Material Management

Introduction to Material Management

Every organisation depends on materials and services from other organisations to varying extents. These
materials and services are obtained through exchange of money. Various materials are used as inputs such as raw
materials, consumables and spares. These are required to be purchased and made available to the shops/users as
and when needed to ensure uninterrupted production. Efficient management of input materials is of paramount
importance in a business organisation for maximising materials productivity, which ultimately adds to the
profitability of the organisation.

Material cost is probably the most important element of cost. In the case of certain industries like cement, sugar,
chemicals, iron and steel, etc., the materials cost forms a very significant portion of the overall cost of
production.

Classification of Inventory

The term material refers to all commodities which are consumed in the production process. The materials which
can be consumed in the production process can be basically classified as:

Direct Materials

Indirect Materials

Material is generally called raw material. Inventory is a name collectively given to raw material; work in process
and finished goods. Even though Material and Inventory are used as synonyms, material usually means raw
material and inventory means raw material along with work in process plus finished goods.

Inventory classification

Inventory includes idle resources that have future economic value. It indicates that it may be available in
different forms depending upon the production cycle stage it is in. Classification of inventory is done on this
basis and thus, the different classifications of inventory are as follows:

Raw materials: Raw materials are input goods intended for combination and/or conversion through the •
manufacturing process into semi-finished or finished goods. They change their form and become part of the
finished product.

Components and parts: Just as raw materials are converted to finished goods in a manufacturing operation,
components and parts are assembled into finished goods in an assembly operation.

Maintenance, repair and operating inventories (MRO): These include parts, supplies and materials used in or
consumed by routine maintenance and repair of operating equipment, or in support of operations.

Work-in-process goods: These include goods in the process of manufacturing and only partially completed. •
They are usually measured for accounting purposes in between significant conversion phases. In-process
inventories provide the flexibility necessary to deal with variations in demand between different phases of
manufacturing.

Finished goods: These represent the completed conversion of raw materials into the final product. They are
goods ready for sale and shipment.

Resale goods: These are goods acquired for resale. Such goods may be purchased by a wholesaler for resale to
distributors, or by distributors for resale to consumers, etc.
Capital goods: These are items (such as, equipment) that are not used or consumed during a single operating •
period, but have extended useful lives and must be utilised over multiple operating periods. Tax laws require that
such an item be capitalised, and a predetermined percentage of its cost be recognised as an expense, each
operating period, over a predetermined time frame, according to equipment classes.

 Construction materials: These are raw materials and components for construction projects such as a
building, bridge, etc.
 Hard goods/soft goods: What one identifies as hard goods and soft goods will vary depending on the
industry involved. For example, in data processing, hard goods include apparatus such as, computers and
terminals, while soft goods include software, data storage media and the like.
 Fuel and lubricants: Fuel and lubricants are used for the oiling purpose for the equipment used in the
process which again varies with the type of industry.
 Stationery goods: It includes writing material like, paper, pen, ink, etc., which are used by the people
involved in the process.
 Primary packing material: Packing material like, plastic, paper, etc. are used to pack the finished goods
for sale.

Meaning of Material Management

Materials management can be defined as “an integrated management approach to planning, acquiring, processing
and distributing production materials from the raw material state to the finished product state”. Materials
management is a key business function that is responsible for the coordination of planning, sourcing, purchasing,
moving, storing and controlling materials in an optimum manner, so as to provide pre-determined service to the
customer at a minimum cost.

Materials management has such sub-fields as:

 Inventory management
 value analysis
 receiving
 stores and management of the obsolete
 slow moving and non moving materials

Materials management is the branch of logistics that deals with tangible components of a supply chain. It 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 said parts. The physical arrangement of
materials/spare parts is called materials management.

Planning and control of the functions supporting the complete cycle (flow) of materials, and the associated flow
of information is called materials management. Materials management is concerned with the control of materials
in such a manner which ensures maximum return on working capital. Materials management is concerned with
the location and purchase of materials needed, their storage and movement. It also arranges to keep an account of
them. It is also responsible for planning their movement through manufacturing processes, store rooms and
distribution channels.

Materials management provides an integrated systems approach to the coordination of the materials activities
and the control of total material costs. The materials management function ranges from receiving the material
requisitions from user department to placement of purchase orders and then, on the other hand, receiving the
materials from vendors and making it available to the users departments.

Objectives of Material Management

The fundamental objectives of the materials management function are acquisition of materials and services:
  of the right quality
 in the right quantity
 at the right time
 from the right source

The key objectives of material management are as follows:

 Buying at the lowest price, consistent with the desired quality and service
 Maintaining a high inventory turnover, by reducing excess storage, carrying costs and inventory losses
occurring due to deteriorations, obsolescence and pilferage
 Maintaining continuity of supply, preventing interruption of the flow of materials and services to users
 Maintaining the specified material quality level and a consistency of quality. This permits efficient and
effective operation
 Developing reliable alternate sources of supply to promote a competitive atmosphere in performance and
pricing
 Minimising the overall cost of acquisition by improving the efficiency of operations and procedures
 Hiring, developing, motivating and training personnel and providing a reservoir of talent
 Developing and maintaining good supplier relationships in order to create a supplier attitude and desire
furnish the organisation with new ideas, products, and better prices and service
 Achieving a high degree of cooperation and coordination with user departments
 Maintaining good records and controls that provides an audit trail and ensures efficiency and honesty
 Participating in 'Make or Buy' decisions

Motives of Material Management

A company may hold the inventory with the various motives as stated below:

Transaction motive

The company may be required to hold the inventories in order to facilitate the smooth and uninterrupted
production and sales operations. It may not be possible for the company to procure raw material whenever
necessary. There may be a time lag between the demand for the material and its supply. Hence, it is needed to
hold the raw material inventory. Similarly, it may not be possible to produce the goods immediately after they
are demanded by the customers. Hence, it is needed to hold the finished goods inventory. The need to hold work
in progress may arise due to production cycle.

Precautionary motive

In addition to the requirement to hold the inventories for routine transactions, the company may like to hold them
to guard against the risk of unpredictable changes in demand and supply forces. For example, the supply of raw
material may get delayed due to the factors like strike, transport, disruption, short supply, lengthy processes
involved in import of the raw materials, etc.

Hence the company should maintain sufficient level of inventories to take care of such situations. Similarly, the
demand for finished goods may suddenly increase (especially in case of seasonal types of products) and if the
company is unable to supply them, it may indicate gain for the competitions. Hence, the company will like to
maintain sufficient stock of finished goods.

Speculative motive

The company may like to purchase and stock the inventory in the quantity which is more than needed for
production and sales purpose. This may be with the intention to get the advantages in terms of quantity discounts
connected with bulk purchasing or anticipated price rise.
Scope of Material Management

The scope of material management includes the following aspects:

1. Material planning
2. Cataloguing or coding the materials
3. Standardisation
4. Scheduling
5. Procurement
6. Inspection
7. Quality control
8. Packaging
9. Storage
10. Inventory control
11. Distribution
12. Disposal

1. Material Planning

Material management involves the process of planning to get the materials. It is the starting point for the whole
material management function. Material planning is a scientific way of determining the requirements starting
with raw materials, consumables, spare parts and all other materials that are required to meet the given
production plan for a certain period. Material planning is derived from overall organisational planning and hence,
it is always a sub-plan of the broad organisational plan. What it does is forecast and initiates the procurement of
materials.

Factors affecting material planning

The factors affecting material planning are:

Macro factors: Global factors such as price trends, business cycles, government’s import and export policies etc.,
are called macro factors. Credit policy of the government is a critical factor as banks follow these guidelines only
while extending financial support to a business entity.

Micro factors: These are essentially the factors existing within the organisation such as corporate policy on
inventory holding, production plan, investments etc., For any organisation, factors such as lead time of
procurement, acceptable inventory levels, working capital, seasonality, delegation of power are micro factors

2. Cataloguing or coding the materials

For easy procurement, storage, retrieval and the distribution of the inventories, it is essential to classify them into
different categories. This classification can be done through codification or cataloguing. Codification or
cataloguing is basically an identification system for each item of the inventory.

There are three broad approaches to developing a suitable identification system. These are:

 Arbitrary approach
 Symbolic approach
 Use of drawing numbers

Arbitrary approach

As and when an item is received by stores in its receiving bay, a running and unique serial number is assigned to
it. This number becomes the code of the item for subsequent use at different stages. It does not help in the
scientific management of inventory. Arbitrary approach is useful only where perhaps items are non-repetitive
and the inventory management need not be scientific.

Symbolic approach

It assigns code in such a manner that the same item number is not allotted to two different materials. The code is
designed such that it can be used to tell many things about an item of material.

The system uses either a numeric codification system or an alphanumeric system. Under the numeric system, a
set of numeric code (length pre-decided) is assigned to each item where different parts of the code describe
different aspects of an item: class, subclass, unique running number of that item, location of the storage
suppliers’ code, etc.
Example:

2 145 098 344

Class Subclass Running Location code

number

Thus, the code of this item shall be a 10 digit code, 2145098344 and it shall always remain so for
this item. It shall then be easy to communicate about this item among the concerned agencies.
Similarly, there can be a code using alpha numeric value like AA223B234 with different alpha
and numerical value describing some pre-decided meaning. It is also called mnemonic system.
Since this code has certain logic, it is also called intelligent code and this system is widely used
everywhere.

Use of drawing numbers

Many firms use drawing numbers as codes to identify an item. Since the drawing number for a
firm remains unique, assigning a code on this basis assumes a unique code for that item and
hence, confirms the requirement of a unique identification for the item.

3. Standardisation

Standardisation means “formulation, publication and implementation of guidelines, rules and

specifications for common and repeated use, aimed at achieving optimum degree of order or uniformity
in a given context, discipline, or field”. Publication means communication of a message, statement, or
text through any means such as audio, video, print, electronically as an e-book or on the web.
Specification means exact statement of the particular needs to be satisfied or essential characteristics
that a customer requires in goods, material, method, process, service, system, or work and which a
vendor must deliver. Specifications are written usually in a manner that enables both parties (and/or an
independent certifier) to measure the degree of conformity.

4. Scheduling

Scheduling means “assigning an appropriate number of workers to the jobs during each day of
work and determining when an activity should start or end”. Schedule depends on the following:

 duration
 predecessor activity (or activities)
 predecessor relationships
 resource availability
 target completion date of the project

5. Procurement
Procurement means acquisition. It includes the complete process of obtaining goods and services
from preparation and processing of a requisition to receipt and approval of the invoice for
payment. It is also called sourcing.

Procurement involves the following activities:

 purchase planning
 standards determination
 specifications development
 supplier research and selection
 value analysis
 financing
 price negotiation
 making the purchase
 supply contract administration
 inventory control and stores, and
 disposals and other related functions

6. Purchasing
Basically, the job of a materials manager is to provide to the user departments, right material at the right
time in right quantity of right quality at right price, from the right source. To meet these objectives, the
activities undertaken include selection of sources of supply, finalisation of the terms of purchase,
placement of purchase orders, follow up, maintenance of relations with vendors, approval of payments to
vendors, evaluating, rating and developing vendors.
Before deciding the quantity to be purchased, the following factors should be taken into consideration:
 Quantity already ordered•
 Quantity reserved - It may happen that a particular quantity, though in hand, might have been
reserved for a particular job which is not available for other purposes. In such cases, this quantity
is such, as if it is not in stock
 Funds availability - Amounts which are kept aside for drawing up purchase budget should be
considered
Normally, the process of purchasing the materials involves the following stages:
 Requisitioning: At this stage, the purchasing officer should receive an accurate description of the
goods or service required. The requisition form by which a member of staff notifies purchasing
officer of a need for goods or services should be simple, but clear. The more accurate and detailed
the requisition form is, the more are the chances that the purchase will meet the expectations.
 Financial approval: Here, the purchasing officer must be given the approval from a responsible
person. It should be done before the purchasing commitment is made, and the purchasing system
should ensure that this is done at the right time and by the right person.
  Market assessment: The purchasing officer receives an approved requisition and starts market
research in this stage. He should check that the item is not already in stock, that there is a
competitive market for the item, if there is a list of “approved suppliers” for the item, if a lower
price can be negotiated, and so on.
 Purchase decision: During purchase decision stage, after the purchasing officer completed the
market assessment • and determined the method of purchase, he decides on the supplier or
suppliers. To avoid internal customer complaints or audit reproof, the decision must be well
documented to provide clear reasons as to why a particular supplier has been chosen.
 Ordering: At the ordering stage, the main instrument purchasing officer works with is an order
form. The order form is an official, numbered document which details the purchase requirements
and authorises the supplier to deliver the goods or services to the company. Also, it can fulfil
other important functions.
 Delivery: At the delivery stage, the purchasing officer controls the method, terms and time of
delivery established while ordering. In case there is a competitive transport market, wise
freighting decisions can lead to considerable cost savings.
 Receipting and accounting: At this stage, the purchasing officer should check whether the quality
and quantity • of delivered goods or services are relevant to ones in the purchase order. Usually,
suppliers are not paid until the goods are checked however, this procedure should be taken up
without unnecessary delays to ensure that payment terms are met.
 Payment: At the payment stage, the purchasing officer makes sure that the payments are made on
the dates they are due, because maintaining good supplier relations is very important. Also, he
should control the terms of payment in case, they include previously negotiated discounts,
progress payments or postponement of payment during warranty period.

6. Inspection
Inspection involves critical appraisal involving examination, measurement, testing, gauging, and
comparison of materials or items. An inspection determines if the material or item is in proper quantity
and condition, and if it conforms to the applicable or specified requirements.
Inspection is generally divided into three categories:
 Receiving inspection
 In-process inspection and
 Final inspection

7. Quality Control
A subset of the quality assurance (QA) process, it comprises of activities employed in detection and
measurement of the variability in the characteristics of output attributable to the production system, and
includes corrective responses. In quality control the role of inspection is to verify and validate the
variance data.

8. Packaging
Packaging includes processes (such as cleaning, drying, and preserving) and materials (such as glass,
metal, paper or paperboard, plastic) employed to contain, handle, protect, and/or transport an article. The
role of packaging is expanding and may include functions such as to attract attention, assist in promotion,
provide machine identification (barcodes, etc.), impart essential or additional information, and help in
utilisation.

9. Storage
Storage means non-transitory, semi-permanent containment, holding or placement of goods or materials,
usually with the intention of retrieving them at a later time. It does not include the interim accumulation
of a limited amount during processing, maintenance, or repair.
10. Inventory Control
Inventory control covers aspects such as setting inventory levels, doing various analyses such as
ABC, XYZ, etc, fixing economic order quantities (EOQ), setting safety stock levels, lead time
analysis and reporting.
11. Distribution
Distribution means movement of goods and services from the source through the distribution channel,
right up to the final customer, consumer, or user.
12. Disposal
Disposal means final placement or riddance of wastes, excess, scrap, etc., under proper process and
authority with (unlike in storage) no intention to retrieve. Disposal may be accomplished by
abandonment, destruction, internment, incineration, donation, sale, etc.

Functions of Material Management:

Material management covers all aspects of material costs, supply and utilization. The functional
areas involved in material management usually include purchasing, production control, shipping,
receiving and stores.

The following functions are assigned for material management:

1. Production and Material Control:

Production manager prepares schedules of production to be carried in future. The requirements

of parts and materials are determined as per production schedules. Production schedules are
prepared on the basis of orders received or anticipated demand for goods. It is ensured that every
type or part of material is made available so that production is carried on smoothly.

2. Purchasing:

Purchasing department is authorized to make buying arrangements on the basis of requisitions

issued by other departments. This department keeps contracts with suppliers and collects
quotations etc. at regular intervals. The effort by this department is to purchase proper quality
goods at reasonable prices. Purchasing is a managerial activity that goes beyond the simple act of
buying and includes the planning and policy activities covering a wide range of related and
complementary activities.

3. Non-Production Stores:

Non-production materials like office supplies, perishable tools and maintenance, repair and
operating supplies are maintained as per the needs of the business. These stores may not be
required daily but their availability in stores is essential. The non-availability of such stores may
lead to stoppage of work.
4. Transportation:

The transporting of materials from suppliers is an important function of materials management.

The traffic department is responsible for arranging transportation service. The vehicles may be
purchased for the business or these may be chartered from outside. It all depends upon the
quantity and frequency of buying materials. The purpose is to arrange cheap and quick transport
facilities for incoming materials.

5. Materials Handling:

It is concerned with the movement of materials within a manufacturing establishment and the
cost of handling materials is kept under control. It is also seen that there are no wastages or
losses of materials during their movement. Special equipment’s may be acquired for material
handling.

6. Receiving:

The receiving department is responsible for the unloading of materials, counting the units,
determining their quality and sending them to stores etc. The purchasing department is also
informed about the receipt of various materials.

Importance of Material Management:

Material management is a service function. It is as important as manufacturing, engineering and finance.
The supply of proper quality of materials is essential for manufacturing standard products. The
avoidance of material wastage helps in controlling cost of production. Material management is essential
for every type of concern.

The importance of material management may be summarized as follows:

1. The material cost content of total cost is kept at a reasonable level. Scientific purchasing helps in
acquiring materials at reasonable prices. Proper storing of materials also helps in reducing their
wastages. These factors help in controlling cost content of products.

2. The cost of indirect materials is kept under check. Sometimes cost of indirect materials also increases
total cost of production because there is no proper control over such materials.

3. The equipment is properly utilized because there are no break downs due to late supply of materials.

4. The loss of direct labour is avoided.

5. The wastages of materials at the stage of storage as well as their movement is kept under control.

6. The supply of materials is prompt and late delivery instances are only few.
7. The investments on materials are kept under control as under and over stocking is avoided.

8. Congestion in the stores and at different stages of manufacturing is avoided.

Summary
 The term material refers to all commodities which are consumed in the production process. The
materials which can be consumed in the production process can be basically classified as direct
materials and indirect materials.
 Material is generally called as raw material. Inventory is a name collectively given to raw
material, work in • process and finished goods.
 Inventory includes idle resources that have future economic value. It indicates that it may be
available in different • forms depending upon the production cycle stage it is in.
 Materials management can be defined as “an integrated management approach to planning,
acquiring, processing • and distributing production materials from the raw material state to the
finished product state”.
 The fundamental objectives of the materials management function are acquisition of materials
and services: of • the right quality, in the right quantity, at the right time, from the right source,
and at the right time.
 A company may hold the inventory with the various motives such as: transaction motive,
precautionary motive, • and speculative motive.
 Material planning is a scientific way of determining the requirements starting with raw materials,
consumables, • spare parts and all other materials that are required to meet the given production
plan for a certain period.
 Materials requirement planning (MRP) considers the annual production plan of the manufacturing
concern.
 Codification or cataloguing is basically an identification system for each item of the inventory.
There are three broad approaches to developing a suitable identification system: arbitrary,
symbolic, and use of drawing numbers approach.
 Standardisation means the formulation, publication, and implementation of guidelines, rules and
specifications • for common and repeated use, aimed at achieving optimum degree of order or
uniformity in a given context, discipline, or field.
 Scheduling means assigning an appropriate number of workers to the jobs during each day of
work and • determining when an activity should start or end.
MATERIAL CONTROL
As stated earlier, materials constitute an important part of the cost of production of a product. It
is, therefore, important to keep a strict control over the cost of materials. Any savings made in
the cost of material will go a long way in reducing the cost of production and improving the
profitability of the concern. It is essential to keep a proper control over materials and supplies
from the time orders for materials are placed with the suppliers until they have been consumed.
Proper control of material can make a substantial contribution to the efficiency of a business.

Definition

Material control may be defined as the regulation of the functions of an organisation relating to
procurement, storage and usage of materials in such a way as to maintain an even flow of
production without excessive investment in material stock. Thus, materials control involves
control of three important function viz., procurement, storage and usage. It has been rightly
pointed out that just as the handling of cash is of utmost important in the case of a non-
manufacturing business, an efficient handling of materials is of vital importance in the case of a
manufacturing business.

Objectives

The following are the main objectives of material control.

1) There should be a continuous availability of all types of materials in the factory so that
production may not be held up for want of any material.

2) Over stocking of materials should be avoided. By doing so the various losses caused by
overstocking can be avoided.

3) Materials should be purchased on the most favourable terms. This helps in effecting maximum
economy in the cost of buying of course, the quality should not be sacrificed at the cost of lower
price.

4) Purchase of materials should be of the right quality consistent with the standards prescribed in
respect of the finished product.

5) Materials should be properly stored so as to prevent losses during storage.

6) The management should be frequently provided with information regarding the cost of
materials and the availability of stock.

Advantages
The main advantages of a good system of material control are as follows:

1) It ensures unrestricted and continuous supply of materials and may be greatly helpful in
preventing production delays.

2) It minimises capital investment in the stock of materials.

3) It considerably reduces the cost of storage and issuing of materials.

4) It eliminates wastage and loss of materials arising on account of spoilage, pilferage, theft, etc.

5) It is immensely helpful in introducing the system of perpetual inventory control by which

accurate ascertainment and valuation of closing stock are facilitated.

6) It ensures the purchase of materials at reasonable prices.

7) It aids management in initiating and formulating proper purchase policies regarding materials.

PROCUREMENT
All organisations lay great efforts to acquire raw materials, components, products, services, and
other resources from suppliers for their operations. In a supply chain, each organisation buys
materials from upstream suppliers, adds value, and sells them to downstream customers. As each
organisation, in turn, buys and sells, the materials move through the whole supply chain. The
trigger that initiates each move is a purchase which is a message that an organisation sends to a
supplier, saying, ‘we have agreed on terms, so send us materials and we will pay you’. In this
process, procurement, purchasing, and sourcing are interchanging tasks having separate
functions as follows:

Procurement:

It is the process of identifying and obtaining goods and services. It includes sourcing, purchasing
and covers all activities from identifying potential suppliers through to delivery from supplier to
the users or beneficiary.

Purchasing:
It is the specific function associated with the actual buying of goods and services from suppliers.

Sourcing:
It is simply identifying and working with appropriate suppliers. It is the process of acquiring
goods, works and services.

Procurement is a strategic process of product or service sourcing, for example researching,

negotiation and planning.
It comprises the following activities:

 Identifying needs and requirements

 Sourcing and evaluating local, national, or international suppliers
 Negotiating terms, conditions, and contracts
 Building and managing supplier relationships
 Performing cost savings and profit margin analysis
 Receiving goods/services and warehouse management
 Processing and organising payment with supplier

Procurement has a vital role in an organisation involving a process of identifying, short listing,
selecting, and acquiring suitable goods or services or works from a third-party vendor through a
direct purchase, competitive bidding, or tendering process while ensuring timely delivery in the
right quality and quantity. Proper procurement is essential to:

 Control spending as organisations can spend more than two thirds of revenue on
procurement, so even small cost reductions can have a big impact.
 Prevent corruption as it is believed to add up to 25% of the cost of procurement contracts.
 Protect the brand of the product or service as accountability is ensured due to information
relating to inadequate supply chains now go right to the higher levels of organisation,
with the company keeping a significant control on it.

The role of procurement in an organisation is to:

a) Ensure uninterrupted flow of raw materials at the lowest total cost.

b) Improve the quality of finished goods produced; and

c) Optimise customer satisfaction.

7 R’s of Procurement. The goal of procurement is to carry out its activities in such a way that
the goods and services, so procured are of the:

1) Right Price

2) Right Quantity

3) Right Quality

4) Right Time

5) Right Place

6) Right Source

7) Right Service
The aim of procurement is to primarily have a reliable supply of materials. Other more
immediate goals being:

 Organising a reliable and uninterrupted flow of materials into an organisation.

 Working closely with user departments, developing relationships, and understanding their
needs.
 Identifying good suppliers, working closely with them, and developing beneficial
relationships.
 Buying the right materials and making sure that they have acceptable quality, arrive at the
time and place needed, and meet any other requirements.
 Negotiating good prices and conditions.
 Keeping stocks low, considering inventory policies, investment, standard and readily
available materials.
 Moving materials quickly through the supply chain, expediting deliveries when
necessary.
 Keeping abreast of conditions, including pending price increases, scarcities, new
products, etc.

PROCUREMENT METHODS

Procurement Process
The procurement process includes identifying a specific product or service
requirement and the various steps on how a business finds new or existing
suppliers, builds supplier relationships, measures cost savings, minimises risk
and is predominately focused on value and return on investment.

A typical procurement process can involve the following steps:

a) Surveying the market

b) Identifying potential suppliers
c) Creating an approved list of vendors
d) Assessing internal needs
e) Preparing a purchase order
f) Requesting proposals and evaluating quotations
g) Selecting the right supplier and negotiating
h) Receiving goods and performing quality checks
i) Developing and managing contracts
j) Obtaining invoice approvals and fulfilling payment terms
k) Establishing a good supplier relationship

Procurement can be either of the following types:

a) Merchant buyers: These include wholesalers and retailers who purchase

for resale.
b) Industrial buyers: These include those who purchase raw materials, capital equipment, or
maintenance, repair, and operating (MRO) supplies.

Procurement activities are often split into two distinct categories:

a) Direct spend:
It is production-related procurement that encompasses all
items that are part of finished products, such as raw material, components,
and parts. It focuses on supply chain management that directly affects the
production process of manufacturing firms.

b) Indirect procurement: It is non-production-related acquisition by obtaining

“operating resources” which a company purchases to enable its operations;
comprises a wide variety of goods and services, from standardised items
like office supplies and machine lubricants to complex and costly products
and services such as heavy equipment, consulting services, and outsourcing
services.

Procurement Cycle

A general approach to procurement has a series of common steps, which start

with a user identifying a need for materials and end with its delivery. Procurement
cycle may be considered as a process to include:

a) Identification of need and requirements:

Based on business objectives, establish a short-term strategy of three to five years followed by
defining the technical direction and requirements.

b) External macro-level market analysis:

Based on its requirements, an organisation assesses the overall marketplace by understanding the
competitiveness of the marketplace and trends that are likely to impact the organisation.

c) Cost analysis:
Accumulation, examination and manipulation of cost data for comparison and projections to help
in plan.

d) Supplier identification:
Identifying suppliers who can provide the required product or services from different sources.

e) Entering into Non-disclosure agreement (NDA):

Request vendors to sign an NDA prior to engaging with them to protect the organisation where
sensitive information is shared with multiple potential vendors.

f) Supplier communication:
Typically conduct competitive bidding processes using a variety of competitive bidding methods
such as requests for quotation, proposals, information, tender, solution or partnership; making
direct contact with the suppliers; samples examined or trials undertaken; and doing best value
assessment.

g) Negotiations and contracting:

To include price, availability, customisation, and delivery schedules which are outlined in
purchase order or formal contract.

h) Logistics and performance management:

To complete supply process based on contract terms, review their experience for reorder to
consider continuing with same suppliers or continue with other suppliers.

i) Supplier management and liaison: Using supplier relationship management process for more
strategic supplies within a formal governance process.

STORAGE OF MATERIALS

After the purchase, receipt and inspection of materials, the next most important step in the
process of material control is concerned with’ the storage of materials which is termed as
‘storekeeping’. Storekeeping is that aspect of material control which is concerned with the
physical storage of goods. For carrying the task of storekeeping, a separate stores department
under the charge of a storekeeper is set up. The storekeeper should have the technical knowledge
and experience in stores routine and the ability of organising various activities relating to the
storage of goods, an efficient system of storekeeping should:
1) Ensure uninterrupted supply of materials and stores without delay to various production and
service departments of the organisation.
2) Prevent overstocking and under stocking of materials.
3) Minimise the cost of storage.
4) Prevent all kinds of stores from theft, deterioration, evaporation and pilferage.
5) Ensure an effective utilisation of available storage space and workers engaged in the process
of storekeeping.
6) Develop a system of providing necessary information about the material items in the stores as
and when required.

Functions of Storekeeping
The following functions are performed by the stores department:
1) Receipt of material from the goods receiving department and ensuring that every Item of
stores received by a storekeeper is duly supported by a indent, a purchase order, an inspection
note and a goods received note.
2) Issue purchase requisition to the purchase department when the stock of material reaches the
re-order level.
3) Maintain proper record of receipt, issue and balance of all items of materials, and check the
bin card balances with the physical quantities in the bins.
4) Placing and arranging materials received at proper and appropriate places and adhering to the
golden principle of storekeeping, i.e., a-place for everything and everything in its place.
5) Issue stores, against proper authorisation, in right quantity of right specification, and at the
right time.
6) Minimising the storage handling and maintaining costs.
7) Ensuring that the stocks neither exceed the maximum leve1 nor go below the minimum level
at any point of time.
8) Preventing the entry of unauthorised persons into the stores.
9) Co-ordination and supervision of staff in the stores department.
10) Carrying out a regular review of the items of stores in hand for locating slow moving and
non-moving items so that the necessary steps may be taken for their disposal before they become
obsolete.

Warehousing
INTRODUCTION

Warehousing is the process of storing physical goods before they are sold or further distributed
in a dedicated warehouse or storage facility. Warehouses safely and securely store products in an
organized way to track where items are located, when they arrived, how long they have been
there, and the quantity on hand.

For small or new businesses, warehousing inventory may be done from home until they outgrow
the space. At that point, a business will have to rent storage space, lease a warehouse,
or outsource logistics to a third-party and store inventory in their warehousing facilities.

In ecommerce, products are stored until an order is placed online, at which point the order is
shipped directly to the consumer from the facility in which it was stored. In traditional retail,
inventory may be temporarily stored in a warehouse before it’s shipped to a brick and mortar
store.

Warehouses play a vital role in the effective operations of a company. Incoming materials and
supplies, in process goods, and finished goods are important assets to a business enterprise. In a
majority of manufacturing organizations, materials constitute the major fraction of cost, i.e., 40
to 80% of total cost. The cost of capital blocked in inventories is substantial. Since production
and consumption cycles rarely match, the success of any business, besides other factors, depend
largely on the process of efficient storage and material control of these assets in order to provide
uninterrupted supply to the points of use or consumption and the warehouse is the place for the
operation of this process. Warehouse management is concerned with carrying the right kind of
materials or goods in right quantity neither in excess nor in short supply and also keeping it safe
against any kind of deterioration, pilferage or theft. Warehouse is the custodian of the
organization’s money, as money is locked up in stocks.

Business organizations utilize warehouses for a variety of needs. It may serve as a storage point
and /or a transit facility for incoming, in process or outgoing goods and also for receipt trans-
shipment of finished goods when located at some point between the company’s plant and its
customer.

DEFINITION

A warehouse may be defined as a place used for the storage or accumulation of goods. The
function of storage can be carried out successfully with the help of warehouses used for storing
the goods.

Warehousing can also be defined as assumption of responsibility for the storage of goods. By
storing the goods throughout the year and releasing them as and when they are needed,
warehousing creates time utility.

Functions of Warehousing:

Following important functions are performed by warehouses:

1) To receive raw materials components, tools, equipments and other items and

account for them.

2) To provide adequate and proper storage and preservation to the various items.

3) To meet the demands of the consuming departments by proper issues and

account for the consumption.

4) To minimize obsolescence, surplus and scrap through proper codification,

preservation and handling .

5) To highlight stock accumulation, discrepancies and abnormal consumption and

effect control measures.

6) To ensure good housekeeping so that material handling, material preservation,

stocking, receipt and issue can be done adequately.

7) To assist in stock verification and stock accounting and provide supporting

information for effective purchase action.

8) To implement and maintain quality systems in warehouses.

Types of Warehouses:

Warehouses can be classified into four groups viz:

(a) Private warehouses

(b) Public warehouses

(c) Bonded warehouses

(d) other type of warehouses

(a) Private Warehouses:

Private warehouses are constructed and owned by the business enterprises in order to store the
products produced by them. These are exclusively owned and used by the producers themselves
and are not meant for other manufacturing or business units.

On account of heavy cost of construction and maintenance of these warehouses, there number is
quite small. Only big business houses can afford to have such type of warehouses.

(b) Public Warehouses:

These are also known as duty paid warehouses. A public warehouse or duty paid warehouse is
one which is open for public at large. Most of the business organisations, especially small and
medium scale, can’t afford to have their own warehouses on account of large financial
investment in their construction and maintenance.

They make use of these types of warehouses, which may be owned by an individual or some
agency whose main object is to provide storage facilities to people for certain fees or charges.
These warehouses operate within rules and regulations formed by the government.
Public warehouses are very useful to businessmen. These warehouses are usually situated near
railway lines or main roads, so as to provide quick transportation services. Goods lying in the
warehouse can be hypothicated to banks and other financial institutions for getting loan and
financial assistance.

Public warehouses ensure greater security and handling of goods on account of latest mechanical
devices used in handling and preserving the goods. Goods can be branded, graded and packed in
desired sizes in the warehouses.

(C) Bonded Warehouses:

Bonded warehouses are used for imported goods which are not granted clearance on account of
non-payment of custom duty by the importer of these goods. Such warehouses are situated near
the ports. Goods can’t be removed from these warehouses until the custom duties are paid.

Bonded warehouses may be run by the government or private agencies (when granted licenses to
operate such warehouses). In both the cases there is a strict control and supervision imposed by
custom authorities on their operation and functioning.

Importer of the goods has some control over his goods and he can inspect and check the goods as
and when he wants. After making part payment of the custom duty, goods can be proportionately
withdrawn from these warehouses.

Goods kept in these warehouses can be branded, packed, graded, labeled and canned in the
warehouse itself. Bank loans can be raised with the help of receipt issued by these warehouses by
giving that receipt as collateral security.

There is a least possibility of goods being exposed to any risk of theft, damage and deterioration.
The entrepot trade i.e., re-export of imported goods is greatly facilitated as the importer can have
the delivery of goods without paying any custom duty.

Other type of Warehouses:

These include:

(a) Special Commodity Warehouses.

(b) Cold Storages or Refrigerated Warehouses.

(c) Institutional Warehouses.

(A) Special Commodity Warehouses:

These warehouses are constituted for storing a particular type of commodity, e.g., tobacco,
cotton, wheat etc. Mature of commodity is important in selecting the type of warehouse. For
storing petrol, storage tanks are needed and for storing agricultural products, godowns are
needed.

(B) Cold Storage or Refrigerated Warehouses:

These are the warehouses which are used for storing perishable commodities like eggs, butter,
fruits, vegetables, fish, fresh meat etc. Goods stored in cold storages can be held for longer time.
Infact, cold storages have made possible the regular supply of certain commodities throughout
the year.

For example, fruits and vegetables of all types can be made available to the people throughout
the year. Refrigerated warehouses have greatly improved the modern way of life.

(C) Institutional Warehouses:

Different institutions and bodies have their own warehouses on account of the nature of their
operations. For example, Banks, Railways, Food Corporation of India etc. has their own
warehouses for conducting their activities. Banks keep the stock of the parties in these
warehouses as security against the loans advanced.

Railways maintain warehouses to store large quantity of goods. Goods to be dispatched to

different parts of the country are kept in warehouses before they are sent. Similarly, goods
received for the purpose of delivery are kept till they are disbursed to the claimant.

Various transport agencies also maintain warehouses for storing the goods which are to be
dispatched and received. Food Corporation of India has built many big warehouses throughout
the country for storing agricultural products.