Materials Management_session 1

7/31/2019 Materials Management_session 1

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INTRODUCTION

For running any industry or business, weneed a number of resources. These resourcesare 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


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INTRODUCTION

In the past there were well defined and rigidboundaries 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 largestsingle expenditure item.


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INTRODUCTION

Planning and controlling the flow of materialsthat are the part of the inbound logistics.

Objectives:

Maximize the use of the firms resources

Provide the required level of customer service


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Company Objectives

Income = Revenue - Expense

Need to increase income with: Best customer service

Lowest production costs

Lowest inventory investment

Lowest distribution costs


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Importance of MM Materials input is very important

as excess material as inventory causes costs tothe company.

shortage of material results into stoppage ofconversion process

and subsequently shortage of finished goods

leading to customer dissatisfaction.The efficiency of organization depends upon theavailability of right materials, in right quantity at theright time & at the right place.


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Materials Management and Profits

Direct labour Direct material

Varies with volume sold

Overhead

Does not vary with volume sold

Importance of mm


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Dollars % of Sales

Sales Revenue $1,000,000 100

Cost of Goods Sold

Direct Material $500,000 50Direct Labour $200,000 20

Overhead $200,000 20

Total Cost of Goods Sold $900,000 90

Gross Profit $100,000 10



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Reduce Materials by 10% and Labor by 5%

Dollars % of SalesSales Revenue $1,000,000 100

Cost of Goods SoldDirect Material $450,000 45Direct Labour $190,000 19Overhead $200,000 20

Total Cost of Goods Sold $840,000 84


Profit has increased 60%



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To get the same result (+ 60% profit) through Sales

Dollars % of SalesSales Revenue $1,200,000 100

Cost of Goods SoldDirect Material $600,000 50Direct Labour $240,000 20Overhead $200,000 17

Total Cost of Goods Sold $1,040,000 87


Sales must increase by 20%



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Importance of MM

Out of 5Ms, that are inputs to a conversion process,material is substantial in terms of its contribution toproduct cost and current assets.

51.1% of product cost is on account ofmaterials.

Materials account for 70% to 80% of workingcapital.

Accounts payable are mostly to materials suppliers


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Quality of the Input and Product quality: When the companies become leaner and leaner, it

is crucial that inputs should remain in the plantonly as long as the Through Put Time demands

and the output product should be Right FirstTime.

Materials adds value to a product, apart frommanufacturing & distribution. Establishment expenses, depreciation on facilities

& equipments & other expenses.

Importance of MM


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

company.

Production process needs very strong materialsmanagement support to gear up to face challenges ofcurrent market.

Materials management provides information about

availability of new products and services in themarket which leads to cost efficient changes in theprocess


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MaterialsManagement -Definition

Materials management is the management of theflow of materials into an organization to the point,where those materials are converted into the firmsend product(s) Bailey & Farmer

Materials Management is the function responsible forthe planning, sourcing, purchasing, moving, storing& controlling materials in an optimum manner, so asto provide the pre-decided service to the customer ata minimum cost .


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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 isthen implemented and controlled.

Purchasing Sourcing the supply after short listing suppliers

through vendor rating. Preparation placement of purchase order, follow up, transportation and handling.


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Functions of MM

Storage & Preservation

The procured material is to be stored and preservedagainst internal and external deterioration and theft.

Against the authorized demand the material from thestore is retrieved and issued.

Inventory control

Inventory control function controls the inventory levelsto ensure shortage free and excess free stock to check

the costs and ensure customer satisfaction


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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


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Integrated Approach to MM

Considering the importance of materials,establishments have a centralized authorityvested with the responsibility of planning,

procuring, preserving, handling, usage &other related aspects.

Such centralized authority wherein, allrelated activities of materials are combined iscalled Integrated Materials Management.


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Benefits of Integration

Better Accountability No mans lands of cost between various functions are

now addressed effectively by integrated materialsmanagement function.

Coordination -

The inter departmental conflicts are balanced. As a result various functions work like a team under

the control of Materials Manager.


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Better performance Performance of Materials management improves on

account of the first two results of integration.

Accountability reduces costs and teamwork improvesproductive performance.

Adaptability to EDP Computerization requires preparatory work that calls

for integrated efforts where there is no scope forconflicts.

Internal conflicts make computerization untenable


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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 canprovide such support to operations.


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Objectives of MM

Low Prices

Reduced operating cost Enhances profit

Includes transportation

High Inventory Turnover-

Value of inventories to be low in relation to sales leadsto efficiency.

Higher ROI

Reduces storage costs.

Primary Objectives


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Objectives of MM

Low Cost Acquisition and Possession -

Reduced handling and storage costs.(throughshipments in large quantities)

Continuity of Supply

Alternative sources

Captive suppliers,

Flexible suppliers

Primary Objectives


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Objectives of MM

Consistency of Quality -

Variety of items of different qualities needed. Rigid specification to be meet

Low Payroll Costs

Low operating costs of material managementpersonnel leads to higher profits.

Primary Objectives


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Objectives of MM

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

Primary Objectives


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Objectives of MM

Reciprocal Relations Purchase department

Deliberately buying from its own customers

New Materials and Products - Purchase department

Working closely with design and researchdepartments for development of new materials andproducts.

Secondary Objectives


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Objectives of MM

Economic Make or Buy

Co-ordinating and assisting other departments inmake-buy decisions

Standardization Design & Engineering Department

Fewer number of items

Review stock to weed out non-standard items

Standardization of suppliers



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Objectives of MM


Product Improvement - Design & EngineeringDepartment

Suggesting materials or components that will dobetter or equivalent job at lower cost

Interdepartmental harmony-

Define departmental responsibilities clearly

Familiarize others with materials directives, polices& organization.


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Objectives of MM


Forecasts

Forecasts in terms of prices, availability and generalmarket conditions are to be regularly monitoredtowards taking important business decisions.

Acquisitions

Helps to takeover bids since they have wide contactswith other company executives.


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Organizing Materials

Management

PurchasingStores &

Inventory

Management

Warehouses

Disposal OfNon-moving &

Slow MovingMaterials


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Organizing Materials

Management Head of MM department Director/Manager-

Materials

Subordinated Functions (As in the fig above)

Where cost of materials is a major part of the costproduction, materials management is not consideredas a sub function of production, but considered asequal to production management.


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Materials Management -

Functional

EngineeringManager

FinanceManager

MarketingManager

PersonnelManager

MaterialsManager

TrafficManager

PurchasingManager

MaterialsControlManager


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Functional The overall job of management is delegated by its

major functions to promote maximumspecialization of skills

Division of work at the 3rd level is also usuallyfunctional.

For example, the materials management job isdivided functionally into its traffic, purchasing &materials control elements


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Product

Purchasing Agent Product A

Purchasing Agent Product B

Purchasing Agent Product C


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product To make individual conscious of profit margins by

giving responsibility of performing vital function inthe 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.


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product Advantages

No wasteful Duplication of efforts

Specialization

Bulk Buying & standardization

Disadvantages

Tends to disperse the overall materials efforts Maruti Udyog Ltd.


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Location

Purchasing Agent Plant A

Purchasing Agent Plant B

Purchasing Agent Plant C


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Location When similar functions are being performed in areas

remote from one another, division of work bylocation is desirable.

Within one plant also, there may be more than onereceiving, shipping or stores department

For example, one Pune based automobile companyhas field expediters in Delhi, Bangalore, Chennai &Mumbai to expedite needed shipments from varioussuppliers


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Location Advantages

All the benefits of Centralized & centralized set up.

Disadvantages All the disadvantages of Centralized & centralized set

up


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Centralization & De Centralization

The need of the organization triggered by product,process and market that ultimately decides how thecontrol should be exercised on the material function.

The control may be centralized or decentralized fullyor in parts keeping in mind overall need.

Management education can provide knowledgeabout available options in practice but the choicerests with the corporate management. New optionscan be developed to satisfy specific needs

conceptually combining various available options.

C li i & D


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Centralization & De

Centralization

Centralization - Centralized control keeps most ofthe decision making at headquarters level delegating

only routine level decision making.

Decentralization - Decentralized control delegatesdecision making to unit level enabling the units to

respond to their respective environment.


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Benefits of Centralization Bulk Buying -

Combining the requirements of all units to buy in bulkand gain benefits of bulk buying.

Interplant transfer of material to deal withemergencies in individual plants.

And interplant transfer to utilize surplus materialavailable at some plant and thereby reduce overall

inventory cost for the company.


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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 largequantities.

Knowledge of the market is essential to anticipatemarket trends in terms of price and availability.

Benefits of unity of command.

Centralized material research resulting in savings forthe company.


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Benefits of De - Centralization Decentralization overcomes problems posed by

significant physical separation between Plants andCentral 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 eachPlant:

When individual plants are engaged in production ofdifferent products, their requirement is productspecific and thereby unique.


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Benefits of De - Centralization Better coordination with Production & other

functions of the plant:

Production is the internal customer of materialmanagement function.

Decentralized control enjoys the benefit of being closeto the customer.

There is also the need to interact with various otherfunctions 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 withoutharming the QCD objectives of the company resultsinto profit.


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Inter departmental relationships

Materials management will have to work in closecoordination with

Production,

Marketing &

Finance departments.

Mutual trust within these departments will help toachieve total organizational objectives.

I t d t t l


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Inter departmental

relationships Production Department-

Information about its plan & schedules to facilitate theMRP

Adjustment in Sales forecast

Changes in Schedules

Materials Management Department-

Informed about the list of suppliers, availability of newmaterials & anticipated delay for re-scheduling ofproduction & avoiding stock outs

Expertise can be used in purchasing capitalequipments


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Inter departmental relationships Close coordination

In anticipating funds requirements

Payment of bills to suppliers Insurance & so on

Strong and dependable delivery system

Materials Management plan activities involvingchange in material inputs. This obviously has animpact on design of the product and process ofmanufacturing.


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Inter departmental relationships Marketing Department

Gives advance information on forecast & specialrequirement to facilitate planning.

Materials Management Department- Through efficient operations can keep prices at a

competitive level.

Consisting of executives from various department to finalizeannual sales targets, production programmes, total budget,materials budget etc

Formal organizational arrangement helps in further

Documents

Materials Management_session 1