CHAPTER ONE

INTRODUCTION
Materials Management is simply the process by which an organization is supplied with the goods and
services that it needs to achieve its objectives of buying, storage and movement of materials. Materials
Management is related to planning, procuring, storing and providing the appropriate material of right
quality, right quantity at right place in right time so as to co-ordinate and schedule the production
activity in an integrative way for an industrial undertaking. Most industries buy materials, transport
them in to the plant, change the materials in to parts, assemble parts in to finished products, sell and
transport the product to the customer. All these activities of purchase of materials, flow of materials,
manufacture them in to the product, supply and sell the product at the market requires various types of
materials to manage and control their storage, flow and supply at various places. It is only possible by
efficient materials management.

The materials requirements planning, purchasing, inventory planning, storage, inventory control,
materials supply, transportation and materials handling are the activities of materials management.
They will be discussed in details in various chapters to follow.

About 20-25 years ago, there was no cut-throat competition in the market to sell the various consumer
items manufactured by different industrial undertakings and the availability of materials to
manufacture these items was not scarce. Therefore, materials management was not thought to be so
important and its separate identity in the organization was not felt.
But today it has become an important management activity to streamline production.

Actually before the production begins it is necessary to ensure availability of all the types of materials
needed for production and its supply at the various production centers. Planning, purchasing and
scheduling are the main functions of materials management. It aims at improved productivity. It is
used to reduce the cost, which increases profitability and streamlines the production. Apart from
management of material cost and its supply it helps in its proper utilization, transportation, storage,
handling and distribution.

The market research and forecasting both for sales of company’s product and purchasing of various
materials required for producing the product are needed at the planning stage.

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Purchasing, procurement of materials, transportation, storage, inventory control, quality control and
inspection of materials and goods supplied at various production centers before production are also
managed as routine work. Materials handling, packaging, warehouse planning, accounting, scrap,
surplus and obsolete materials disposal, finished goods safety and care are the activities managed by
the materials management department.

Selection of personnel for marketing, purchasing, inventory control, stores management and materials
handling and their training and placement is also to be seen by the materials management department
This indicates that it is very essential to have a materials management department in any organization
to support the management in the production activities. It also helps in the marketing, sales promotion
and control of all the types of materials for its quantity, quality and cost.

1.1 HISTORICAL DEVELOPMENT OF MATERIALS MANAGEMENT

The conceptual foundation that gives to the birth of management boom during and after World War II
also gives birth to an entirely new approach and an idea in the management field of what we
understand largely today as Materials Management. Although the concept is of recent origin and had
its root in USA, it has now spread fairly widely all over the world.

The development of materials management can track back to 1920s when the control, repair and
maintenance of materials were the responsibilities of purchasing managers in some industries. After
World War II, Prof. Howard T. Lewis of the Harvard Business School conducted extensive studies in
industrial purchasing practice. Depending upon the size and type of industry and on the basis of the
study, Prof. Howard T. Lewis made recommendation to several airframe companies, whose operation
have been studying, for the establishment of new managerial position, viz. the director of Materials.
He envisioned the responsibility of this new position to include purchasing, inventory control,
receiving, inspection, warehousing, traffic and possibly other activities.

But its real appreciation goes as far back as world war I. the threat of material of shortage during the
war, the heavy inventorying during the business collapse of 1920-21, culminating in a prolonged
depression following the ‘profitless prosperity’ of 1926-29, all contributed to a better understanding of
the inventory problem. At the same time, improved means of transportation and communication, a
recognition of unnecessary cost-burden, rapid technological changes in both product and

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manufacturing process in many industries and a host of other factors came in to play when industrial,
economic and social organization in the USA were undergoing fundamental changes under the impact
of ‘scientific management’.
The outbreak of the war in 1939 set the US defense forces thinking seriously about increasing its
military personnel and material, and with this in view, entered the market as the single largest buyer
with an increasing emphasis on quality standards.
After this, the concept of material management became acceptable in every organization to give due
emphasis for the material aspect. In a constant attempt towards meeting day-to-day materials
operation, the establishment of functional organization of Materials Management became
indispensable in order to serves achievement of corporate goals and perform materials activities
efficiently, fulfillment of materials program objectives, elimination of waste and duplication of efforts,
and greater possibility of reduction on material cost.

1.2 DEFINITION OF MATERIALS MANAGEMENT

Every organization requires materials for its operation, and there will always be the necessity for some
stores and stocks to be maintained either for immediate consumption, conversion, or re-use.
Manufacturing organizations require a variety of raw and other materials that must be acquired, stored,
and handled. Similarly, service organizations need materials, equipment, and some stores to run their
operations. In both cases enough stocks of materials and equipment have to be maintained to meet at
least short-run requirements. These stocks or inventory are cash in kind that need at most care.
Therefore, their safe custody, upkeep, and maintenance, handing and proper supply are of great
importance.

Almost all organizations, regardless of their nature, are demanding proper and efficient management
of materials. Furthermore, both real and contrived shortage of materials, including food stuffs, metals,
and energy resources, have made materials management an important and difficult organizational
function. The reason is that materials, especially components and sub-assemblies, have specific uses
and have low flexibility. And they need more care in procurement, storage, handling, and distribution.
Definition

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 Material management is the process of planning, organizing, implementing and controlling the
tasks associated with the flow of material to through and not of an organization in an integrated
fashion.
From the above definition we can infer the following main points;
 Material management, as other management branch employ the basic functions of
management:
a) Planning b) Organizing
c) Directing d) Controlling
 All these functions target at the optimum use and allocation of materials.
 Materials should be managed before, during and after the process
Inputs  process 
outputs
 M.M. (material management provides an integrated system approach to the coordination of
materials activities and the control of total material costs. It advocates assigning to a single
operating department all major activities which contributes to the cost of materials
 Materials management designed to ensure supply of materials of the right quality, in the right
quantity, at the right time, at the right price, and at the right place acquired from the right source in
order to ensure economy, efficiency, and smooth operation of an organization.
 Materials management is concerned with the flow of materials from suppliers to production and
the subsequent flow of products through distribution centers to the user. Materials management is,
thus, an activity that involves planning, acquisition, storage, control and disposition of inputs like
raw materials and in-process goods which go into the production process directly and also capital
equipment, tools and accessories, spare parts and other in-direct materials which are required for
everyday operations.

1.3 WHY DO WE STUDY MATERIALs MANAGEMENT

The basic reason/objective of learning materials management is economic.
economic. It is concerned with
minimizing the cost of materials in organizations without hampering the operation and efficiency of
the organizations.
In most cases more than 50% of the total expenditure of an organization or a typical manufacturing
organization is spent on materials. For example, organizations in news paper and fertilizers spend 30-

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40% of their total expenditure on materials, pharmaceuticals and chemical industries spend about 40-
50%, in textile they spend 60-70%, and in sugar they spend more than 70% on materials. Here the
magnitude of expenditure on materials in developing countries can be even more than the developed
countries. Therefore, the study of materials management should be taken seriously.
Organizations can bet better benefits by reducing cost from materials than trying to reduce costs from
other sources such as wages and salaries of people for different reasons. This is because reducing
benefits/rewards from people will dissatisfy them and the benefit that will come to the organization in
terms of cost saving is also small.
Consider the following example:
Sales 80 Million Birr
Materials Cost 50%
Profit Margin before Tax 10%
By what percentage materials cost should be reduced to attain and profit increase/gain as a result of a
25% increase on Sales?
25% (80 Million Birr) = Birr 20 Million sales increase
10% (20 Million) = Birr 2 Million Profit Margin increase
50% (80 Million Birr) = Birr 40 Million Cost
So, in order to get an equivalent increase in profit margin (for a 25% sales increase) we need to reduce
costs only by 5% 2 Million

2Million
 100 =
40 Million = 5%

Hence, instead of increasing sales by 25%, it is easier to reduce costs of materials by 5% in a

competitive market economy.

The other reason for studying materials management is attitude.

attitude. I.e. Peoples have and feel less concern
for materials. Once money is converted into materials they don’t consider that there is money in the
materials. They will show less concern and probably may neglect the materials. But materials are
money. They are acquired through exchange of money. The attitude of people is not less only to
materials but also on those people who are related to materials.

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People working in relation to materials are considered as having less status and less importance. This
attitude must be changed by studying various aspects of materials management.

1.4 OBJECTIVES OF MATERIALS MANAGEMENT

The objectives of materials management can be stated below.
 Maintaining continuity of productive operations by ensuring a uniform flow of materials.
 Reducing materials costs by systematic use of scientific techniques.
 Releasing working capital for productive purpose by efficient control of inventories.
 Increasing the competitiveness of end products by ensuring right quality at the right price
especially in foreign market.
 Saving foreign exchange through economic use of foreign purchases and import substitution.
 Establishing good buyer-seller relation.
 Ensuring low departmental cost and high efficiency.
 Setting high ethical standards.
In this way it is clear that materials management covers all aspects of materials, including flow of
materials cost, quality, supply, conservation and utilization.
The prime objective is to supply the user department with the required quantity at a constant rate with
uniform quality so that production or service rendered is not held up. At the same time materials
manager has to ensure the optimum usage of facilities like capital, storage space and other aspects of
materials management. Increased production and sales are necessary to bring about the same increase
in profit, which result in reducing material costs or increasing production and sales to the extent of
30% to 40% which is not easy.

The primary task of modern materials mgt with an integrated view in purchasing materials is Right
Quality, Right Quantity, at the Right Price from the Right Source, at the Right Time, using Right mode
of Transport.

1.5 SCOPE OF MATERIALS MANAGEMENT

Material management applied both in the public and private sector in varying degree dependent on
materials. Effective materials management is necessary for all organizations.
Manufacturing organizations: - for many manufacturing firms materials account for 50% - 75% their
product cost. Service firms: - service firms use fewer raw materials and components

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The main functions that come under the umbrella of material management are:
1. Materials demand forecasting: follows from sales forecast
2. Purchasing acquisition of the kinds and quantities of materials required by department
3. Inventory control: planning and maintains stocks of raw materials, tools, supplies and other
materials, classification
4. Traffic/transportation: includes both incoming and outgoing transportation also called logistics
management (physical distribution)
a) traffic control involves
- the selection of carriers
- documentation of shipments
- study of carrier services and rates
- evaluations of carrier performance
b) traffic concerned with assessing the total cost of transportation including:
- loading and unloading
- methods of packaging
- transit time
- developing techniques for reducing overall transportation costs
5. Store and material handling involves:
- Receiving
- In plant materials movement
- Insurance
- Documentation, etc.
6. Disposal of scrap and surplus materials

1.6 IMPORTANCE OF MATERIALS MANAGEMENT

In general, materials management (MM) is important for three reasons:
1) customer service
2) cost reduction
3) administrative efficiency
1. Customer service

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Material management serves other units/departments of the organization. These services support the
goal of fast process throughout the organization, and include:
 Un interrupted flow of materials
 Assistance to customers-repair, replants or delivery
 Reduction in parts shortage
 Average transit from warehouse to customer
 Minimum of transportation delays
 Accurate inventory counts
 Good forecast accuracy

2. Cost reduction
The importance of materials management can be realized when it is said that;
 Purchases account for nearly 50% of an organization’s annual expenditure
 Nearly 80% of working capital is find up in the inventory
 5% saving of materials cost will substantially increase the profit margin of an organization
Cost reduction effort related to profit and effective material management certainly make deference.
Specific cost reduction measures include:
 reduction in material costs
 reduction in storage space
 reduction in physical inventory
 increase in inventory turn over
 reduction in transportation cost
 reduction in setup time
3. Administrative efficiency
The last area is administrative efficiency which covers quality of measures related to department
efficiency in operation and development of people.
These measures include:
 Material management budget vs. actual
 Ratio of material budget to sales
 Ratio of key people among functional

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  Installation of productivity- enhancing systems

1.7 ORGANIZATION FOR MATERIALS MANAGEMENT

By organization for material management, we mean the frame work (structure) with in tasks and
responsibilities are discharged.
 It is question of where and how should material management be located in the organization
structure.
 Its position in organization structure depends on type and size of the organization
There are two approaches of organization for material management
1) Integrated structure
 This is a modern approach where all activities of materials headed by a materials
manager with other sub functions under him/her.
 It integrates of all materials related activities

General
M.D Manager

Marketing HR Material Manger

Finance & Account Manger
Operating ManagerInformation Manager
Manager Manager

Purchasing Store & warehouse

Inventory
Stop &
control Traffic & Transportation
Materials & Purchasing
Scrap
study
& Surplus Disposal
warehouse

Fig1. Integrated structure

Benefits of the integrated approach:

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 1) equal status with other functional mangers
2) can view the total commitment on his/her department
 produce a policy
 establish procedures and budgets
3) Reports to higher level in the organization thus greater scope to influence board divisions
affecting his area of operations and interfacing ones.
4) scope to evaluate the strengths and weakness throughout the white of the materials
management department
5) better accountability: though centralization of authority and responsibility for all aspects
of materials function, a clear cut responsibility established
6) better performance: as all inter-related functions are integrated organizationally, greater
speed and accuracy, results in communication
7) better service

2. Differentiation /Defused approach

 This is a very old approach where individual material functions are assigned to other functional
areas
This organization assignment of individual functions to other major functions is based on:
I. “Most use” criterion
Example: Purchasing might be assigned to the operations department since the major money is spent
for raw materials
 Traffic/transportation: might be assigned to marketing department since he/she would be
responsible for delivery of finished items for business
 Material and purchase study to R & D department
II. Critical relationship criterion
Example: Inventory control might be assigned to finance in view of the dollar
Investment involved
III. Executive Interest Basis
Example: Value analysis function might be assigned to engineering department.
The point is that, the responsibility for different, but interrelated, functions becomes widely dispersed
throughout the organization structure.

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 General Manager

Production Marketing Finance Research and

Department Department Department Development

Purchasing & Transportations & Inventory Control & Material Purchase

inventory physical Distribution Purchasing Study

Fig2. Differentiation /Defused approach

Benefits/Advantage
a. No additional level of mgt is created
b. No need for additional employees, and other resources
c. Avoids additional horizontal communications

Disadvantages
1) overseeing of materials in each department
2) subordination of material function
3) Expenditure on materials is a higher percentage of a company’s total annual expenditure.
There would be no senior manager at an influential level to control it.
4) There would be no one capable of promoting effective to coordinated materials plan to
meet materials needs of different sections of the organization.
5) Problem of coordination and communication
6) No job specifications
7) No employee development

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