suppliers are invited to submit a
bid to supply products or services. In most cases, an official
payment is needed by the suppliers to support and secure the
tender bid engagement. An evaluation team will go through
the tenders and decide who will get the contract to supply
materials needed. However, care has to be taken that the
lowest bidder is responsible party and is capable of meeting
the delivery schedule and quality requirements.
Special purchasing systems
3) Blanket order system: It is an agreement to provide a required
quantity of specified items, over a period of time, usually for
one year, at an agreed price. Deliveries are made depending
upon the buyer’s needs. This system allows a buyer not to
hold more stock than necessary at any time, and avoids the
administrative expense of processing frequent purchase
orders. The supplier, under the system maintains adequate
inventory to meet the blanket orders.
Special purchasing systems
4) Zero stock: Some manufacturers try to operate on the basis of
zero stock and the supplier holds the stock for these them.
This system could work well if the seller holds the inventory
and if the two parties work in close coordination. However, the
price per item in this system will be slightly higher as the
supplier will include the inventory carrying cost in the price.
5) Rate contract: The system of rate contract is mostly applied in
public sector organizations and government departments. It is
common for the suppliers to advertise that they are on ‘rate
contract’ for the specific period. After negotiations, the seller
and the buyer agree to the rates of items.
Special purchasing systems
6) Reciprocity: Reciprocal buying means purchasing from one’s
customers in preference to others. It is based on the principle
Do unto your customers as you would have them do unto
you”. In a reciprocal buying agreement, the buyer agrees to
purchase one product from the seller provided the seller of
that product agrees to purchase another product from the
buyer. This approach has two major benefits: first, it maintains
the supply to the company – finding an alternative supplier to
completely replace the previously internally sourced supplier
could potentially cause major disruptions while any new
supplier gained a better understanding of our requirements;
and, second, providing the potential for a revenue stream for a
defined period can make the sale more attractive to possible