1.

1 INTRODUCTION
;"
("Materials management is a total concept involvin an or anizational stru · · · o
· sm e · · · , e systematic flq:w and control of material from identification of the
need through customer""delivery." ' . .,.
The definition of materials management given above has been accepted by the International
.,F..ederation of Purchasing and Materials Management. - -
-- : -Included within-this concept are the material functions of,planning, schedulin , bu in ,
stor· , movi g and distributing. These are ogically represented by 1sciplines of production
~d ~nventory, control, , pure asing ,a nd physical distributiop.. · .
(!lie objective of materials management is to contribute to increased profitability by
~oordinated achievement of least matedals cost. This is done through optimizing capital "
Jnvestment, capacity and personnel, consistent with the appropriate customer service level.
· Another definition adopted by the National Association of Purchasing Management (USA)
reads as follows:
' "~aterials management is an organization~! · concept in which a single manager has
~Ulbonty and responsibility for all activities, principally concerned with the flow of materials
into
. an organization. (Purchasing, production, planning and sc hedu1·mg, 1ncorrung· · traffi1c,
inventory control, receiving
· and stores norma · II y are me
· Iude d •)"

1•2 MANAGEMENT IN RELATION TO MATERIALS FUNCTION

~~U,ile,tdiscussion on how the basic functions. of mariage~.:;,ft can be applied_ to materials

ction can be found in A.K. Datta[201 and K.S. Menon . Management is a process
1
 • . . the work of others. Management .
.d. nd supervising .al . . 1s
involving the responsibility for gm mg a achines and maten s m a given tin-.
. b . money' m d . . ......e
concerned with managing human emgs, fiactors of pro uctwn or the M's ,t
1 known as oJ
frame. The above factors are popu1ar Y . system. The management process .
ny production . . ffi . 1s
production. These are the inputs 10r a .
• &
planning, organizmg, sta mg, directing
popularly abbreviated as POSDCORB which meanslt of management process, the inputs ar'
· · As a resu e
coordination and control and budgeting. d •ces Table 1.1 indicates the producti'o
•
converted into outputs m &
the 1orm of go ods an servi · n
.
system as an mput-output mo de1[331 •

TABLE 1.1 Process of Management

Outputs
s~----
_ _!_ln~p~u~t:s~(~R~e=s~o~u~rc~e=s~)_ _ _ _ _~M~a~n~ag~e'.::.'.m=en::t:_:p~ro:__c_e_s_s_____::G~o~o~d:.
T · M~n Planning
and
I Money Organizing
Services
M Machines Directing
E Materials Staffing
Leading
Communication
Coordinating
,.,
Cop.trolling
~,
, Of the ·various factors of production, materials are the· most important one as they tie
'u p 50 ·to 60 per '<;ent of the cost of product' for successfully increasing the productivity of
the industry. Any reduction in the ·cost of :materials results in increased profits·. Thus,
materials purchasing should'not be regarded as 'spending activity but converting the industry
a
· into profit centre when an economic purchase and storage' of_material is done.
In modem industrial management, the materials department ·is a full-fledged department
and -, not under production department. Materials department is the 'custodian' of materials
and production department is the 'user' department. Under the integrated concept of materials
management, both purchasing and storage are integrated under one vice-president responsible
for ·the · overall materials · function.
' I

1.3 .·:_ FUN~TIONS

-
. OF MAN~GEMENT AS APPLIED TO MATERIALS
·•
,
The applicatiOJl of POSDCORB to materi'
· al~ function
·· is bn·efly
. di scussed here.
,· '

, Planning
,,,
, Planning· for materials is of utmost
. importance. Planning deci·des wh'1ch matena. Is are needed,
when tbey are needed, m h~w much quantity. The well-known tools for materialsf
lanning are: (1) Forecastmg techmques-Forecasting .involv aki d ess o
·P b d · · es m ng an educate gu
,future demands ase on past consumption. This techniqu . . . . g we
e 1s we11 suited for esumatin

I
requirement of raw material of a particular type. (2) Material requirement planning (MRP)-
MRP is a tool for estimating the material requirements of components of different types
which produce final assembly of finished equipment. When the demand for finished product
is known through forecasting, the demand for sub-assemblies and components that go into
the making of the sub-assemblies can be calculated with accuracy by the MRP approach ..

Organizing
Organizing involves developing a hierarchical structure which describes the various positions
of personnel and their reporting relationship in terms of responsibility, authority and
accountability. Organizing is indicated on an organization chart which, in the classical
situation, forms a pyramidal structure. A good organization structure is essential, so that no
confusion remains in the minds of managers with respect to their roles and responsibilities.
There is a clear flow of information from top to bottom and vice versa.

Staffing
Staffing function consists of recruiting and retaining of suitable individuals in various
positions in the unit. To do this, management assesses future needs and makes necessary
arrangements to meet them. Although this is the personnel department's direct responsibility,
the materials manager is also indirectly involved so far as the people under his supervision
and control are concerned.

Directing
Directing signifies communicatio1,1 from top to bottom. In case of materials management,
the materials manager receives instruc~ions from top management about his broad objective,
which usually fall under the following categories:
• Low price of materials
• High inventory turnover ratio
• Continuous supply of material
• Systematic record keeping
• To minimize the cost of procurement plus storage of material
• Good supplier relations,
• Development of personnel in the materials department.

Controlling
A materials manager occupies the central position in the sense that, he is linked with
suppliers, sales persons, production department, design and development department, apart
from his direct lfok with the top management.
The materials manager has link with ,finance in respect of procurement of capital
goods and equipment, make or buy decisions through break even analysis. His link with ,
production is direct because he has to supply materials needed in assembling and production
departments. His link with marketing and sales department is due to his role in material
handling and traffic which is responsible for delivering the finished goods to the ultimate
customer.
 ,,i~ · • · one who is in contact with all the functional areas of
Hence the matena1s manager 1s . .
· · H · ·n a commanding position to control thmgs effectively and make
the orgaruzauon. e 1s 1 · .
things happen. Thus, he carries a heavy responsibility. on hts shoulders.

1.4 MANAGEMENT OF MATERIAL RESOURCES

Materials management is concerned wit~ the managem.e pt of material resources. It considers

the cost we incur on materials and seeks to reduce this cost.
Traditionally, we think of the cost of materials in terms of the pr~ce we pay to acquire
the materials, that i$, their basic cost. This is what we see in, the statements 9f a company' 8
annual accounts. This cost, by itself, is enormously high, as materials account for . 50 to
60 per cent of the net price of a product. The materials purchase function is particularly
important in the present scenario because most of the industries of the engineering type such
as automobile industry purchase 90 to 95 per cent of items through vendors and fabricate
5 to 10 per cent inhouse. These 5-10 per cent items represent the core competency of the
industry. 'The purchase manager has been called 'External Production Manager' by
Gopalakrishnanr221 • · ·
Today, however, materials management takes into account not only the cost of materials,
but ·also the cost we incur on materials. There are, therefore, two distinct and different costs
relating to materials. According to K.S. Menon, cost of materials and cost on materials
should be minimized.
In fact, ·the costs on material in many cases are hidden costs, since they are not classified
unde~ the ~eaq "materials" in a company's accounts. Instead, they go under misleading
headings, like overheads, scrap, storage costs, and indirect labour, and so on. The main
thrust of materials management is to attack all these hidden costs on materials wherever they
may occur. . •
Some of these costs which get added to the basic cost incurred on buying materials are:
• Cost of _purchasing: This can be very high, if we have cumbersome and bureaucratic
purchasmg procedures.
• Taxes: Sales tax, excise, octroi, ·etc.
• Packing costs. · .
• ;;;nsportation costs, including clearing costs, incurred at railheads, ports, airports,
. '

• Insurance premium.
• Receiving. ·
• Inspection costs.
• Materials handling costs.
• Loss caused by scrap and cost of re-work.
• Loss suffered on finished d . .
• Inventory carry· go~ reJ~cted by quality control.
mg costs, cons1stmg .of · t .
to staff required for store-k . m erest on capital locked up; salaries payable
eepmg and stores a t·
rents, taxes, insurance prem1·u . 1 ccoun mg; amounts payable towards
.· m, oss caused by p·rn .
1 erage, spoilage and deterioration,
 obsolescence, etc. In India this cost works out to approximately 30 per cent per
annum of the basic cost of materials stored.
A distinctive feature of these costs (except maybe taxes) is that none of them adds any
value to the final product and hence should be accounted for. All these costs are variable
and controllable, and every rupee saved on them adds to the profits of a manufacturing
enterprise, or brings about a reduction in the cost of services rendered by a service organization.
The most important fact about materials management is that it is a joint corporate
responsibility which has to be equally shared by various interrelated functional departments
of a manufacturing company such as sales, production, design, accounts, transportation,
legal, maintenance, quality control and, of course, purchase and stores.
Take finished goods, to start with. Their stock limits are usually determined by the sales
department. Most sales personnel do not realize the implications of keeping high stocks of
finished goods or stocks of obsolete items. Sales personnel are well known for their attitude
towards the 'important customer' whom they must satisfy 'at any cost'. So the tendency is
to always keep high stocks and also to maintain stocks of accessories and parts which have
become obsolete because of subsequent changes made in the design of a product. Let us take
an example. Trucks, manufactured by the Tatas today, have a number of features which
were not there 25 years ago. Some of the changes in the design _were made 15-18 or even
20 years ago. Since a large number of 20 year-old trucks are operating even now, it can
be understood that high cost is incurred by a manufacturer if he is keeping large stocks of
obsolete truck parts and accessories in order to satisfy his customers.
Further, materials should not become the concern of materials department alone. Presently,
production department is concerned only with production of maximum batch sizes · in a
single production run. The maintenance department is concerned with keeping maximum
spares for critical mother machines so that they are kept in running condition. Sales people
make their forecast and want production to make enough quantity to match the forecast.
Any error in forecast affects the level of raw material or finished goods inventory. Thus,
even though procurement and storage of materials is the major objective of the materials
management department, a system approach or an integrated approach demands that 'material'
should become the concern of all the departments.

1.5 . OBJECTIVES OF MATERIAL MANAGEMENT

Dean S. AmmerC 21, who can be credited with writing the first ever book on materials
management, has discussed the objectives of materials management in detail. In the words
of Ammer: "The manager's most basic job is to focus the efforts of his subordinates on the
objectives of the enterprise. In materials management, this boils down to supplying material
at lowest possible total cost. To achieve this fundamental objective, the materials manager
must take into account both the long and the short-term effects of his actions. He must also
consider the impact o_f his operation on the costs of other activ_ities ~ithin the organizatio~."
The function of the materials manager is basically economic even m non-profit cooperative
or service type charitable organizations. T12_e_m<:>st fundamental objectiv~ is surv~val. Managers
 ,,
come and go, but institutions live forever. If the materials manager is successful in hi
economic role, he will contribute to the survival of the organization. Among private companiess
at least, 'profits are essential to survival; in non-profit sector, costs ca~not exceed for an'
prolonJi~d period. Every enterprise also bas objectives th,at are seemingly non-economic. 1!
the long run, they turn out to be economic, since if they are not achieve~, th~ e~terprise
will f~l to prosper and may not even survive. Aniong these non-econoIDic objectives are
1

favourable ~ommunity relatjons, maximum service to customers, pleasant working conditions

and qpportunities for advancement for employees, technological leadership, and others.
Each function of the business should work towards achieving those objectives. The
materials function i,s no exception. It contributes to survival and profits by providing
materials at the l,owest total cost There are many ways in which it can achieve this overall
objective; ,tp.~ most obvious is to pay minimum prices for materials. But the materials
function also keeps active ~is objective when it boosts inventory turnover or gets material
of supe~or quality.,In both cases, the true cost of material is reduced, in one because of
l~ss investment and in the other, ~ecause of fewer rejections due to failure to meet specifications.
We will n,ext examine ,i,n detail some typical objectives of materials management. Each
objective, in some way, contributes to the achievement of some overall company's goals and
obj¢ctjves. If the contribution is made directly by ,the ,materials function, it is called a
primary :objective. If it· is indirect, and results from the materials department acting in
servi~e . or sU!,ff capacity to another department in achieving its objectives, it is called a
~econdary:objective.

.1.5.1 ,. P,ri.:.,ary Obi,ectives

, I

In_ the opi~on_ of Dean S. Ammer, almost every materials department has at least nine
' pnmary. obJect1yes:
f 1· These
I are:, low prices, high inventory turnover' continuity
. of supp1y,
consistency o . qua 1ty, ow. payroll costs, favourable relations with suppliers, development
of perso~el, good records and low cost of acquisition and possession.
. , , (. Low p~c~s: Obtaining the lowest possible price for purchased materials is the most
important
· f thobJective
. · of
· · the materials department· If the maten'als department reduces the ·
, pnces. • o • e• items 1t buys, operating costs are reduced and profiits are enhanced · Thi '
o,b~ect1ve 1s important for all purchases of materials and servi • . · . .· s
transportation. To achieve this obiective ' the pu h ces, mcludmg logistics and
• J , re ase manager must b f
Q.!1,_!he_ supplier. Market prices are available
catalogues; etc.
tr!!
m~ket pnc,es. He ~hould negotiate with the su lier and i . . . -~ aw~~ .~ ,current
s~~ond nvite g~oti:ltlO_l!~ _before finapzing
ary data m the form of brochures,
/ 2. High inventory •turnover·• When mventones
. . are lo · -·- . -·
turnover = sales + average inventories) 1 . . . w m re1atton to. sales (inventory
. h , ess capital- 1s tied • .
u)creases t e efficiency with whi h th up m mventories. This in tum
inv~su;iei;: is higher. Also, storage :,d c: c~mpany's capital is utilized, so that ~turn o~
is highh6re India the inventory turnover r:~n~t~s:s of ~nventories are lower when turnover
:~,u:t-i:~ti:eefower r~w material to finished prodic! t:o:chie~ed because, usually in one
high and a figu;:r~;~~n~ and manufacture prevails, the in;ee;:;on cycles. In Japan, where
1s not uncommon. ry turnover cycles are very
 ~ - ..Continuity of supgly: When there are disruptions in the continuity of supply,
excess costs are inevitab~. Production costs go up. Continuity of supply is particularly
important for highly automated · processes; where costs are rigid . and must be incurred even
when production stops .because of t,ie· lack of ·materi~l. This objectiv~ is achieved through
intelligent use of lead time estimate and a certified supplier whose material is ooi_i~cted
but loaded--stnri:ghTontlie'pro~uction 1ine. Ex-employees of the organization who start their
ancillary are right suppliers beca~~ their know-how of the company's needs.
/ 4.. ~onsistency of quality: ~e materials department is responsible for the quality
only of the mat~rials and services furnished by outside supplier~ !!_ie manufacturing department
is responsible for quality control of manufacturing processes..;>Vhen materials purchased are
homogeneous and in a primitive state (e.g., sand and gravel), quality is rarely a big problem
for materials personnel. But when the product is in a highly advanced stage of manufacture
and specifications are a tremendous challenge for suppliers to meet consistently (e.g.,
military rockets), quality may become the single most important objective of materials
management. Quality should be verified for specifications and performance in a rigorous
manner.
..,...5_ Low payroll costs: The common objective of a company is low payroll costs. The
lower the payroll, the higher the profits-all other factors · being equal. But because no
department can do its job without a payroll, the_objective of a low payroll must be viewed
in a proper perspective. A technique for calculating the order processing cost involves use
of the formula: \ oA,
':J) ~.,.,.,y
1
a-U- ,,_,y· c, = (L + OH)
9J.>'"'"' ~ c l > -t- r-° N

where s~ ·
L = Annual labour costs and salary
OH= Office overheads per year
N = Number of orders placed for various items per year.

It will be shown later that C3 affects the economic order quantity in inventory control
in the economic order quantity formula for inventory control.
.-6:' Favourable supplier relations: Manufacturing companies rely on outside suppliers
to a far greater degree than is generally recognized. This is because in present times
industries purchase up to 95 per cent of their items from vendors. This makes favourable
relations With suppliers extremely important. A company's standing in the business community,
to a considerable degree, is determined by the manner in ·which it deals· with its suppliers.
A company with a good reputation in supplier relations is more likely to attract customers
than one with a bad name.
Suppliers can also make a direct contribution to a company's success. Their product
development and research efforts can be of ~emendous assistance to their customers. Although
such efforts naturally help the supplier too, it is important to remember that suppliers should
be regarded as trading partners. Efforts to stimulate superior performance from the supplier
through joint cost reduction projects, a willingness to share new processes and ideas help
in building ties with suppliers.
 u

Good supplier relations involve inviting the supplier to the plant_ and see:;g ~is advic~
and have early supplier involvement. He can contribut~. to design .m? I ications anq I
improvements. Executives from the industry should also visit the supplier s pla~t to know
more about his business problems. In fact, a supplier should be treated as a tradmg Partner
instead of an adversary or a foe. . . .
One of the major problems of materials management 1s sudd~n shifts m the demand for 1

materials, requiring either rapid cancellation of existing comnntments or ext~a output to

prevent shortages. Cooperative suppliers can be immensely helpful to the matenals manager
in sorting out such problems. . .
/'7. Development of personnel: Every department in the company should be I?teresteq
in developing the skills of its personnel. Each department head sh_ould m~e special effon
to locating in junior posts men· and women who have the leadership potential the company
_needs for sustained success and growth. They should also try to d~velo~ such men and
women as the company's future executives; the company's future profits will depend on the
talents of its managers. Motivational techniques such as j~.,~~-en!~_gement, J2_b ro~~tion anct
j~~-~nrichment should be used.
/ 8. Good records: Good records are considered a primary job of materials management
although they are not an end in itself. They contribute to the role of the materials department
in the company's survival and profits only indirectly. They are necessary and useful; they
help materials personnel do a better job. Proper maintenance of office automation equipment
is an essential requirement for efficient functioning of the office. Good records are considered
a primary objective in the purchasing and traffic phases of materials management as well
as in the accounting department. Office automation greatly improves the efficiency of a
firm. Good record keeping protects the purchase and stores from charge of corruption.
Buyers spend company's money and can yield to temptation. Suppliers may try to win
them over by giving them gifts on the occasion of Diwali, Christmas and other celebrations.
Although 99 per cent of buyers are above corruption, the opportunity does exist, for there
are fish to spoil the pond. Good records along with well-planne.d administrative controls and
periodic_ au~!s, can discour~ge corru~tion. They also partly remove suspicion from a completely
honest 1~d~v1dual on the J_ob that 1s popularly. associated with graft and corruption.
9. M1mmum total variable cost: A matenals department should see to it that ordinarily
the purchase batch quantity should result in minimum total cost of inventory carrying and
procurement cost. These costs are discussed in detail in Chapter 12.

1.5.2 Secondary Obiectives

~ e secondary objectives Of materials management are not n. . . . and

. variety as the primary opjectiv'\s. Since they represent the 1
~ar y so hm1ted, m sco~e .on
to the achievement of the primary obiiect· f matenals department s contnbuU
ive o .some other department,
from industry to industry. EssentiallyJ purch - they can vary WI·delY
other departments because of its exte;nal fi asm{hand materi~ls department is able to assi~:
ways. . ocus. ey can assist other departments in severilJ
There are literally hundreds of poss •bl
Among the more common ones acco d.1 e secondary objectives in materials managerneol•
' r mg to Ammerl2J' are reciprocity' new materiaJs aJld
 products, economic make-or-buy decisions, promotion of standardization, product improvement,
good interdepartmental relations, accurate economic forecasts, and alertness to possible
acquisitions.

1. Favorable recipcoca) relations: _}Vhen a company deliberately huys from its awn
c_µstomers as much as possible, it is ractising reci rocit . Sound reciprocity involves
balancin of the advantages an disadvanta es ·n ' "'· · · ruihent
f9t getting es. Imtlarl s ·ers will u their own bu in ower as a sales tool.
In consumer goods industrie~, reciprocity is rarely a problem; sales are spread among
many users. In producer goods industries, however, reciprocity is a way of, business life,
particularly among industries where there is little product differentiation and prices are
uniform. The materials department in su9h industries often coordinates its purchases with
the sales department to make certain that- the company's customers who are ·also suppliers
get f~voure~ t~eatment( A very interesting example of reciprocal relations is(observed in the
~brasive gnndu~g _wh~~ n~~stryl'./ Th_e industry A makes alum!l!-a ~braish:e and ,apart from
Its own u~e supphes It to~ mdustry C. Industry C makes -silicon carbide and supplies it to
industry A. There is ·a pact between these abrasive wheel giants not to .supply raw materials
to any third industry at prices prevailing be.tween .these trading .partners. •
'2. New materials and products Design and produption managers are always interested
in new products an matena s that will help them operate more efficiently and thereby
achieve one of their primary objectives. The materials department can help . becau~e its
personnel deal regularly with the suppliers responsible for, the m~w developments . .When
they learn anything of interest, they can provide _information to production, design or other
departments. . . , , .
~ c make w:.~huy or outsourcing;) Make-or-b_uy dec_isions 01; outsourcing
~ecisions are often initiated by materials personnel, since they are the group most intimately
concerned with the selection of supply sources. By no means are they solely responsible for
these decisions. However, make-or-buy decisions should be a committee effort, representing
the points of view of all the departments in the company. The materials department, in its
regular reviews of cost and availably of materials, will often spot the need for new make-
or-buy decisions and it should refer them to the committee for actic;m . .Finance and top
management can utilize break even chart to take a financially-based make-or-buy decision.
4, Standar~~tion: The . fewer the items that neeq be controlled, simpler and more
efficient the materials management process. Thus it is in the interests of materials personnel
to promote standardization and simplification of specifications. The design departments are
primarily responsible for standards and specifications, but ~aterials department make a
· substantial contribution. They can periodically review inventory, weed out nonsta~dard
items, and promote the incorporation of standard components into product designs to reduce
cost. They can also promote standardization with suppliers. . . .
5. Product improvement: Tins is perhaps the single most important obJective of th_e
design · d~ ent. However, materials personnel can definitely assist_ in this regard. Their
economic knowledge can supplement the technical knowledge of the engmeers on ~rogr~es
to boost profits through product change. The design of pra~tically any product is bas_ically
a compromise between design and economic objectives. Matenals personnel can help engmeers
achieve their design objectives more economically by getting materials_ or components that
will do a better or equivalent job at lower cost. This would be achieved through Value
engineering and value analysis efforts. .
6. I artmenta ony: The materials department deals with each and every
department in the mn. It can con ribute to their success, but its. own success depends on
how successful it is in gaining the cooperation of persc~mnel m other. departments. In
practice, most materials managers are fully aware of the importance of good mt~r~~~artmentaJ
relations. To prevent disputes, they are careful 'to define departmental responsib1ht1es clearly
and also try to familiarize others with materials objectives, policies, and organization.
7. To manage materials well, some perception of the ~uture rega~ding
prices, costs, and general business activity is necessary. In large compames, professional
economists make forecasts that are used for both sales and purchase planning. Materials
personnel translate these general forecasts into specific forecasts for purchased materials.
They may also provide the economists with data for forecasts because, owing to · their
external focus, they are intimately familiar with the ip.arket and general business conditions
through their daily contacts with suppliers.
In the smaller company that cannot afford professionals, the materials manager may
have to play the role of the company's economist. In such a case, good forecasts become
a primary objective of materials management. .
. 8. 1cquisitions: Most company managements are interested in growing not only by
mtema'Yexpans10n 6ut also by acquiring other businesses. It is not easy to identify a possible
candi~ate for acquisition .and then to make the necessary advances for eventual merger. The
matenals ~~ager can _often _play_ an important role in acquisitions, since he normally has,
through his Job of dealmg with his many suppliers, more contact with the outside business
world than other executives in 'the company Needless to say that it co·uld be v b ·
£ th . · . . . ·. . · ery em arrassmg
or e chief e_xecutive officer of one company to approach his counte art · th
company and d . .. . rp m ano er
iscuss an acqms1tion. It 1s always prudent to start discu · d
~cquisition on a low key. ss10n on mergers an
A good organization structure does not by itself produce good performance just as a gooa
constitution does not guarantee great Presidents or good laws of a moral society. But a poo,
organization structure makes good performance impossible, no matter how good the individual
managers may be. To improve organization structure . . . will therefore always improve
performance.
- PETER F. DRUCKER

2.1 INTRODUCTION

Materials management serves various functions-materials planning, purchasing, receiving,

stores, material handling, inventory control, scrap and surplus disposal, etc. These functioni
in isolation yield optimal results, e.g. purchasing will be interested in availing quantiq
discounts and buy maximum material on one batch. On the other hand, stores will bi
interested in keeping stocks to the minimum. Objectives of materials management are ir
conflict and one single top manager should be permitted to take decisions in consultatior
with CEO. The three vital functions of materials management, namely materials plannini
and control, purchasing and stores and inventory control should be handled by manager:
reporting to the vice-president of materials. However, it should be noted that even in thi
USA, only 60 per cent industries follow integrated materials management. .
According to Peter Drucker, the management guru, a good organization chart is vita
for the success of any organization. If the organization chart is not properly designed, th~ 0
even with good personnel, it becomes difficult to achieve the objectives. Accompany~o!
diagram in Fig. 2.1 is the organization chart with materials manager occupying a positt 01
of vicy-president, then both managers of purchasing and storage report to vice-president 0
14

I
 CEO

VP VP VP
marketing production
VP VP VP VP
materials finance D&D finance HRM

Manager Manager
purchasing Manager Manager Manager
traffic stores and inventory disposal
preservation control and
accounting
....._,__..... Chaser Receipt ._~__,

Super- Incoming Di$patch Mainte- Overseer Issue Analyst Accoun- Supdt-

visor visor
nance record ~----- tant disposal,
auction
Crew Crew Crew
O.A. = Office Assistant

FIGURE 2.1 Organization chart for integrated materials management.

materials. The VP materials is responsible for planning and execution of various objectives
of the materials management.

2.2 ACTIVITIES OF MATERIALS MANAGEMENT

The following activities generally come within the sphere of materials management (Table 2.1).
TABLE 2. l A Brief Outline of Activities of Materials Mangement
I

Activity Description
(1)
_,,1/
Inventory control
Planning and maintaining levels of raw materials, tools, general
supplies, ~tc. Keeping a watch on in-process and finished goods
inventory. Applying selective inv~ntory control methods calculating
economic order quantities aQd economic manufacture quantities,
doing simulation . to work out when to order and };low much to
order. Doing material requirement .planning in case of dependent
demand inventory.
(~ Purchasing Developing vendors for supply of components, sub-assembly and
also for other items such as supplies, assisting design department
in standardization, value analysis, advising and disposal of surplus
and scrap. Procurement of materials at right time in right quantities
from right source, right quality, etc.
ef
I

Storekeeping Re~eiving, storing and issuing as well as material handling in stores.

(4) Traffic or carrying Receiving incoming materials called inbound logistics and caring
and fowarding for outbound logistics.
 . f inventory contro1'
purchase, stores and traffic is given
A brief outline of the working 0
below:

Inventory control . f omic order quantities as

. . out calculations o econ We]J
The inventory control section cames bl' hes highest and lowest level of variou
. 'f It esta 1s s
as economic manufactunng quantI ie~. U t timely procurement as well as to control
items. Lowest and highest levels are fixed tof e ec urement and by using the method lllost
investment. There are different metho_d~ . proc aised at the appropriate point of tirn
0

suitable for each class, purchas~ reqm st tions are :.t to be ordered are sent to purcha e.
i
These purchase requisitions which show the quan_1 do not arrive on time, the inventose
department for placing purchase order. If the mat~na sTh. signal helps the purchase sect · ry
· d · 1 t the purchase section. ts
contro l section sen s a s1gna 0. .
1on
. . Th 1·nventory control section I
to activate purchase chasing act1v1ty to expedite supphes. e . d . th a_ so
·
contributes to selective control through AB C ana1yst s, Ved analysts an
. app11es
h o er
b d se1ecttv e
inventory control measures to give consumption details for prepanng pure ase u get, etc.

Purchase
The function of the purchase section is to obtain materials to meet purchase requisitions
received from stores or other user departments. It keeps record of all the vendors but very
often new vendors will have to be developed. The purchase department makes use of various
sources such as industrial products finder, catalogues, market information to have details on
availability price and design details of products. Usually prices of several items are negotiated
and predetermined but in some instances tenders are invited when the item is costly, on
receipt of purchase requisition. The quotations are tabulated in a comparative statement and
approved in accordance with the procedure lai_d down by the management. Orders are placed
on the basis of criteria· such as quality, price, delivery time, after-sales service, etc.
The responsibility of the purchasing section does not end with placing orders. It has to
perform chasing activity to ensure that materials do arrive on time. Different chasing
method~ such ~s telephones: e-mail, fax, personal visit, etc. are used for this purpose.
Pur~hasmg section also contnbutes to cost reduction through value analysis, standardization,
particularly when the_ firm cannot afford a full-fledged value analysis section. The disposal
s
of urplu~ and s~rap ts an~ther function often handled by the purchase in smaller industries.
In large mdustnes there 1s a separate section for dealing with scrap surplus and waste
control. . '

Stores

The function of the stores is to receive store d . . .

receiving section tool stores gene 1 't an issue matenals. The stores is divided into
, , ra sores raw mat · 1 • d
so on. The receiving section also t d' . ena s stores, firushed part stores an
) ' erme goods inward d · 11
incoming materials, checks the correctness o{ the . ep_artment (GID), receives _a
and then sends the materials to the respect· quantity received, arranges for inspecuon
1ve
note. In the stores, materials are properly t d stores along Wt'th a report called goods mwar
. d
Materials are stored in bins and racks ansdore until dr~wn by the various user departments.
great attention has to be paid to proper storage
 so that_ they are free from damage and possibilities of pilferage. At the same time, right type
of eqmpment sho~l~ be used for storage and handling so that material handling expenses
are kept to the ~rum~~- Procedures for issue of different materials such as tools, general
stores, raw matenals, fm1shed components, etc., vary to some extent. While tools are issued
on loan, gen~ral stores, raw materials, finished components, etc. are issued on requisition
for cons~mptl?~ by the ~ser. The accuracy of the material on the computer and physical
balance 1s venf1ed from time to time by internal auditors. The stores sends a report to the
purc~ase department when the stock of an item has reached reorder level or if shortage of
any item has reached reorder level and likely to cause production hold-up.

Traffic or carrying and forwarding

The function of the traffic section is to clear goods coming by rail, sea, air, etc. as well
as to despatch finished goods often termed inbound and outbound logistics. The documents
relating to incoming goods are sent to them by the purchase section or direct by the
suppliers. On receipt of the documents, the traffic section will contact the railway authorities,
shipping agents, or airlines office, pay any charges due and take delivery ·of the goods.
Certain formalities are to be observed in clearing goods that are imported. Claims for
missing or damaged goods are referred to the insurance company or carriers.
'

2.3 -IMPORTANCE OF MATERIALS DEPARTMENT

According to GopalakrishnanC261 , the fast developing Indian economy has placed before the
materials manager a tremendous challenge and responsibility. The task is really Herculean
when we recognize that more than Rs 15,000 crores worth of materials and components per
annum go into the production channels, of which imports alone constitute about Rs 3,000
crores. The challenge he faces is all the more tough as the money tied up in inventory
aggregates Rs 15,000 crores, of which obsolete materials lock up funds to the tune of
Rs 2,500 crores. The largest central purchasing organization in · the country, namely the
Directorate General of Supplies and Disposal (DGSD), buys over Rs 1,200 crores worth of
materials per year.
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
indicates that materials account for nearly 60 per cent of the to!al expenditure. The_information
on the average materials expenditure for different manufacturing industries is given in
Table 2.2, as reported by Gopalakrishanl261 • ·
Thus, (Jhe importance of materials management lies in the fact that any significant
contribution made by the materials manager in reducing materials cost will g.9_~ ~ ~ay
jn improving 1he profitabilij:y ~~<:I_ !!I~. rate of return_<?E -~~,!!lent. ~uch an in~~ease in
profitability can be effected by increasing smes. Bu t with the growmg competition and
government restrictions on expansions, this alternative is not easily achieved. Besides, some
increase in profitability can be achieved by concentrating on the materials cos~, whi~h is
typically a major rupee item for most organizations. In fact, as market pressure mtens1fies,