Material management

Every organization, big or small, depends on materials and services from other
organizations to varying extents. These materials and services are obtained through
exchange of money and the physical arrangement of it all is called Materials
Management or even Material Management.

Definition
Planning and control of the functions supporting the complete cycle (flow) of materials,
and the associated flow of information. These functions include (1) identification, (2)
cataloging, (3) standardization, (4) need determination, (5) scheduling,
(6) procurement, (7) inspection, (8) quality control, (9) packaging, (10) storage,
(11) inventory control, (12) distribution, and (13) disposal. Also called materials
planning

4.1 INTRODUCTION AND MEANING

Materials management is a function, which aims for integrated approach towards the management
of materials in an industrial undertaking. Its main objective is cost reduction and efficient handling
of materials at all stages and in all sections of the undertaking. Its function includes several
important aspects connected with material, such as, purchasing, storage, inventory control, material
handling, standardisation etc.

4.2 SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT

Materials management is defined as “the function responsible for the coordination of planning,
sourcing, purchasing, moving, storing and controlling materials in an optimum manner so
as to provide a pre-decided service to the customer at a minimum cost”.
From the definition it is clear that the scope of materials management is vast. The functions
of materials management can be categorized in the following ways: (as shown in Fig. 4.1.)
1. Material Planning and Control
2. Purchasing
3. Stores Management
4. Inventory Control or Management
5. Standardisation
6. Simplification
7. Value Analysis
8. Erogonomics
9. Just-in-Time (JIT)
All the above mentioned functions of materials management has been discussed in detail
 
Various materials used as inputs, such as raw materials, consumables & spares, are
required to be purchased and made available to the shops / users as & when needed to
ensure uninterrupted production. Therefore, efficient management of input materials is
of paramount importance in a business organization for maximizing materials
productivity, which ultimately adds to the profitability of the organization.
The main concern of any Business management is to maximise the Return on
Investment (ROI). The relationship of various entities here can be expressed as: 

                                          Profit                      Sales

                           ROI  =   ---------- X ----------------------------------------- 
                                          Sales        Current Asset + Fixed Asset

Thus ROI = profit margin + asset turnover rate

A firm's profit margin reflects management's ability to control costs in relations to
revenue. The asset turnover rate reflects management's ability to effectively utilize the
firm's productive assets.

Hence a firm can improve ROI in three ways :

 By reducing cost
    By getting more sales from available assets or Get
Currency converter
 By some combination of the above 
Thus , it is the cost control that holds the key

In many manufacturing organisations, the cost of materials

alone happens to range from 40 % to 60 % of the total
expenditure. Obviously, a better management of material is
expected to ensure reduction in overall cost of operation
and smoothness in supply of inputs. 

This requires well coordinated approach towards various

issues involving decision making with respect to materials.
   
All the materials related activities such as material planning & indenting, purchase
systems & procedure, variety reduction through standardization & rationalization,
reducing uncertainties in demand & supply, handling & transportation, inspection,
proper storage & issue of materials to the internal customers, inventory management,
vendor management & finally disposal of obsolete, surplus & scrap materials etc. taken
together is termed as “INTEGRATED MATERIALS MANAGEMENT”

To carry out these functions efficiently, it is essential to have a very good supplier base,
order booking process & inventory management system as well as expertMATERIALS
MANAGEMENT (MM) professionals. 
 
Materials management ,thus, can be defined as a joint action of various materials
activities directed towards a common goal and that is to achieve an integrated
management approach to planning, acquiring processing and distributing production
materials from the raw material state to the finished product state.

Materials Management as such is a key business function that is responsible for co-
ordination of planning, sourcing, purchasing, moving , storing and controlling materials
in an optimum manner so as to provide a pre-decided service to the customer at a
minimum cost.

In its process of managing , materials management has such sub fields as inventory
management , value analysis, receiving, stores and management of obsolete , slow
moving and non moving.
Materials Management's scope is vast. Its sub functions include Materials planning and
control, Purchasing, Stores and Inventory Management besides others. The various
activities represent these four functions:

Learn Purchase Procedure

 Planning and control  
 Purchasing  
 Value analysis and
 Physical distribution

The planning and control functions are inventory management , production planning and
scheduling. 

Purchasing functions are buying, subcontracting, value analysis and follow ups. 

Distribution functions are receiving , packaging, shipping, transportation and storage,

making it the Integrated Materials Management. 

Integrated Materials Management

Various functions served by materials management include the material planning,
purchasing, receiving, stores, inventory control, scrap and surplus disposal. All these
functions can have separate working norms including the one for  performance.

Efficient management of input materials is

   of utmost importance in a business
organization for maximizing materials
productivity, which ultimately adds to the
profitability of the organization.

This requires well coordinated approach

towards various issues involving decision
making with respect to materials. 
All the materials related activities such
 as material planning & indenting, purchase
systems & procedure, variety reduction
through standardization & rationalization,
reducing uncertainties in demand &
supply,

handling & transportation, inspection, proper storage & issue of materials to the internal
customers, inventory management, vendor management & finally disposal of obsolete,
surplus & scrap materials etc. taken together is termed as Integrated Materials
Management. 
 

For example , while inventory manager would like to have minimum level of inventory to
show of his performance , Purchasing manager would like to place bulk orders in order
to lessen his work load and show discounts as reductions. Both of these acts may be
little contradictory from the organisational point of view. That is if some of the functions
were to be handled separately, a conflict of interests may occur. 

Therefore, the conflicting objectives need to be balanced and intertwined from a total
organisational viewpoint so as to achieve optimum results for the organisation as a
whole.

In an integrated set up, one materials manager (usually the chief) is responsible for all
such inter related functions and he is in a position to exercise control and coordinate all
the activities with a view to ensure proper balance of the conflicting objectives of the
individual functions.
 
  
Integration also attains the synergetic
advantage in terms of eliminating water
tight compartments that set in in a
disjointed environment of working. The
resulting benefits can be seen in terms of
rapid transfer of data, through effective and
informal communication channels.

This is crucial as the materials

management function involves handling
vast amount of data. Therefore, integrating
the various functions  identify themselves to
a common materials management
department which in turn results in greater
coordination and better control.  Now a

days , in many tradition bound companies too, even the spare part planning which
hitherto was done by the operation people has been brought under the umbrella of an
 Integrated materials Management.
Better accountability ,better coordination, better performance, better adaptability to EDP
are some of the tangible advantages of the Integrated Materials Management besides a
perceptible team spirit , morale and cooperation are the intangible gains.
 

  
Training and development of staff and executive
through rotation of people is another great
advantage because of a bigger canvas produced by
integration of Materials function.

To carry out these functions efficiently, it is

essential  

to have a very good supplier base, order booking process & inventory management

system as well as expert Materials Management (MM) professionals

ABC analysis is a business term used to define an inventory categorization technique

often used in materials management. It is also known as Selective Inventory Control.

ABC analysis provides a mechanism for identifying items that will have a significant impact on overall
inventory cost, [1] while also providing a mechanism for identifying different categories of stock that will
require different management and controls.[2]

When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity
issued/consumed in period) with the results then ranked. The results are then grouped typically into three
bands[3]. These bands are called ABC codes.

ABC codes

1. "A class" inventory can be any thing which is used to reflect adhoc material management
requirement.
2. "B class" inventory can be any thing which is used to reflect semi adhoc material management
requirement.
3. "C class" inventory can be any thing which is used to reflect permenent material management
requirement.
Uses
An ABC analysis requires directionally correct data. It relies on the availability of systems
allowing measurement of the criteria chosen for the analysis.
This availability of data becomes critical whenever the population on target is spread over
several sites, countries, etc., or worse, is not coded in a homogeneous way. Sometimes, a
conversion of data using product standard codes is mandatory.
Tool Limitations / Common Pitfalls
Most of the time only past annual spend is available to perform an ABC analysis. By
definition it is what was “bought” but not what will be the next year’s spend. The use of past
annual spend is fine if the business needs will not change in the near future. The buyer may
consider that next year figures will be the same as the last year’s one. In the case where the
buyer considers that the future needs may vary from the past figures, it would be better,
whenever available, to use “future annual spend” provided by the internal customers or
“budgeted” figures.
Special attention must be given to risk issues as explained in the When and Why to use it
section.

4.4 PURCHASING
Purchasing is an important function of materials management. In any industry purchase means
buying of equipments, materials, tools, parts etc. required for industry. The importance of the
purchase function varies with nature and size of industry. In small industry, this function is
performed by works manager and in large manufacturing concern; this function is done by a
separate department. The moment a buyer places an order he commits a substantial portion of
the finance of the corporation which affects the working capital and cash flow position. He is
a highly responsible person who meets various salesmen and thus can be considered to have been
contributing to the public relations efforts of the company. Thus, the buyer can make or mar the
company’s image by his excellent or poor relations with the vendors.

4.4.3 Purchasing Procedure

The procedure describes the sequence of steps leading to the completion of an identified specific
task. The purchasing procedure comprises the following steps as indicated in Fig

1. RECOGNITION OF THE NEED

The initiation of procedure starts with the recognition of the need by the needy section. The
demand is lodged with the purchase department in the prescribed Purchase Requisition Form
forwarded by the authorised person either directly or through the Stores Department. The
purchase requisition clearly specifies the details, such as, specification of materials, quality and
quantity, suggested supplier, etc. Generally, the low value sundries and items of common use are
purchased for stock while costlier and special items are purchased according the production
programmes. Generally, the corporate level executives are authorized signatories to such
demands.
Such purchases are approved by the Board of Directors. The reference of the approval is made
on requisition and a copy of the requisition is sent to the secretary for the purpose of overall
planning and budgeting.
2. THE SELECTION OF THE SUPPLIER
The process of selection of supplier involves two basic aspects: searching for all possible sources
and short listing out of the identified sources. The complete information about the supplier is
available from various sources, such as, trade directories, advertisement in trade journals, direct
mailing by the suppliers, interview with suppliers, salesmen, suggestions from business
associates,
visit to trade fair, participation in industries convention, etc. Identification of more and more
sources
helps in selecting better and economical supplier. It should be noted that the low bidder is not
always
the best bidder. When everything except price is equal, the low bidder will be selected. The
important considerations in the selection are the price, ability to supply the required quantity,
maintenance of quality standards, financial standing etc. It should be noted that it is not
necessary
to go for this process for all types of purchases. For the repetitive orders and for the purchases
of low-value, small lot items, generally the previous suppliers with good records are preferred.
3. PLACING THE ORDER
Once the supplier is selected the next step is to place the purchase order. Purchase order is a
letter sent to the supplier asking to supply the said material. At least six copies of purchase order
________ __ _____ _ __
are prepared by the purchase section and each copy is separately signed by the purchase officer.
Out these copies, one copy each is sent to store-keeper, supplier, accounts section, inspection
department and to the department placing the requisition and one copy is retained by the
purchase
department for record.
Fig. 4.4 Purchasing procedure
4. FOLLOW-UP OF THE ORDER
Follow-up procedure should be employed wherever the costs and risks resulting from the
delayed
deliveries of materials are greater than the cost of follow-up procedure, the follow-up procedure
tries to see that the purchase order is confirmed by the supplier and the delivery is promised. It
is also necessary to review the outstanding orders at regular intervals and to communicate with
the supplier in case of need. Generally, a routine urge is made to the supplier by sending a
printed
post card or a circular letter asking him to confirm that the delivery is on the way or will be made
as per agreement. In absence of any reply or unsatisfactory reply, the supplier may be contact
through personal letter, phone, telegram and/or even personal visit.
5. RECEIVING AND INSPECTION OF THE MATERIALS
The receiving department receives the materials supplied by the vendor. The quantity are verified
and tallied with the purchase order. The receipt of the materials is recorded on the specially
designed receiving slips or forms which also specify the name of the vendor and the purchase
order number. It also records any discrepancy, damaged condition of the consignment or
inferiority
of the materials. The purchase department is informed immediately about the receipt of the
materials. Usually a copy of the receiving slip is sent to the purchase department.
6. PAYMENT OF THE INVOICE
When the goods are received in satisfactory condition, the invoice is checked before it is
approved for the payment. The invoice is checked to see that the goods were duly authorised
to purchase, they were properly ordered, they are priced as per the agreed terms, the quantity
and quality confirm to the order, the calculations are arithmetically correct etc.
7. MAINTENANCE OF THE RECORDS
Maintenance of the records is an important part and parcel of the efficient purchase function.
In the industrial firms, most of the purchases are repeat orders and hence the past records serve
as a good guide for the future action. They are very useful for deciding the timings of the
purchases and in selecting the best source of the supply.
8. MAINTENANCE OF VENDOR RELATIONS
The quantum and frequency of the transactions with the same key suppliers provide a platform
for the purchase department to establish and maintain good relations with them. Good relations
develop mutual trust and confidence in the course of the time which is beneficial to both the
parties. The efficiency of the purchase department can be measured by the amount of the
goodwill it has with its suppliers.

4.6 INVENTORY CONTROL OR MANAGEMENT

4.6.1 Meaning of Inventory

Inventory generally refers to the materials in stock. It is also called the idle resource of an
enterprise. Inventories represent those items which are either stocked for sale or they are in the
process of manufacturing or they are in the form of materials, which are yet to be utilised. The
interval between receiving the purchased parts and transforming them into final products varies
from industries to industries depending upon the cycle time of manufacture. It is, therefore,
necessary to hold inventories of various kinds to act as a buffer between supply and demand for
efficient operation of the system. Thus, an effective control on inventory is a must for smooth
and efficient running of the production cycle with least interruptions.

4.6.2 Reasons for Keeping Inventories

1. To stabilise production: The demand for an item fluctuates because of the number of
factors, e.g., seasonality, production schedule etc. The inventories (raw materials and
components)
should be made available to the production as per the demand failing which results in stock out
and the production stoppage takes place for want of materials. Hence, the inventory is kept to
take care of this fluctuation so that the production is smooth.
2. To take advantage of price discounts: Usually the manufacturers offer discount for
bulk buying and to gain this price advantage the materials are bought in bulk even though it is
not required immediately. Thus, inventory is maintained to gain economy in purchasing.
3. To meet the demand during the replenishment period: The lead time for procurement
of materials depends upon many factors like location of the source, demand supply condition,
etc.
So inventory is maintained to meet the demand during the procurement (replenishment) period.
4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the
delivery schedules at 100 per cent service level, means they cannot afford to miss the delivery
schedule which may result in loss of sales. To avoid the organizations have to maintain
inventory.
5. To keep pace with changing market conditions: The organizations have to anticipate
the changing market sentiments and they have to stock materials in anticipation of non-
availability
of materials or sudden increase in prices.
6. Sometimes the organizations have to stock materials due to other reasons like suppliers
minimum quantity condition, seasonal availability of materials or sudden increase in prices.

4.6.5 Benefits of Inventory Control

It is an established fact that through the practice of scientific inventory control, following are the
benefits of inventory control:
1. Improvement in customer’s relationship because of the timely delivery of goods and
service.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilisation of working capital. Helps in minimising loss due to deterioration,
obsolescence damage and pilferage.
4. Economy in purchasing.
5. Eliminates the possibility of duplicate ordering

4.6.7 Inventory Model

ECONOMIC ORDER QUANTITY (EOQ)

Inventory models deal with idle resources like men, machines, money and
materials. These models are concerned with two decisions: how much to order
(purchase or produce) and when to order so as to minimize the total cost.

ILLUSTRATION 4: An oil engine manufacturer purchases lubricants at the rate of

Rs. 42 per piece from a vendor. The requirements of these lubricants are 1800 per year.
What should be the ordering quantity per order, if the cost per placement of an order is
Rs. 16 and inventory carrying charges per rupee per year is 20 paise.
SOLUTION: Given data are:
Number of lubricants to be purchased, D = 1800 per year
Procurement cost, C3 = Rs. 16 per order
Inventory carrying cost, CI = C1 = Rs. 42 × Re. 0.20 = Rs. 8.40 per year
Then, optimal quantity (EOQ), Q0 =(2 C3D / C1) under square root
Q0 =2 ×16 ×1800 / 8.4 under square root
= 82.8 or 83 lubricants (approx).

4.5 STORES MANAGEMENT

Stores play a vital role in the operations of company. It is in direct touch with the user
departments
in its day-to-day activities. The most important purpose served by the stores is to provide
uninterrupted service to the manufacturing divisions. Further, stores are often equated directly
with money, as money is locked up in the stores.

FUNCTIONS OF STORES
The functions of stores can be classified as follows:
1. To receive raw materials, components, tools, equipment’s 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 minimise 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 house keeping so that material handling, material preservation, stocking,
receipt and issue can be done adequately.
7. To assist in verification and provide supporting information for effective purchase action

4.11 JUST-IN-TIME (JIT) MANUFACTURING

Introduction

Just-In-Time (JIT) Manufacturing is a philosophy rather than a technique. By eliminating all

waste and seeking continuous improvement, it aims at creating manufacturing system that is
response to the market needs.
The phase just in time is used to because this system operates with low WIP (Work-In-
Process) inventory and often with very low finished goods inventory. Products are assembled
just before they are sold, subassemblies are made just before they are assembled and components
are made and fabricated just before subassemblies are made. This leads to lower WIP and
reduced lead times. To achieve this organizations have to be excellent in other areas e.g. quality.
According to Voss, JIT is viewed as a “Production methodology which aims to improve
overall productivity through elimination of waste and which leads to improved quality”.
JIT provides an efficient production in an organization and delivery of only the necessary parts
in the right quantity, at the right time and place while using the minimum facilities”.

4.11.2 Benefits of JIT

The most significant benefit is to improve the responsiveness of the firm to the changes in the
market place thus providing an advantage in competition. Following are the benefits of JIT:
1. Product cost—is greatly reduced due to reduction of manufacturing cycle time, reduction
of waste and inventories and elimination of non-value added operation.
2. Quality—is improved because of continuous quality improvement programmes.
3. Design—Due to fast response to engineering change, alternative designs can be quickly
brought on the shop floor.
4. Productivity improvement.
5. Higher production system flexibility.
6. Administrative and ease and simplicity.

4.9 VALUE ANALYSIS

Value engineering or value analysis had its birth during the World War II Lawrence D. Miles
was responsible for developing the technique and naming it. Value analysis is defined as “an
organized creative approach which has its objective, the efficient identification of unnecessary
cost-cost which provides neither quality nor use nor life nor appearance nor customer features.”
Value analysis focuses engineering, manufacturing and purchasing attention to one
objectiveequivalent performance at a lower cost.Value analysis is concerned with the costs
added due to inefficient or unnecessary specifications and features. It makes its contribution in
the last stage of product cycle, namely, the maturity stage. At this stage, research and
development no longer make positive contributions in terms of improving the efficiency of the
functions of the product or adding new functions to it.
Value is not inherent in a product, it is a relative term, and value can change with time and
place. It can be measured only by comparison with other products which perform the same
function. Value is the relationship between what someone wants and what he is willing to pay for
it. In fact, the heart of value analysis technique is the functional approach. It relates to cost of
function whereas others relate cost to product. It is denoted by the ratio between function and
cost.
Value = Function / Cost

4.9.1 Value Analysis Framework

The basic framework for value analysis approach is formed by the following questions, as given
by Lawrence D. Miles:
1. What is the item? 2. What does it do?
3. What does it cost? 4. What else would do the job?
5. What would the alternative cost be?
Value analysis requires these questions to be answered for the successful implementation
of the technique.