Materials Mgmnt

8/4/2019 Materials Mgmnt.

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Materials Management- An

Overview

N.K.Agarwal


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Materials Management (MM)

The integrated functioning of purchasing and alliedactivities so as to achieve the maximum coordinationand optimum expenditure in the area of materials

Importance of MM to any enterprise Purchasing accounts for nearly 50% of its annual

expenditure

Nearly 80% of its working capital is tied up in inventory

Inventory carrying cost is almost 25-30% per annum

Materials represent 40-60% of the sale price Materials represent about 60-80% of the production cost of a

product

That even a 5% saving in material cost will substantiallyincrease the profit margin of the enterprise


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Activities generally included in MM Stock control or Inventory control

Planning and maintaining stocks of raw materials, tools,

general supplies etc. Handling classification, codification, analysis etc

Purchasing

Developing sources of supply, finalising prices,placingorders, obtaining materials in the right time, contributing

to standardisation, value analysis etc. Disposal of surplus, reclaimed, waste and scrap

materials

Storekeeping

Receiving, storing, issuing etc.

Material handling within the stores



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Traffic or C & F

Clearing incoming materials, both inland and foreign

Dispatching finished goods

In addition, following functions also need closeattention

Coordination among above major activities

Liaison between designing, engineering, manufacturing

and/or production Cost reduction and value analysis and liaison with marketing



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Total Materials Management

Underlying principle is to provide effectiveness to afunction that must start from the planning stage andwill end when the finished product is finally distributedto meet the common goals of organisation Planning sets the goal and indicates the available resources

of finance

Scheduling specifies the requirements, the quantum and thedelivery schedules

Purchasing and Procurement select and retain vendors andcontracts with them

Inspection and Quality Control conduct test checks for

conformance to specifications Stores and Inventory Control determine inventory status,

undertake maintenance and upkeep

Materials Handling and Distribution Logistics control physicalmovement, flow and distribution and finally traffic, shipment

and dispatch conclude with the final delivery


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Combined Materials departments- Stores andPurchase: Advantages Procurement at the right time

Combined setup brings about greater coordination andincreased sense of responsibility with regard to gettingthe right materials at the right time

Lead time and stock control

Variation occurring due to late delivery time, effect onproduction, necessity for adjusting maximum andminimum levels on stock control cards etc. betterappreciated by a common department

Cost reduction and productivity

Objective of material management to increaseproductivity (or profit) through standardisation, reductionin procurement cost through bulk purchasing, avoidingobsolescence etc. can be more effective in a common

department



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Materials Management- Interfaces Interfaces of MM are many

A rational approach has a direct bearing on the cost-economicswithin a firm or industry

MM has interfaces of two kinds

Internal, and

External

Internal interfaces

Market forecasting

Forecasting attempts to visualise what future would look likeand most organisations forecast future demands for theirproducts

Forecast is used to determine production on the basis ofexisting or expanded resources including materials

Short term forecasts are made for determining input-outputlevels

Long term forecasts serve as links between the companys

internal controllable factors and the external environment


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Production

Flow- process starts before the actual production andcontinues throughout the production and even after

production Production demands uninterrupted flow of materials

Finance

MM is closely tied up with the availability of finance whichis a scare resource for any company operation

When financial difficulty arises, everybody becomesconscious of reducing costs, including material costs andservices

Affecting the materials budget

Materials Management- Interfaces


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Inventory control

Function of inventory control is to balance set-up costs ofprocurement with inventory carrying costs in order to see thattotal cost is kept to a minimum

Inspection and Quality control

Inspection and quality control starts even at the design stagewhen product quality is featured and has to be ensuredthroughout

It often stretches beyond and even after sales

Materials handling, traffic and physical distribution logistics

MM must ensure that materials are physically distributed at theright time with the minimum handling and maintaining thephysical flow of materials in a continuous fashion



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Engineering

Engineering is responsible for preparing the technicalspecifications for a companys products and the materials

that go into them Prices paid for production materials and the costs to

fabricate them are intimately related to theirspecifications



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Purchasing

Engineering

Manufacturing

Marketing

Quality

Marketing

Matl Control TimingQuantities

SourceapprovalInspection

Make or buy

Distribution

Materials Management-Interfaces


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Materials Management- Organisation

MM provides an integrated systems approach to thecoordination of materials activities and the control ofthe total material costs

Several models have been in use in the industry Main purpose behind the object of structuring is to

promote efficiency and economy of operations of thetotal organisation

Organisational approach Primarily concerned with the functional integration under oneChief Executive who may be held responsible for achievingall the materials objectives, deriving his power and authorityfrom the top management


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Divisional approach

Modern approach is conventional approach where decisionmaking rests with the top functionaries

Routine works are assigned to various operating staffwho are responsible for the implementation of thepolicies and programmes under the control andsupervision of top and middle level managerial staff

Sub divisions are possible either by

Function,

Location,

Product,or

Process or the stage of manufacturing



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President

Executive VicePresident

ManagerMaterials

Purchasing Traffic

Stores &Receiving

InventoryControl

ProductionControl

ManagerF & A

ManagerMarketing

General organisation structure using MM Concept


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Organisation by Function

Functional division is a very common feature which allows for theefficient use of specialist skills in each of the phases of MM such aspurchasing and procurement,receiving and inspection,stores and

inventory control, traffic and warehousing etc. Organisation by location

Particularly suitable in the case of multi-plant organisation whichneed a materials organisation of their own for efficient operations

Organisation by products

Has the advantage of using functional specialisation with productspecialisation

Organisation by Process or stage of manufacture

Means a MM department for each process or stage of manufactureand is rarely met within practice



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Multi-plant MM organisation

The extent to which purchasing activity be centralised at thecorporate level is an additional problem for such organisations

Some firms centralise the activity almost completely buyingmaterials for all plants at a central headquarters office

Some others decentralise the function entirely giving each plant fullauthority to conduct all its purchasing activities

However, majority of firms develop an orgnisation somewherebetween these two extremes

Advantages of Centralisation

Greater specialisation Permits greater technical specialisation among buyers

Leads to the development of more knowledgeable andmore highly skilled buying personnel


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Consolidation of requirements

Facilitates consolidation at the corporate level for all plants

Consolidation leads to larger purchases from a smaller numberof suppliers, yielding more favorable prices and increased

supplier service Increased purchase volumes also permit the negotiation of

highly profitable long-term contracts for many productionmaterials

Easier Purchasing Coordination and Control

Consolidation permits more direct administration and control of

such important policies as those affecting supplier selectionprocedures, supplier relations, purchasing ethics, budgetcompliance, and the consistency of general purchasingpractices among the various buyer groups



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Effective Staff Planning

Provides the concentrated staff know-how to improvepurchasing research work

All purchasing planning needs can be conducted in moredepth with greater efficiency for all purchasing operationsthroughout the corporation



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Decentralisation- Advantages

Advantages of Decentralisation in a multi-plant organisation

Easier coordination with operating departments

Facilitates coordination of purchasing activities with the user

departments within each plant Buyers can personally discuss purchase requirements with

using supervisors any time they wish

Develops closer working relationship between suppliers

representative, buyers and plant users

Speed of operation

Purchasing department can respond more quickly to the users

needs

Better suited to handle emergency requirements from users


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Effective use of local resources

Helps in reducing material transportation costs by theeffective use of local suppliers

Plant autonomy Decentralisation of purchasing gives a plant manager full

authority to handle this responsibility and as such thepurchasing activity is highly cost effective

Decentralisation- Advantages


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Centralisation - Factors

Similarity of material usage in each of the multiplants Similarity of types of materials or markets facilitates the

specialisation of buyers for the purchases

Most firms find that their plants do use a number of the sameclassification of materials even though they may not exactlythe same item

Plant department size Centralisation is more advantageous when a firms individual

plant purchasing departments are not large enough Geographic dispersion of the plants

Closer a firms plants are situated geographically, the morefeasible centralisation becomes


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Materials Management Concept

MM concept has evolved to meet the following needsof the firms Coordination of responsibilities of materials oriented

department with the other interrelated departments

Effective identification and control of total materials costs

MM provides An integrated systems approach to the coordination of

materials activities, and

Control of total materials costs

MM concept Advocates assigning to a single operating department all

major activities which contribute to the cost of materials

Objective is to optimise performance of the materials systemas opposed to suboptimising the performance of individual

operating units that are major parts of the materials system


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In practice, based on studies in U.S.A.

In 53% of the firms, materials manager reports to a generalmanagement executive

President or General Manager, the executive vice-president or the vice-president for administration

In 43% of the firms, the materials manager reports to themanager of manufacturing

In these firms, the materials function is a second-level

activity



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Strength of the concept Evidence supports the claim that a materials management

type of organisation improves coordination and control of theactivities that contribute to the material costs

Operating effectiveness depends heavily upon the policiesand performance of other materials activities

Under MM concept, these matters become the responsibilityof one top level executive

If inventory levels or material costs are out of line, top

management can immediately pinpoint the weak link inthe materials chain

Eliminates the buck passing possibilities prevalent in anorganisation that divides the responsibility for the totalmaterial costs



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President

Executive VicePresident

ManagerMaterials

Purchasing Traffic

Stores &Receiving

InventoryControl

ProductionControl

ManagerF & A

ManagerMarketing

General organisation structure using MM Concept


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Materials Management- Profit Center

For the average firm, MM is responsible to spendover 50% of what the firm receives

More amount is spent for purchase of materials andservices than for all other expenses together

Composite industry average for the cost of materialsis around 57% Differs from industry to industry

This highlights the profit making possibilities of the

purchasing Every rupee saved in materials is equivalent to a new rupeeof profit

An additional rupee from sales however is not a new rupeeof profit

Applicable expenses must be deducted from the sales todetermine the net profit


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Cost of materials can vary 10-15% depending uponthe skill with which the purchasing function isorganised and operated

Also additional profit from purchase savings cannormally be made without increases in expenditure

On the other hand, additional profit from increased salesnormally entail both increases in expenses and increases in

risk of capital American Management Association has suggested

2% savings of the annual purchasing costs

Materials Management- Profit Center


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Industry Matl to Sales ratio

Food industry 71.3

Textile industry 60

Petroleum and coal products 84.1

Primary metal industries 63.3

Fabricated metal products 51

Electric and electronic equip. 44.5

Instruments & related products 36.3All industries 57.6

Purchasing expense as a percentage of sales income


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Materials Management

Prime objective of Materials Management is toreduce total costs associated with the acquisition andmanagement of materials

Effective control over costs can be obtained onlywhen a firm is analysed and controlled as a totaloperating system

Goal of materials management is

To obtain materials at the lowest possible price consistentwith both quality and continuity of supply

To maintain minimum inventory of materials so as to freeworking capital for other useful purposes, and

All activities should be carried out at a minimum of cost


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References

Materials Management: A.K.Datta

Purchasing & Materials Management: D.W.Dobler /Lamar Lee / David N. Burt

Purchasing & Materials Management: N.K.Nair


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Thank You


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Documents

Materials Mgmnt