EFFECTIVE MATERIAL MANAGEMENT

INTRODUCTION TO MATERIAL MANAGEMENT

Materials management is the branch of logistics that deals with the tangible
components of a supply chain. Specifically, this covers the acquisition of spare parts and
replacements, quality control of purchasing and ordering such parts, and the standards
involved in ordering, shipping, and warehousing the required parts.

Materials management is part of logistics and refers to the location and movement
of the physical items or products. There are three main processes associated with
materials management: spare parts, quality control, and inventory management. Materials
management is important in large manufacturing and distribution environments, where
there are multiple parts, locations, and significant money invested in these items.

The first process in materials management is related to spare parts. A detailed

business process is required to determine the order point for the spare parts, identify the
ideal quantity to order, process receipt of the parts, and then make sure they are in the
correct place. Spare parts are integral to the continuing operation of production lines and
related equipment. Poor management of this process can cause downtime and loss of
production.

Every organization, big or small depends on materials and services from other
organizations to varying extents. These materials and services are obtained through
exchange of money.

The various materials used as inputs such as raw materials, consumables and
spares, are required to be purchased and made available to the shops or users as and 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.

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A firm’s profit margin reflects management’s ability to control costs in relations

to revenue. The asset turnover rate reflects management’s ability to effectively utilize the
firm’s productive assets. Hence a firm can improve ROI in three ways:-

 By reducing cost
 By getting more sales from available assets
 By combination of above

The fundamental objectives of the Materials Management function are acquisition

of materials and services, often called the famous 5Rs of Materials Management:

 of the right quality

 in the right quantity
 at the right time
 from the right source
 at the right time

Areas of Concentration

Goals:

The goal of materials management is to provide an unbroken chain of components

for production to manufacture goods on time for the customer base. The materials
department is charged with releasing materials to a supply base, ensuring that the
materials are delivered on time to the company using the correct carrier. Materials is
generally measured by accomplishing on time delivery to the customer, on time delivery
from the supply base, attaining a freight budget, inventory shrink management, and
inventory accuracy. The materials department is also charged with the responsibility of
managing new launches.

In some companies materials management is also charged with the procurement

of materials by establishing and managing a supply base. In other companies the
procurement and management of the supply base is the responsibility of a separate
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purchasing department. The purchasing department is then responsible for the purchased
price variances from the supply base.

In large companies with multitudes of customer changes to the final product over
the course of a year, there may be a separate logistics department that is responsible for
all new acquisition launches and customer changes. This logistics department ensures that
the launch materials are procured for production and then transfers the responsibility to
the plant materials management.

Quality Assurance

A large component of materials management is ensuring that parts and materials

used in the supply chain meet minimum requirements by performing quality assurance
(QA). While most of the writing and discussion about materials management is on
acquisition and standards, much of the day to day work conducted in materials
management deals with QA issues. Parts and material are tested, both before purchase
orders are placed and during use, to ensure there are no short or long term issues that
would disrupt the supply chain. This aspect of material management is most important in
heavily automated industries, since failure rates due to faulty parts can slow or even stop
production lines, throwing off timetables for production goals.

Materials mangers are rarely responsible for the direct management of quality
issues concerning the supply chain or the customer. A separate quality function generally
deals with all issues concerning the correctness of the parts to the finished product and
the final product.

Standards

There are no standards for materials management that are practiced from
company to company. Most companies use ERP systems such as SAP, Oracle, BPCS,
MAPICS, and other systems to manage materials control. Small concerns that do not
have or cannot afford ERP systems use a form of spreadsheet application to manage
materials.
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Materials management is not a science and depending upon the relevance and
importance that company officials place upon controlling material flow, the level of
expertise changes. Some companies place materials management on a level whereby
there is a logistics director, other companies see the importance level as managing at the
plant level by hiring an inventory manager or materials manager, and still other
companies employ the concept that the supervisors in the plant are responsible
accompanied by a planners.

Because there are no standards there is only best practices for any particular
business sector that are widely used. For example, the generations of releases to the
supply base come in many forms from the lowest level that requires sending facsimiles
and PDF files, the EDI information exchange, to the ultimate practice of a supplier web
base site.

Materials Management Challenges

The major challenge that materials managers face is maintaining a consistent flow
of materials for production. There are many factors that inhibit the accuracy of inventory
which results in production shortages, premium freight, and often inventory adjustments.
The major issues that all materials managers face are incorrect bills of materials,
inaccurate cycle counts, un-reported scrap, shipping errors, receiving errors, and
production reporting errors. Materials managers have strived to determine how to manage
these issues in the business sectors of manufacturing since the beginning of the industrial
revolution. Although there are no known methods that eliminate the afore mentioned
inventory accuracy inhibitors, there are best methods available to eliminate the impact
upon maintaining an interrupted flow of materials for production.

One challenge for materials managers is to provide timely releases to the supply
base. On the scale of worst to best practices, sending releases via facsimile or PDF file is
the worst practice and transmitting releases to the supplier based web site is the best
practice. Why? The flaw in transmitting releases via facsimile or email is that they can
get lost or even interpreted incorrectly into the suppliers system resulting in a stock out.

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The problem with transmitting EDI releases is that not all suppliers have EDI systems
capable of receiving the release information. The best practice is to transmit the releases
to a common supplier web base site where the suppliers can view (for free) the releases.
The other advantage is that the supplier is required to use the carrier listed in the
web site, must transmit an ASN (advanced shipping notification), and review the
accumulative balances of the order

Improving circulation infrastructure

Redundancy can be reduced and effectiveness is increased when service points

are clustered to reduce the amount of redundancy. An effective materials management
program can also resolve “island” approaches to shipping, receiving, and vehicle
movement. Solutions can include creating a new central loading location, as well
consolidating service areas and docks from separate buildings into one. Developing better
campus circulation infrastructure also means re-evaluating truck delivery and service
vehicle routes. Vehicle type, size, and schedules are studied to make these more
compatible with surrounding neighborhoods. This will reduce truck traffic, creating a
safer environment for pedestrians and a more attractive environment for other uses.

Materials Management Week

Each year, an entire week is dedicated to celebrating resource and materials

management professionals for their outstanding contributions to healthcare and the
overall success of the supply chain. Sponsored by the Association for Healthcare
Resource & Materials Management (AHRMM), National Healthcare Resource &
Materials Management Week (MM Week) provides an opportunity to recognize the
integral role materials management professionals play in delivering high-quality patient
care throughout the health care industry.

Benefits

The effective materials management plan builds from and enhances an

institutional master plan by filling in the gaps and producing an environmentally
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responsible and efficient outcome. An institutional campus, office, or housing complex

can expect a myriad of benefits from an effective materials management plan. For
starters, there are long-term cost savings, as consolidating, reconfiguring, and better
managing a campus’ core infrastructure reduces annual operating costs. An institutional
campus, office, or housing complex will also get the highest and best use out of campus
real estate.

An effective materials management plan also means a more holistic approach to

managing vehicle use and emissions, solid waste, hazardous waste, recycling, and utility
services. As a result, this means a “greener,” more sustainable environment and a
manifestation of the many demands today for institutions to become more
environmentally friendly. In fact, thanks to such environmental advantages, creative
materials management plans may qualify for LEED Innovation in Design credits.

And finally, an effective materials management plan can improve aesthetics.

Removing unsafe and unsightly conditions, placing core services out of sight, and
creating a more pedestrian-friendly environment will improve the visual and physical
sense of place for those who live and work there.

Optimization of Material Flow can have the following benefits:

  Improve Product Quality

  Reduce Purchasing Costs
  Reduce Freight / Transportation Cost
  Reduce Manufacturing Waste
  Increase Production, Cash Flow
  Improve Customer Satisfaction
  Reduce Downtime, Product Cost


The importance of proper management of Materials need hardly be emphasized.

In any manufacturing industry, nearly 60% to 70% of the total funds employed are tied
up in Current Assets, of which Inventory is the most significant component. In the cost
structure of most of the products, materials constitute 50% of the total cost, again
pointing to the need for the proper budgeting and control on cost of materials The
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objective of any commercial organization is to get the best mileage out of every rupee
invested in the company. In other words, Management through their policies, decisions,
coordination and control mechanisms must maximize the Return On Investment (ROI)

Profits
ROI = ————————
Capital Employed
Profits = Sales – Manufacturing Cost

Manufacturing Cost = Labour (10%) +Material (70%) + Overheads (20%)

Overheads include Bank Interest Charges of Inventory held.

Capital employed = Fixed Assets + Current Assets
Current Assets = Cash (10%) + Receivables (20%) + Inventory (70%)

From the above, it is clear that ROI can be maximized either by increasing Profit
Margin or by reducing the Capital Employed or by both. In the current market situation,
Sales Price cannot be increased (rather there is a demand to reduce it) and as such Profit
can be increased only by reducing the Material Costs.

On the other hand, the opportunity to reduce the Overheads and Capital Employed
is more by Inventory Reduction. It is thus evident that the ROI can be maximized by
either reducing the material cost or reducing the current assets by way of inventory of
materials or can be optimized by increasing profits and reducing capital employed.

It is evident that Materials Manager can make a direct contribution in increasing

profitability in the following ways :

a) By deciding inventory norms rationally and through control systems. Inventory

Turnover can be maximized which in turn will maximize current Assets Turnover and
ROI.
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b) By proper planning and control of Spare parts, capacity utilization can be increased
which will increase the turnover of Fixed Assets and consequently increase ROI.

c) By developing dependable sources and purchasing quality materials at competitive

prices, materials cost per rupee of sales can be brought down which will increase Profit
Margin and in turn ROI.

d) By developing proper systems and control on issue of materials, the consumption can
be minimized, resulting in reducing the materials cost, which will increase the Profit
Margin and also ROI.

Let us now see the financial position of three companies – A, B, C, and how the ROI has
improved by controlling the Inventory (all figures in lakhs)

Items A B C
Assets 5.00 5.00 5.00
Inventory 8.00 6.00 4.00
Cash/Credit 1.00 1.00 1.00
Borrowing 3.00 2.00 1.00
Sales 20.00 20.00 20.00
Operation Costs 18.00 17.50 17.00
Interest @ 15% 0.45 0.30 0.15
PBT 1.55 2.20 2.85
ROI % 11.00 18.30 28.50