Materials Management

CHAPTER 1
INTRODUCTION

1.1 Materials Management: An Overview

The significance of materials to the efficient operation of organizations is increasing more

than ever. Shortages of raw materials, components, and products have been experienced on a
global scale. With demand exceeding supply, the price of many materials has increased
significantly.

Every organization requires materials for its operation, and there will always be the necessity
for some stores and stock to be maintained, either for immediate consumption, re-use, or
conversion manufacturing organizations require a variety of raw and other materials, that must
be acquired, stored, and handled. Similarly service organizations need materials equipment, and
some stores to run heir operations. In both cases enough stocks of materials and equipment have
to be maintained to meet at least short-run requirements. These stocks or inventory are cash in
kind that need at most care. Therefore their safe custody, up keep and maintenance, handling and
proper supply are of great importance.
Almost all organizations, regardless of their nature, are demanding proper and efficient
management of materials. Furthermore, both real and contrived shortage of materials, including
food stuffs, metals, and energy resources, have made materials management an important and
difficult organizational function. The reason is that material, especially components and sub-
assemblies have specific uses and have low flexibility. And they need more care in procurement,
storage handling, and distribution.
What is Materials Management?
Materials management is concerned with the flow of materials from suppliers to a firm's
store, to production department and the subsequent flow of products through distribution centers
to the user. Materials management is, thus, an activity that involves planning acquisition, storage,
control and disposition of inputs like raw materials and in-process goods which go into the
production process directly and also capital equipment tools and accessories, spare parts and
other indirect materials which are required for everyday operations. It is designed to ensure

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supply of materials of the right quality, in the right quantity, at the right time, at the right price,
and at the right place acquired from the right source in order to ensure economy, efficiency, and
smooth operation of an organization.
The Objectives of Materials Management/Functional objectives
Poor performance may jeopardize any plant’s capacity to provide the goods and services that
the society so urgently requires. The primary objective of materials management is thus to
provide service and support to operating functions, mainly to production and operations,
accordingly, materials management is established to achieve the following objectives.
Purchasing and Procurement.
Materials should be purchased in required quality and quantity, at a minimum cost, and to be
made available in time. However, as purchasing objectives vary in relative importance from one
organization to another, one may concentrate efforts more on one rather than the other. When
raw materials are available at a price, price objective is paramount. Here the key objective is to
procure raw materials at a minimum price and such depends on intelligent timing of purchases.
When the materials to be procured for the manufacture of some components and parts that are to
be used in complex machines are scarce, timely availability dominates. Still in others such as
aircraft and ship building industries, consistency in quality and reliability may be the sole
criterion because of the complexity of the end products.
Stores and Inventory Management
Although inventory function is more complex, more subtle, and the balances of costs and gains is
much more difficult to find out, one of the objectives of materials management is to have the
correct quantity and right quality of material on hand at the time required. Keeping the right
balance of inventory is important because when inventory turnover is high, storage and carrying
cost are low. Sometimes, however, inventory turnover may be the turning point because we stock
not because thousands of spares and parts go to make a complicated machine but because we
keep them ready for after sale customer service. Here striking a balance between stock-outs and
built-in- inventory becomes the most important materials management objective. The objective
of stores and inventory management is achieved by proper receipt and inspection of materials,
issue and dispatch, storage and storekeeping, stock records and stores accounting identification
and coding, materials control, handling and traffic, and disposals of surpluses, wastes and
obsolete materials.

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Materials Management

Continuity of Supply
In automated processes where costs are rigid and are not easily amenable to reduction due to
lack of production materials continuity of supply is of paramount importance. This fore shadows
all other objectives, because idle time costs of men and machines push up overall costs of
production and expediting supply means additional transport costs.
Quality of materials.
Where quality of materials presents cost plus production engineering problems, it may well
become one of the prime objectives of materials management, where other objectives are
sacrificed at quality cost.
Good supplier relations
Good supplier relations greatly depend on the product or service reputation of the company.
However, suppliers respond favorably to fair treatment, they are uncooperative and unwilling if
indifferently treated. The materials management can thus improve relations by providing the
required stimuli and reward for their better performance.
Product development and new products
The discovery and improvements of materials frequently leads to new products development
and lower costs on existing products. Materials and components that will do better or equivalent
jobs at a lower cost. Product efficiency is basically a compromise between engineering design
and economic objective of management. Again a program designed to find ways and means of
utilizing the by-products or wastes is always profitable and materials management can render
substantial help by adding new products to the existing products-line. Besides materials
management can also help in price, demand and requirements fore casting Materials
management has intimate knowledge of the market conditions through daily contacts with
suppliers. Therefore by analyzing and interpreting data of past sales, seasonal variations in
prices, availability and demand for materials, it helps to forecast the future trends and plane
material requirement accordingly.
1.2 Benefits of Materials Management
The major benefits or materials management are described below.
i) Maximum Company profits or Minimum operating costs.
Like any other organization function, materials management is responsible for minimizing
operating costs or maximizing company profit or improving customer and social service. It has

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significant potential for increasing company profits or social service. Cost reduction can be
achieved by the following means:
- Decreasing parts shortages (resulting in more efficient use of labor, machines and
materials).
- Reducing inventory levels through improved controls.
- Lowering transportation costs as a result of using minimum cost shipping methods.
- Reducing materials obsolescence through greater control of inventory.
- Lowering purchase prices and total acquisition costs through the use of quantity
buying and other techniques.
ii) Improved customer service
Customer service can be defined as a customer-oriented company philosophy that integrates and
manages all elements of customer relations within a predetermined optimum cost-service mix so
as to build goodwill. Many companies rank customer service second in importance only to
product quality. A common saying is that "the customer is the king".
iii) Interaction of individual manager objectives
Every manager is responsible for meeting the overall objectives of the organization, but each
manager recognizes that future success in the organization is dependent upon the achievements
of her or his own department. In a fragmented materials organization, Individual supervisors
concentrate on the immediate objectives at the sacrifice of long-term goals; they fail to cooperate
with other groups in order to achieve their own immediate objectives.
John J. Davin discusses the problem of conflicting objectives as follows:
There is a natural tendency for functional, departments-purchasing, production and inventory
control, physical distribution- to look in ward to accomplish their objectives. The purchasing
manager prepares his budget, plans, and objectives each year and is held accountable for his
accomplishments. Likewise the inventory manager is expected to improve turns in order to make
his profit contribution. Without coordination these two managers may end up working against
each other-one trying to bring materials into the plant on a volume basis, the other trying to
prevent materials form accumulating ahead of production. Materials management is a natural
solution to the dilemma. Instead two managers reporting to different supervisors with dissimilar
goals, a materials manager becomes the sole decision maker for materials as they flow through
the organization.

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iv) Improvement of resource control

A goal of any organization, whether its a profit oriented company or a non-profit organization, is
control of the organizations resources. Through coordinated control of resources, materials
managers successfully contribute to overall company objectives. Generally these resources are
grouped into the fours M'S: materials, Machines, Manpower and money.
Materials
Control of materials is crucial for any organization with a materials management function, and
this control relates to all areas. The purchasing group is responsible for procurement of materials
to provide on-time deliveries, thus preventing costly disruptions in operations. Inventory control
may be responsible of controlling thousands of items. The materials group tries to achieve
optimum inventory turnover and minimum inventory levels while maintaining fully supplied
company operations. Material lead times can be shortened with good communication among
materials sub functions. Greater control of materials will reduce obsolescence.
Machines (Facilities)
Capacity requirements planning, for both the short term and the long term will develop new
facilities needs. Planning must be an ongoing activity to assure capacity availability when
required. As the same every effort must be expended to provide optimum use facilities by
efficient operation control techniques (i. e. efficient scheduling of machines, manpower,
overtime hours and improved facilities planning can contribute significantly to the maximum use
of company capacity). The need for new buildings and equipment can be eliminated or
minimized big effective control of operations.
Manpower
No Company can grow or prosper without capable people. Usually with a fragmented materials
management organization, individuals within each group have less chance for broad
development; but as members of an integrated materials organization have a great opportunity to
gain know, ledge of the various areas. Personnel can be rotated and promoted between the sub
functions.
Money
Materials management provides a systems-oriented structure of minimizing monetary
expenditures and controlling the management of money. In many companies the materials
management organization decreases monetary problems by minimizing inventories, reducing

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Materials Management

total cost of procurements, diminishing costs of materials handling and physical distribution,
instituting effective programs for measuring and controlling the various sub function activities.
v) Reduction of duplicated efforts
A fragmented materials organization has a natural duplication of activities built into it. All of
the materials sub functions are interrelated, and the overlap of activities inevitably contributes
to repetition of efforts. Duplications are not unusual in records and data, in which each group
maintains its own information. Also, duplication commonly occurs when may people in the
company are expediting orders.
1.3 Systems Approach to Materials Management/The Concept of Integrated Materials
Management
What is a system? a system is a set of elements, which are interrelated and integrated in order to
achieve a certain objective.

Input Processing Output

Feed Back /Control/

The concept of an integrated material management

Material management is a system approach towards the management of materials as it
advocates the management of Purchasing, Receiving, Storage, Inventory control and other
material activities under one division in an integrated manner.
Traditionally, these materials management activities are managed independently under the
supervision of different functional heads.
The systems approach to materials management considers the interrelation and
interdependence of materials management with other internal functional/ departmental
activities and with the elements in the in the external environment

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Materials Management

Technical. Legal
Environment Environment

Other
Subsystem

Marketing Financial sub

Sub-System System

Cultural & Material Political

social sub Management Environ
system Subsystem ment

Personnel Sub
Production sub system
system
Economic
Environment

Materials Management is a management activity, which is primarily concerned with the

efficient flow of materials to, through, and out of an organization for optimum use of materials.
Materials required for manufacturing have to match the production schedules that must be
related to marketing possibilities the function therefore, covers maximum utilization,
conservation, elimination of waste, avoidance of unnecessary delays and assurance of right
quality and needed quantity at an economic cost.
There is no good deal of understanding with regard to its scope. Some emphasis the
acquisition aspect; some refer to it as inventory control and stores management; some again
attach great importance only to materials logistics and movement control and handling aspects.
However as the term materials management has now been universally accepted, and is being
widely used, the only thing that has to be answered is the question of integration. The general
trend is, therefore, towards an integrated systems approach, which covers the availability, flow,
conservation, utilization, quality and cost of materials.
Materials Management is responsible for planning, acquisition, storage, movement and
control of materials and finally goods so as to optimize personnel and physical facilities and

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Materials Management

capital, while providing better customer service in its perfect harmony with the organizational
goals. It involves the provision of the right materials at the right price of the right quality, in the
right quantity, at the right time, and from the right source. It is, therefore, a systematic and
dynamic approach for the flow of materials to, through and out of an organization throughout its
flow cycle.

1.4 Organization for Materials Management

General manager

Materials Management
Department

Handling and
Procurement Supply
Maintenance

Purchasing Receiving Stores Traffic Scrap and

surplus disposal

Material planning
and inventory
control

Organization structure for materials management

Organizing may be defined as a process of identifying, classifying and grouping various

activities establishing authority- responsibility relationship to create a structure capable to
accomplish predetermined objective organization structure is this an established pattern in which
various parts of an organization are interrelated and interconnected. The activities of materials
management are similarly grouped and integrated to form the organization structure. The
underlying purpose of organization, logically, is to facilitate efficient operation of each work
group. Although the activities of Materials Management are inherent in all organizations it
importance may vary from one organization to another organization. The following

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organizational chart shows a structure where materials management plays a major role in
achieving primary objectives of an organization such as construction companies.
Functions included in Materials Management
The following are typical functions of Materials management
Purchasing
Purchasing department has the responsibility of acquiring the kinds and quantities of the right
quality materials authorized by the requisitions issued by Production scheduling, inventory
control, engineering, maintenance and any other department or function requiring materials.
Receiving
The receiving department is responsible for the physical handling of incoming shipments, the
identification of such material, the verification of quantities, the preparation of reports, and the
routing of the materials to the place of use or storage.
Materials planning and inventory control
This is the aggregate planning of material requirements to meet the brood, overall production
Overall production plan, it also involves keeping detailed records of parts and production
inventories and non production materials-such as expendable tools office supplies and
maintenance of physical stocks, and issuing requisitions to the purchasing department. Material
requirements determined by production control are checked against the inventory records be fore
requisitions are sent to the purchasing department.
Stores
This function physically controls and maintains all inventory items appropriate physical
safeguards must be established to protect items from damage, unnecessary obsolescence due to
poor stock rotation procedures etc. Records must be maintained which enable immediate location
of items.
Traffic
Transportation costs have an increasing influence on material costs in recent years Traffic is
responsible for transporting various materials from suppliers’ stores to a firm’s stores, It also in
dudes the transportation of materials from their point of recent or storage to the point of usage.
Scrap and Surplus Disposal
Material managers are concerned with the effective, efficient and profitable disposal of scrap
surpluses, obsolete, and waste materials generated within the firm. In addition to the desire to

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obtain good value for disposals, materials management is responsible to protect the environment
from pollution.
Material handling and maintenance
Materials management concerns itself with the physical movement of materials from their
original source to their point of use. More efficient distribution and smoother work flow are
some of the results of efficient handling maintenance of materials is also included in the group of
the functions of materials management maintenance department must keep its equipment in good
operating condition long beyond what could be considered “ beyond economical repair’’.
Relationship of Purchasing with other department and External institutions
1.5 Make, Buy or Lease Decisions
An organization may be in need of different raw materials, parts, components or products
which one processed and or assembled in to a finished product. In sourcing a part or product it
either purchases from an outside source or the firm may seek to undertaken production within the
firm’s own plant for reasons of cost, convenience and control, which outside supply source does
not always provide. Accordingly any firm has the following three basic alternatives:
1. Buy the parts or products completely from an outside source.
2. Make all the parts or products within the firm.
3. Buy some components parts, materials or products and make the remaining
and assemble others.
Make or Buy Decisions
Any manufacturing concern may be contracted with the problem of choosing one of these
alternatives. The decision problem often arises when a new product is added to the production
line or existing products are redesigned it also arises when the firmnoteces that other firms are
manufacturing the same part more economically, or it may also arise then the supplier fails to
supply satisfactorily. Still in other cases, the issue may come up as a planned solution to the
problem of idle production capacity.
Practically, a manufacturing enterprise can neither buy nor make all the products or components
completely. As a general rule, therefore, a manufacturing firm will make some of its parts or
components and buy others from outside sources either in a semi finished or finished state. Cost
considerations and conditions in the supply market may suggest a change even when the part was
formerly purchased.

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Although it is not the sole factor cost comparison is the most important consideration in
deciding whether to make or buy. The estimated total cost of production must be compared with
the total cost of purchase to know the pay off. The policy of never make what you can buy may
serve no purpose unless it is justified by economic analysis. It is apparent that when a make-or-
buy, decision has to be made, what matters is not the purchasing policy or source of supply but
the consolation and cooperation of production cost, quality, and other technical departments .A
simple make or buy decision may have such economic complications as that may effect the total
organization interest on a much wider scale which can even overthrow a product or threaten
product stability in a highly competitive market

However as cost comparison is not the sole factor it will be found that there are certain
factors on which make or buy decisions can be based. Quantity, quality, availability and
flexibility of supply, control of trade secrets, patent, research and development and alternative
sources of supply are the important factors that enter in to considerations to reach a decision,
either to make or buy.
Quantity: requirements of too large of a quantity would lead to ‘make’ rather than ‘buy’
while too small quantity does not justify such a decision. But quantity alone may not prove to be
the best and most economical solution to be the problem.
Quality: If the quality of the bought-out components does not differ widely from the made
out ones, the quality factor may not make the decision infavour of making. However if there is a
marked quality difference between the bought out and made out components and if the outside
supplier can not ensure the required quality and when the company can not allow even a slight
difference in the quality due to technical complexity then the decision is in favor of making. To
the contrary when the slight differences do not affect the final product significantly, the decision
may be infavour of buying.
Reliability: It refers to the capacity of outside suppliers, interms of time, and state of
delivery, to assure a regular and steady supply in large quantities and of the right quality. If
suppliers can not assure a ready supply and fail to keep up the deliver schedules the balances
usually swings to buying because this adversely affects production plans.

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Availability and flexibility of supply: This is another factor that has to be considered in a
decision of making or buying. The presence of many sellers and the flexibility of buyers often
provide a strong stimulus to make and vice versa.
Control of Trade Secrets and patents: If the company wants to protect the unpatented
supplier to have any knowledge of the designs, the case for making is obvious. On the other
hand if the company feels that the design and patent of the components concerned are not so
important as the design and the patent of the final Product it may be desirable to follow a policy
of buying.
Technical factor: when special technical expertise is not available within and around the
organization, the decision may be infavour of buying. Besides when the time allowed is short
and when there is shortage of space and skilled manpower, the decision still favors buying.
1.6 Pitfalls and Problems of Materials Management
The following review of pitfalls and problems of surrounding materials management programs
can help managers, to cope with such situations
Lack of qualified managers
Capable managers with broad experience and knowledge of various materials sub functions
generally have not been available. Improved education and cross-training personnel within the
materials organization have alleviated this problem.
Insufficient upper management support
The success of an integrated materials management program is dependent upon upper
management's understanding and continuous support. This is especially true in establishing a
new organization. Management requires extensive education and understanding regarding the
program's philosophy. What it is and what it is not. No one should presume that because a
company has established a materials management fully understands the principles and functions
involved. Programs can achieve only mediocre success without executive level support.
Improper planning and implementation
Ineffective planning and implementation can destroy programs. Desire alone or the use of a new
life for an unchanged organization will not ensure success. Management must understand the full
requirements of instituting a total materials programs. This is especially true of the time needed
to successfully implement new functions. Failures have been traced to a desire for immediate
results, which required and produced a shotgun approach disorganized management looked for

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immediate solutions at the expense of planned improvement followed by the innovations of new
systems.
Lack of credibility
The performance of the materials function might be criticized for two shortcomings: trouble
avoidance and opportunism. The trouble avoidance context is the more familiar one: many
people inside an organization are inconvenienced to varying degrees because the materials
function, avoiding the effort required or providing in accurate information does not meet
minimum expectations. Or the function will opportunistically satisfy only requests that can be
resolved easily.
In such situations, marketing is repeatedly called by customers whose orders were not shipped on
the date set by materials management. Operation supervisors are unhappy because of frequent
part shortages machines and employees are idle because of poor scheduling. Finance and
engineering complain about materials management not meeting commitments. The materials
organization must establish a record of dependable performance; other groups within the
company should be able to reply upon the information it provides.

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