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MATERIALS MANAGEMENT

- AN OVERVIEW

INTRODUCTION
For running any industry or business, we

need a number of resources. These resources are popularly known as 5 M's of any Industrial activity i.e. Men Machines Methods of Production & Management. Money Oil price hike Materials 1900 to till date

INTRODUCTION
In the past there were well defined and rigid

boundaries between organizations.


JIT viewed suppliers as partners

mutual analysis for cost reduction mutual product design greatly reduced inventory improved communications (internet, EDI)

In many organization, materials form the largest

single expenditure item.

INTRODUCTION
Planning and controlling the flow of materials

that are the part of the inbound logistics.


Objectives:

Maximize the use of the firms resources Provide the required level of customer service

Company Objectives
Income = Revenue - Expense
Need to increase income with:

Best customer service Lowest production costs Lowest inventory investment Lowest distribution costs

Importance of MM
Materials input is very important

as excess material as inventory causes costs to the company. shortage of material results into stoppage of conversion process and subsequently shortage of finished goods leading to customer dissatisfaction.

The efficiency of organization depends upon the availability of right materials, in right quantity at the right time & at the right place.

Importance of mm
Materials Management and Profits
Direct labour

Direct material

Varies with volume sold

Overhead

Does not vary with volume sold

Materials Management and Profits


Dollars $1,000,000 % of Sales 100 50 20 20 90 10

Sales Revenue Cost of Goods Sold Direct Material $500,000 Direct Labour $200,000 Overhead $200,000 Total Cost of Goods Sold $900,000 Gross Profit $100,000

Materials Management and Profits


Reduce Materials by 10% and Labor by 5%
Dollars $1,000,000 % of Sales 100

Sales Revenue Cost of Goods Sold Direct Material $450,000 Direct Labour $190,000 Overhead $200,000 Total Cost of Goods Sold $840,000

45 19 20 84 16

Gross Profit

$160,000

Profit has increased 60%

Materials Management and Profits


To get the same result (+ 60% profit) through Sales
Dollars $1,200,000 % of Sales 100

Sales Revenue Cost of Goods Sold

Direct Material Direct Labour Overhead


Gross Profit

$600,000 $240,000 $200,000


$1,040,000

50 20 17
87

Total Cost of Goods Sold

$160,000

13

Sales must increase by 20%

Importance of MM
Out of 5Ms, that are inputs to a conversion process,

material is substantial in terms of its contribution to product cost and current assets.

51.1% of product cost is on account of materials. Materials account for 70% to 80% of working capital.

Accounts payable are mostly to materials suppliers

Importance of MM
Quality of the Input and Product quality:

When the companies become leaner and leaner, it is crucial that inputs should remain in the plant only as long as the Through Put Time demands

and the output product should be Right First Time.

Materials adds value

to a product, apart from manufacturing & distribution. Establishment expenses, depreciation on facilities & equipments & other expenses.

Importance of MM
Management of materials is crucial in a Just In Time

company.

Production process needs very strong materials management support to gear up to face challenges of current market.

Materials management provides information about

availability of new products and services in the market which leads to cost efficient changes in the process

Materials Management Definition


Materials management is the management of the

flow of materials into an organization to the point, where those materials are converted into the firms end product(s) Bailey & Farmer the planning, sourcing, purchasing, moving, storing & controlling materials in an optimum manner, so as to provide the pre-decided service to the customer at a minimum cost .

Materials Management is the function responsible for

Functions of MM
Materials Planning & Control Primary function.

The market forecast is converted into production schedules by production planning and control. Materials management prepares the materials plan to meet the production schedule. The plan is then implemented and controlled. Purchasing Sourcing the supply after short listing suppliers through vendor rating. Preparation placement of purchase order, follow up, transportation and handling.

Functions of MM
Storage & Preservation The procured material is to be stored and preserved against internal and external deterioration and theft. Against the authorized demand the material from the store is retrieved and issued.

Inventory control Inventory control function controls the inventory levels to ensure shortage free and excess free stock to check the costs and ensure customer satisfaction

Integrated Approach to MM
Need for Integrated Approach
Conflict of Interest within departments

Purchase Production Marketing

To

exercise control & coordination by materials manager. Rapid Transfer of Data common message channel

Integrated Approach to MM
Considering the importance of materials,

establishments have a centralized authority vested with the responsibility of planning, procuring, preserving, handling, usage & other related aspects.
Such

centralized authority wherein, all related activities of materials are combined is called Integrated Materials Management.

Benefits of Integration
Better Accountability

No mans lands of cost between various functions are now addressed effectively by integrated materials management function.

Coordination

The inter departmental conflicts are balanced. As a result various functions work like a team under the control of Materials Manager.

Benefits of Integration
Better performance

Performance of Materials management improves on account of the first two results of integration. Accountability reduces costs and teamwork improves productive performance. Computerization requires preparatory work that calls for integrated efforts where there is no scope for conflicts. Internal conflicts make computerization untenable

Adaptability to EDP

Benefits of Integration
Other Benefits

Present & Future: At present industry in our country is passing through the transition from traditional systems to Just in Time like production. Just In Time needs dependable procurement systems. Only an integrated materials management function can provide such support to operations.

Objectives of MM Primary Objectives


Low Prices Reduced operating cost Enhances profit Includes transportation High Inventory Turnover Value of inventories to be low in relation to sales leads to efficiency. Higher ROI Reduces storage costs.

Objectives of MM Primary Objectives


Low Cost Acquisition and Possession Reduced handling and storage costs.(through shipments in large quantities) Continuity of Supply Alternative sources Captive suppliers, Flexible suppliers

Objectives of MM

Primary Objectives
Consistency of Quality Variety of items of different qualities needed. Rigid specification to be meet Low Payroll Costs Low operating costs of material personnel leads to higher profits.

management

Objectives of MM

Primary Objectives
Favorable Supplier Relations Attract customers Product Development & Research efforts are passed on. Last minute cancellation. Development of Personnel Long term growth of company Good Records Prevents corruption

Objectives of MM Secondary Objectives


Reciprocal Relations Purchase department Deliberately buying from its own customers New Materials and Products - Purchase department Working closely with design and research departments for development of new materials and products.

Objectives of MM Secondary Objectives


Economic Make or Buy Co-ordinating and assisting other departments in make-buy decisions Standardization Design & Engineering Department Fewer number of items Review stock to weed out non-standard items Standardization of suppliers

Objectives of MM Secondary Objectives


Product Improvement - Design & Engineering

Department

Suggesting materials or components that will do better or equivalent job at lower cost

Interdepartmental harmony Define departmental responsibilities clearly Familiarize others with materials directives, polices & organization.

Objectives of MM Secondary Objectives


Forecasts Forecasts in terms of prices, availability and general market conditions are to be regularly monitored towards taking important business decisions.
Acquisitions Helps to takeover bids since they have wide contacts with other company executives.

Organizing Materials Management


DIRECTOR - MATERIALS

Purchasing

Stores & Inventory Management

Warehouses

Disposal Of Non-moving & Slow Moving Materials

Organizing Materials Management


Head

of MM department Director/ManagerMaterials Subordinated Functions (As in the fig above)


Where cost of materials is a major part of the cost

production, materials management is not considered as a sub function of production, but considered as equal to production management.

Materials Management Functional


GENERAL MANAGER

Engineering Manager

Finance Manager

Materials Manager

Marketing Manager

Personnel Manager

Traffic Manager

Purchasing Manager

Materials Control Manager

Materials Management Functional


The overall job of management is delegated by its

major functions specialization of skills

to

promote

maximum

Division of work at the 3rd level is also usually

functional.
For example, the materials management job is

divided functionally into its traffic, purchasing & materials control elements

Materials Management Product


PURCHASE AGENT

Purchasing Agent Product A

Purchasing Agent Product B

Purchasing Agent Product C

Materials Management product


To make individual conscious of profit margins by

giving responsibility of performing vital function in the manufacture & marketing of a particular product/product line.
For example, one buyer may specialize in castings &

forgings, another in sheet steel, another in production parts & so on.

Materials Management product


Advantages

No wasteful Duplication of efforts Specialization Bulk Buying & standardization

Disadvantages

Tends to disperse the overall materials efforts Maruti Udyog Ltd.

Materials Management Location


CORPORATE PURCHASE MANAGER

Purchasing Agent Plant A

Purchasing Agent Plant B

Purchasing Agent Plant C

Materials Management Location


When similar functions are being performed in areas

remote from one another, division of work by location is desirable.


Within one plant also, there may be more than one

receiving, shipping or stores department


For example, one Pune based automobile company

has field expediters in Delhi, Bangalore, Chennai & Mumbai to expedite needed shipments from various suppliers

Materials Management Location


Advantages All the benefits of Centralized & centralized set up. Disadvantages All the disadvantages of Centralized & centralized set up

Centralization & De Centralization


The need of the organization triggered by product,

process and market that ultimately decides how the control should be exercised on the material function.
The control may be centralized or decentralized fully

or in parts keeping in mind overall need.


Management

education can provide knowledge about available options in practice but the choice rests with the corporate management. New options can be developed to satisfy specific needs conceptually combining various available options.

Centralization & De Centralization


Centralization - Centralized control keeps most of the decision making at headquarters level delegating only routine level decision making. Decentralization - Decentralized control delegates decision making to unit level enabling the units to respond to their respective environment.

Benefits of Centralization
Bulk Buying Combining the requirements of all units to buy in bulk and gain benefits of bulk buying. Interplant

transfer of material emergencies in individual plants.

to

deal

with

And interplant transfer to utilize surplus material available at some plant and thereby reduce overall inventory cost for the company.

Benefits of Centralization
Benefit of specialized skills of one individual at the

corporate level to all the units or plants.

Buying needs specialized skills specific to the commodity in market specially buying is in large quantities. Knowledge of the market is essential to anticipate market trends in terms of price and availability.

Benefits of unity of command. Centralized material research resulting in savings for

the company.

Benefits of De - Centralization
Decentralization

overcomes problems posed by significant physical separation between Plants and Central Office.

These problems can occur due to information flow. They may occur due to lack of sensitivity to environment due to physical separation .

Uniqueness of product line requirement of each

Plant:

When individual plants are engaged in production of different products, their requirement is product specific and thereby unique.

Benefits of De - Centralization
Better

coordination with functions of the plant:

Production

&

other

Production is the internal customer of material management function. Decentralized control enjoys the benefit of being close to the customer. There is also the need to interact with various other functions in the plant. Decentralized control can take decisions based on these interactions effectively.

Supportive to the Concept of Profit Center: Any successful attempt to reduce this cost without harming the QCD objectives of the company results into profit.

Inter departmental relationships


Materials management will have to work in close

coordination with

Production, Marketing & Finance departments.

Mutual trust within these departments will help to

achieve total organizational objectives.

Inter departmental relationships


Materials Management and Production
Production Department Information about its plan & schedules to facilitate the MRP Adjustment in Sales forecast Changes in Schedules
Materials Management Department Informed about the list of suppliers, availability of new materials & anticipated delay for re-scheduling of production & avoiding stock outs Expertise can be used in purchasing capital equipments

Inter departmental relationships


Materials Management and Finance
Close coordination

In anticipating funds requirements Payment of bills to suppliers Insurance & so on

Strong and dependable delivery system

Materials Management and Engineering


Materials

Management plan activities involving change in material inputs. This obviously has an impact on design of the product and process of manufacturing.

Inter departmental relationships


Materials Management and Marketing
Marketing Department

Gives advance information on requirement to facilitate planning. Through efficient competitive level. operations can

forecast

&

special

Materials Management Department

keep

prices

at

Formal Committees

Consisting of executives from various department to finalize annual sales targets, production programmes, total budget, materials budget etc Formal organizational arrangement helps in further interdepartmental relationships