CHAPTER ONE

INTRODUCTION TO MATERIALS MANAGEMENT

1.1. OVERVIEW

Materials management is an indispensable core activity of all types of organizations. All

organizations are continuously involved in procurement, storage, and stock replenishments of
different types of materials. In some of the industries the cost of materials input ranges from 45%
to 85% of the product cost. Thus, the slightest efficiency in materials management releases
substantial gains to the organization in terms of cost and capital requirement. Due to such
strategic role materials management has assumed greater importance in modern management. In
fact, along with other areas of management like production, marketing, finance and personnel,
materials management has been recognized as fifty key area of the management of organizations.
Many researches indicate that materials take substantial share of firms’ investment and product
cost. For instance, in India, Iran, Mexico Ital, UK, USA, Japan materials account 66%, 66%,
64%, 62%, 61%,59%, and 56% respectively. (Sharma, 2006)

1.2. DEFINITION OF MATERIALS

The broader view of ‘material’ takes one’s focus to the fundamental scientific and philosophical
issue of “matter” that deals with anything that occupies space in the physical world.

Matter in science, is a general term applied to anything that has the property of occupying space
and the attributes of gravity and inertia. Its formation has scientific explanation. Certain
elementary particles of matter combine to form atoms; in turn, atoms combine to form
molecules. The properties of individual molecules and their distribution and arrangement give to
matter in all its forms various qualities such as mass, hardness, viscosity, fluidity, color, taste,
electrical resistivity, and heat conductivity, among others.

In philosophy, matter has been generally regarded as the raw material of the physical world,
although certain philosophers of the school of idealism, such as the Irish philosopher George
Berkeley, denied that matter exists independent of the mind. Most modern philosophers accept
the scientific definition of matter.

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According to dictionary definition given by Microsoft® Encarta® 2007 material is:

1. Something used in making items: the substance used to make things

2. Information: information such as facts, notes, and research used in the making of
a book, movie, or other work
3. Somebody suitable: somebody regarded in terms of his or her suitability to
perform a particular job or task

The dictionary definition views material as a resource that takes a form of input, information and
talent.

Looking into both the broader philosophical view of mater as the raw material of the physical
world and the narrower view of material as the substance used to make things; one can safely
conclude that material is for an organization that produces goods and services as matter is for the
entire physical world. Parallel to this, one can easily notice that material, in our context, is
nothing but a specific case of matter that possesses the basic properties of matter and becomes a
useful input to an organization.

1.3. TYPES OF MATERIALS

Materials are classified into: production materials, capital equipments, consumable materials and
services. Except services the rest possess physical property and are analogous to the definition of
goods according to the Ethiopian public procurement and property administration proclamation.
The definition states that “Goods are raw material, products and equipment and commodities in
solid, liquid or gaseous form, marketable software and live animals as well as installation,
transport, maintenance or similar obligations related to the supply of the goods if their value does
not exceed that of the goods themselves;” (FDRE proclamation no /2001, pp.). the basic
categories of materials are:

1.3.1. Production materials

Production materials are those materials which can become part of the physical product. They
become the components of physical item. They include raw materials, fabricated or
manufactured parts and component parts.

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 i. Raw materials

Raw materials are the basic ingredients of the final product which will help to make the
physical product. Raw materials are natural or near natural. Natural raw materials are raw
materials on which values are not added. They include such materials as minerals, forest
products, etc. on the other hand, near natural materials are those materials on which some
values are added such as agricultural products: grain, cotton, diary products, etc.

ii. Fabricated (or manufactured parts)

Fabricated parts are those materials which have been processed a step above the raw materials. In
other words, they are materials which have undergone certain level of transformation from the
level of raw materials. These items become part of the physical product.

iii. Component parts

Component parts are those materials that have even processed further and are completed to a certain level.
They also become part of the physical product, but they maintain their own identities. They include items
such as zippers, buttons, bulbs, spark plugs, batteries, etc.

1.3.2 Capital items

Capital items are those items that don’t become part of a physical product. They help to process,
manufacture or transform the raw materials and fabricated items into the final product. They can
be classified into installation items and accessory equipments.

Installation items are major capital items useful to the manufacturing of final product. They help
to convert or process raw materials into final products. They include such items require large
financial outlay. They are usually made to order.

Accessory equipments represent those materials that are used to process or transform materials
to final products just like installation items, but do not require large financial outlays installation
items. They include items such as forklifts, trucks, materials handling equipments, etc.

Consumable items represent materials that facilitate the production and transformation of raw materials
into the final product without themselves becoming the physical part of the fial product. They include
maintenance, repair and operating supplies (MROS). Maintenance and repair represent such items like

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light bulbs, screw, nail, nuts, bolts, and paints. Operating supplies include items such as stationery items,
oil, lubricants, etc.

1.3.3 Service

In principle, services are not materials. They include intangibles such as consultancy, research
services, etc. they are included in materials management even though they are not materials
because they are involves I procurement of services. The Ethiopian public procurement and
property administration proclamation classifies service as consultancy and services.

i. <consultancy service> means a service of an intellectual and advisory nature provided by

consultants using their professional skills to study, design and organize specific projects,
advice clients, conduct training and transfer knowledge;
ii. <services> means any object of procurement other than works, goods and consultancy
services: such as maintenance, security, janitorial, electricity, telecommunication and
water supply services;
1.4 DEFINITION OF MATERIALS MANAGEMENT

The dictionary or American production and inventory control society defines the materials
management as follows:

 “Materials management is a term to describe the grouping of material functions related to

the complete cycle of materials flow, from the purchase and internal control of
production materials to the planning and control of work in progress, to the warehousing,
shipping and distribution of finished products. It differs from the materials control in that
the latter term traditionally is limited to the internal control of production materials.”

Other definitions of materials management include:

 “materials management can also 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. In its process of
managing, materials management has such sub fields as inventory managemen, value
analysis, receiving, stores and management of obsolete, slow moving and non moving

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 items. The various activities represent planning and control, purchasing, value analysis
and physical distribution.”
 “Materials management is the integrated functioning of purchasing and allied activities so
as to achieve the maximum co ordination and optimum expenditure in the area of
materials goods, ………….works & consultancy services.” (N.K.Nair, 1985:pp.1)
 “materials management as practiced today, can be defined as a confederacy of traditional
material activates bound by a common idea the idea of an integrated management
approach to planning, acquisition, conversion, flow and distribution of production
materials form the raw materials state to the finished good state… it advocates the
assignment of all major activities to which contribute to materials’ cost to a single
materials management department”. (Dobler, Lee and Burt, 1984, p.27)

The above definitions commonly focus on two central elements activities of materials
management and their integration. The activities signify materials flow as components of the
materials system. Accordingly, materials management is the management of such flow. Materials
management activities include:

Anticipating materials requirements scientifically;

Sourcing, obtaining and inspecting materials;
Introducing materials into the organization;
Storing and handling materials, disposal of scraps and unserviceable items;
Monitoring the status of materials;
Replenishment of stocks; and
Strengthening material system.

Materials management, thus, is all about the integration of such activities as Sharma (2006) put
the concept of materials management symbolically as:

MM=P1+P2+C+I

Where, P1=purchasing P2=procurement C=inventory/sores

I=materials information system MM=materials management

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 1.5 HISTORICAL TIMELINE OF MATERIALS MANAGEMENT

The field of materials management has reached to its current state having made a long journey in
the past. The main factors that contribute to the development of the field include: the previous
system of living, the occurrence of major incidents, the development of other professions and the
contributions of various scholars. These are:

1.5.1 Materials management in antiquity

The practice of materials management could be traced back to the creation of human being as the
life of human being had never been dissociated with and independent on the material world that
presents different versions of natural materials. The ancient man/woman had to spend his/her
time on collecting and maintaining natural resources that are greatly instrumental for satisfying
his/her basic needs for food, water and shelter. The connection of mankind to materials furthered
ahead when mankind began to produce manually his housing assortments with wood, stone, skin
and then clay. For instance, to succeed in hunting and cutting meat, the hunter would create a
sharp edge on his stone or wood. Similarly, the hunter had to look for improving the performance
of his wood or stone through trail and error; maintaining the material when the edges are blunted;
and replacing his tools when they are no longer useful. Embedded in such activities lies integral
activities of materials management such as acquisition, repair and maintenance, value analysis
and disposal. Such early engagement to materials activities further intensified with the
development of production activities ranging from agriculture to construction. The construction
of the Egyptian pyramid, the Great wall of China or the Axum obelisk of Ethiopia marked the
advancement of mankind not only in construction and project management but also in materials
management.

1.5.2 Barter system

After the human being learned the manner of getting what he needs through exchange initially
through bartering, the glimpse of procurement take root in human mind. As the barter system
came with all its limitations of double coincidence of wants, lack of standard measuring unit,
difficulty of getting what one need with what one has, etc.; one had to be wise on finding
practical answers to the questions of what to offer?, where to sell?, when to offer?, and how to

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negotiate?. Such routines filter out the materials management activity of procurement with
emphasis on negotiation and transportation.

1.5.3 Industrial revolution

The conversion of human power through the advent of steam engine by James Watt in 1778, its
later replacement by gasoline engine and then by electric power has marked a boom in industrial
production and an expansion of large and complex factories. Such complexity in production and
factories came with inextricable link to materials management.

1.5.4 Standardization of parts

The idea of standardization was propounded by Eli Whitney and then by Henry Ford in 1913
(through introduction of moving assembly) following its early application in war ship building in
Vince at the beginning of 14th century. Its rationale is to ensure interchangeability of parts
through production of items in uniform fashion. This idea influenced the manner or procurement,
material handling and control till today where it is applicable.

1.5.5 Economic order quantity (EOQ)

The early introduction of mathematical application in the area of materials management dated
back to 1917 when Harris came up with the Economic Order Quantity formula. The model tells
the quantity of inventory that should be ordered in each order period so as to minimize the total
cost of holding and ordering inventories.

1.5.6 Statistical quality control

The introduction of statistical tool based on the concept of binomial distribution in early 1930’s
by Walter Shewhart was the early episode of development in the area of inspection. In addition,
the touch of H.F. Dodge and H.G. Roming produced statistical table for quality control.

1.5.7 Mathematical models

The two decades following the beginning the year 1945 were known by the extensive
development of operation research tools. The manner of solving real business problems through
the use of mathematical models become an intellectual endeavor of the day. Among others,

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simplex method, simulation, decision theory, and project scheduling techniques of PERT and
CPM were onboard during the period. Some of these do have a bearing, at least indirectly, on the
development of materials management.

Such developments seem to be closely linked to the fact that management of materials in
industries has been a real problem ever since the end of second world war in 1945. Heavy
demand for materials in various industries brought shortage of materials in many parts of the
world in the years after the war to end up with advanced materials management.

1.5.8 Computer

The advent of computers in 1950’s and its intensified use in 1970’s has a multifaceted impact on
the development of materials management. Proper organization of material data, application of
computer assisted decision and many others foster the improvisation and manufacturing
(CAD/CAM) brought significant improvement in the area of value engineering and material
handling.

1.5.9 Tools of material planning and control

The introduction of forecasting tools, material requirement planning by Joseph Orlicky and
Oliver Wight, and inventory control tools in 1970’s lay mark on the contemporary material
planning and control.

1.5.10 Just in time system (JIT) and factory automation

The seed of JIT system came from Tai-Ichi, the member of Toyota Motors of Japan in 1970’s
with the idea of maintaining zero level of stock through purchase of inventories just in time of
need. Its implementation came with the idea of locating factories nearer to major supplier,
maintaining sound relationship with suppliers, use of automation to facilitate in bound logistic.
Today, the earlier JIT system is termed as “Little JIT” to part it from “Big JIT” that incorporates
the idea of waste elimination (Poke Yoke) with that of “Little JIT”. This shaped the manned of
inventory planning, acquisition and in bound logistic.

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 1.5.11 Value analysis/value engineering

The notion that it is possible to reduce cost through elimination of unnecessary parts of a product
while obtaining the same benefit from the product helped a lot in controlling materials’ cost right
at product design stage (Value Engineering) or after product design (Value Analysis).

The vice president of General Electric, Harry Elicher, was credited for the adoption of the
concept in 1948. But it was Larry Miles, Elicher’s subordinate, who came with the initial idea
according to the testimony of the General Manger of General Electric in 1952.

1.5.12 Materials management concept

Basically, the inception of the concept of materials management is attributed to the structural
solutions proposed during 1970’s in order to solve the mis coordination of material activities.
Traditionally the purchasing department was assuming the major responsibility of materials
related activities while other units such as receiving, logistic, store etc. are separately structured.
However, such arrangements were followed by cost inflating, sluggish and mis-coordinated
materials handling and management restructuring those units that perform procurement, store,
material planning and control activities together under a highly empowered materials
management unit stands out to be the number one solution. Thus, integration of material
activities through structural response has been the expression of the concept of materials
management till to date.

1.5.13 Supply chain management

Supply chain management as a full-fledged concept appears in 1990’s. it is a total systems

approach to managing the entire flow of information, materials and services form raw materials’
suppliers through factories and warehouses to the end customer. As this concept came with the
demand of organizing organization activities following end to end material flows, it granted a
higher level status, better integration and unity of direction to materials management functions.

1.5.14 E-commerce

The use of computer applications over network to complete a transaction or part of a transaction
by buyers and sellers made possible through e-commerce. The popularity of e-commerce came

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with the passing of the previous millennium. Two laws explain why e-commerce has flourished,
the Moore law and the Metcalfe’s law. The former holds that computer powers doubles every 18
to 24 months while the latter supports it with the idea that the utility or value of a network equals
the square of the number of users. Procurement, selling, establishment of network especially in
international market became relatively easier, effective and speedy because of e-commerce.
Moreover, it brought an invaluable support to supply chain management.

1.6 Contributions of the materials management function

Effective management of materials and purchasing can contribute significantly to the success of most
modern organizations. Performance of the materials management function can be viewed in two
contexts: trouble avoidance and opportunistic.

The trouble avoidance context is the most familiar. Many people inside the organization are
inconvenienced to varying degrees when the materials management function does not meet with
minimum expectations. Improper quality, wrong quantities, and late delivery may create inconveniency
for the ultimate user of the product or service. Therefore materials management contributes to the success
of an organization by ensuring that materials are available for use of the right quality, in the right
quantity, at the right price, at the right time, and with the right service.

The opportunistic context is that of potential contributions to organizational objectives given that the
materials management function is doing well.

Profit Leverage Effect: If, through better purchasing, a firm saves Birr l00, 000 in the amounts paid to
vendors for needed materials, supplies and services that Birr l00,000 savings goes directly to the bottom
line (before tax) account on its profit and loss statement. If that same firm sells an additional Birr100, 000
of products, the contribution to profit, assuming a 5% before tax profit margin, would be only Birr 5000.

Assume: Gross sales Birr 1,000,000

Cost of goods sold (assuming purchases account for 50% of sales dollar) 500,000

Profit (assuming a before tax margin of 5%) 50,000

Now, assume this firm was able to reduce its overall purchase cost by 10% (500,000x0.1= 50,000)
through better management of the function. This would be a Birr 50,000 additional contribution to before

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tax profits. To increase before tax profits by Birr 50,000 solely through increased sales would require an
additional Birr 1,000,000 or a doubling of sales.

Return on Assets Effect: - Firms are increasingly more interested in return on assets (ROA) as a measure
of performance. If, purchase costs were reduced by 10% that would effect a 10% reduction in the
inventory asset base. This again improves investment turnover and profit margin. Investment turnover
multiplied by profit margin will give us higher return on assets.

Information Source: - The contacts of the purchasing function in the marketplace provide logical source
of information for various functions within the organization. Primary examples include information about
prices, availability of goods, new sources of supply, new products, and new technology, all of interest to
many other parts of the organization.

New marketing techniques and distribution systems used by suppliers may be of interest to the marketing
group. News about major investments, mergers, acquisition candidates, international political and
economic developments, pending bankruptcies, major promotions and appointments, and current and
potential customers may be relevant to marketing, finance research, and top management. Purchasing
unique position vis-à-vis the market place should provide a comprehensive listening post.

Effect on Efficiency:- If purchasing selects a vendor who fails to deliver raw materials which measure
up to the agreed upon quality standards, this may result in a higher scrap rate or costly rework, requiring
excessive direct labor expenditures. If the vendor does not meet the agreed on delivery schedule, this may
require a costly rescheduling of production, decreasing overall production efficiency, or in the worst case
it will result in shutdown of the production line --- and fixed costs continue even though there is no
output.

Effect on Competitive Position:- A firm cannot be competitive unless it can deliver end products or
services to its customers when they are wanted and at a price the customer feels is fair. If purchasing does
not do its job, the firm will not have the required materials when needed and at a price which will keep
end product costs under control.

Effect on Image:- The actions of the purchasing department influence directly the public relations and
image of a company. If actual and potential vendors are not treated in a businesslike manner, they will
form a poor opinion of the entire organization and will communicate this to other firms. This poor image
will adversely affect the purchasing’s ability to get new business and to find new and better vendors.
Public confidence can be boosted by evidence of a sound policy and fair implementation.

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Training Ground: The purchasing area is also an excellent training ground for new managers. The needs
of the organization may be quickly grasped. Exposure to the pressure of decision making under
uncertainty with potentially serious consequences allows for evaluation of the individual’s ability and
willingness to take risk and assume responsibility. Contacts with many people at various levels and a
variety of functions may assist the individual in charting a career plan and will also be a value as the
manager moves up the organization. Many organizations find it useful to include the purchasing areas as
part of a formal job rotation system for higher potential employees.

Management Strategy and Social Policy:- The Materials function also can be used as a tool of
management strategy and social policy. Does management wish to introduce and stimulate competition?
Does it favor geographical representation, minority interest, and environmental and social concerns? For
example, are domestic sources preferred? Will resources be spent assisting minority suppliers? As part of
an overall organization strategy, the materials function can contribute a great deal. Assurance of supply of
vital materials or services in a time of general shortage can be a major competitive advantage.

Similarly, access to a better quality or a lower priced product or service may represent a substantial gain.
These strategic positions in the marketplace may be gained through active exploration of international and
domestic markets, technology, innovation management systems, and imaginative use of corporate
resources in the materials area.

1.7 FUNCTIONS INCLUDED IN MATERIALS MANAGEMENT

We can define materials management 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 and the discussion, it is
clear that the scope of materials management is vast. We can broadly identify the following functions.

1. Materials planning and Control:- This is the aggregate planning of materials requirements to
meet the broad, overall production plan. It is concerned with the approximate quantities of the
key and critical purchased materials needed to produce the approximate quantities of end
products in specific time periods (probably by weeks). If problems in obtaining needed
quantities are apparent, the aggregate production plan must be adjusted.

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2. Production Scheduling:- The production scheduling manager plays an important part in
establishing the total production schedule. Working with information inputs which either
estimate future demands for a company’s products are based on the receipt of actual orders, or
are a combination of both, production control develops the specific time and quantity schedules
for parts and materials needed facilitate the production schedule. Production scheduling is
concerned with number of units to be produced, the time intervals over which production will
occur, and the availability of materials and machines to produce the number of units specified
within the schedule time constraints. Once the number of units to be produced within a
specified time period is determined, production scheduling is in a position to figure detailed
requirements for parts and materials, both purchased and manufactured, by using bills of
materials and specifications supplied by engineering. Companies with integrated data
processing systems, which have incorporated bills of material and specification requirements
within the system, can determine material requirements for any production schedule with great
rapidity. Materials requirements planning (MRP) fits in well with the materials management
concept. A good production scheduling department should provide for follow up activities to
make certain that its schedules are met. If records are kept of materials in various stages of
fabrication, it is helpful in limiting losses from spoilage, pilferage, or obsolescence and in
maximizing turnover.

3. Receiving:- The receiving department is responsible for the physical handling of incoming
shipments, the identification of such material, the verification of quantities, the preparation of
reports, and the routing of the material to the place of use or storage. In some organizations,
the responsibilities for packaging of finished products for shipment, the stenciling or labeling of
the shipping instruction on the shipping containers, and the delivery to the carrier also are
included.

4. Material and purchasing Research:- This function is concerned with the collection, classification,
and analysis of data necessary to find alternative materials; forecasts of supply, demand and
price of major purchased commodities; analysis of vendor costs and capabilities; and devising
new and more effective methods of processing the paperwork necessary to operate the material
system.

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5. Stores:- This function physically controls and maintains all inventory items. Appropriate physical
safeguards must be established to protect items from damage, unnecessary obsolescence due
to poor stock rotation procedures, and theft. Records must be maintained which enable
immediate location of items.
6. Purchasing:- The purchasing department hast the responsibility of buying the kinds and
quantities of materials authorized by the requisitions issued by production scheduling, inventory
control, engineering, maintenance, and any other department or function requiring materials .
Where the purchasing department has the right and the duty to advise, question, and even to
challenge other departments on matters of material specification and selection, a dynamic value
is added to the operation of the purchasing function and firm.
The specific activities of purchasing can be grouped

 Checking the specifications of materials which are requisitioned in an endeavor to

standardize where possible and to buy the materials which are the best values for the
purposed intended.
 Selecting the best available sources of supply, negotiating the terms of purchase, including
delivery and performance, and preparing the proper purchase orders. Maintaining the
necessary records to provide historical data on price trends, vendor performance and the
like.
 Follow up to ensure on time delivery and receipt of the proper quality and quantity.
 Acting as the company’s intelligence unit in the marketplace, constantly searching for new
and more effective suppliers and new materials and products with the objective of reducing
costs or improving the company’s products.
 Supervising or conducting all contacts between suppliers and all other company
departments on all matters relating to the purchase of materials.
7. In-plant Materials Movement:- This includes all those activities involved in moving
materials from their point of receipt or storage to the point of usage. This involves the
physical handling and transportation of materials from their storage area to the point where
they will be employed; issuance of material to using departments; maintaining of records
necessary transfer accountability from the materials function to the user; and provision of
information which will enable preparation of useful accounting reports. The “kitting” of
parts for production floor would be performed in this activity.

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8. Traffic:- Transportation costs have had an increasing influence on material costs in recent
years. Also, types of transportation have had a major influence on inventory policy; for
example the use of air freight and air express had reduced size of inventory stocks for
certain items. There are’ two basic traffic activities:
 Traffic control involves the selection of carriers, documentation of shipment, study of
carrier services and rates, tracing shipments, audit and approval for payment of carrier
charges, and the evaluation of ãarrier performance.
 Traffic analysis is concerned with assessing the total cost of transportation, including
loading and unloading, methods of packaging, transit time, thefts and other losses, and
with developing techniques for reducing overall transportation costs.
9. Disposal of Scrap and surplus:- Traditionally this has been a function included with the
responsibilities of purchasing. Aside from the desire to obtain good value for disposals, two
major additional concerns stem from protection of the environment and shortages of critical
materials.
10. Quality Control:- Quality control continues to be a difficult function to place in many
organizations. The responsibility for inspection of incoming raw materials and supplier’s
operation places it directly with materials management.
11. Inventory Control:- The inventory control function is responsible for keeping detailed
records of parts and materials used in the production process. Records of parts and
materials on order are maintained and periodic physical inventories are taken to verify or
adjust the records. Material requirements determined by production control are checked
against the inventory records before requisitions detailing needs are sent to the purchasing
department. In addition to the control of production inventories, there is need to control
the non-production materials such as expendable tools, office supplies, and maintenance,
repair, and operating supplies.

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 The specific control methods include:

1. Maintaining records of items on hand, on order and total usage. Establishments of

controls to minimize losses from spoilage and theft and to prevent stock outs or
duplication.
2. Handling the physical stocks of MRO (maintenance, repair, and operating supplies) items
to be issued as needed for operations or maintenance.
3. Issuing requisitions to the purchasing department when stocks reach the reorder point
or special need arises. Both production and non-production parts, materials, and
supplies can be controlled through one inventory control department or they can be
organized into two separate departments.

1.8 ORGANIZATION OF MATERIALS MANAGEMENT

Organization is the result of an organizing activity. Organizing refers to the process of

determining organizational tasks, grouping them together based on their relationship either in
terms of similarity or sequential relationships, forming work units, establishing a system of
authority and communication among work units and employees, assigning duties and
responsibilities of the work units, and committing resources that are deemed essential for the
smooth functioning of work units. It is derived from the vision, mission and objective of the
organization and lays a foundation for detail work procedures.

Organization of materials management is a complex process which requires the involvement of

members from various work units of an organization. It specifically demands integration of
separate systems and activities such as purchasing, stores, inventory control, production planning
and control, materials handling. It also requires spelling how the materials sub system is related
to other sub system of the organization so that it brings synergetic effect company wide. The
organization calls for answering core issues related to:

Centralization versus decentralization of materials activities

The degree of managerial power that the unit/s should be given
The units that should come under materials work unit

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 1.8.1 The traditional versus the modern approach of organization

Since no single structure embraces all the intricacies of the complex organizational variations,
the application or organizational structure requires a great deal of effort to understand and
analyze the firm’s environment and to mold the generic structural solutions. So far, two generic
structural solutions have been widely known: the traditional approach and the contemporary
approach.

The traditional approach is known for independent structuring of materials management units
under the chief executive officer separately. The following are the major limitations of the
approach:

The units are controlled by the generalist CEO who has limited insight of and foucus on
materials management
The units tend to lose sight of the overall materials management objective in a quest for
their unit’s objective. Such lack of integration is often followed by wastage in terms of
inflated materials cost, defective materials and outputs and frequent delay of customer
orders.
Creates ambiguity on the responsibility of units pertaining to the material resource of the
organization

With all its limitations, the traditional approach is still applicable in small firms where an
individual is managing a wide range of activities. This feature of small firms curbs the problem
of coordination.

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 Chart 1: traditional approach of materials management organization

Chief
executive
officer

Marketing
Production/oper Purchasing Administrativ
manager
ation manager e and finance
management

Production Stores Stock Purchasin Sales Transport

control control g

Many organizations all over the world are adopting the materials management set-up as a
contemporary approach (N. K. Nair, 1985). This contemporary approach to organizing materials
activities rests on the idea of creating integration among materials related activities. All units that
perform activities related to the function of materials management are structured under the
materials management work unit. The approach brings better synergistic effect on the overall
materials activities. In short this approach is to have an integrated materials department handled
by a materials manager with purchase manager under her. The other functions included in the
integrated materials set up would be stores, inventory control, planning, cost reduction,
transportation, value engineering, etc.

The following rationales justify the application of the contemporary approach:

 Integration of materials activities promote efficiency of operation, resource sharing,

unity of direction and cost control.
 The natural challenge of integrating materials activities in big organization could be
curbed with the modern approach
 The materials management work unit will be a separate cost center
 The approach provides prime responsibility of materials administration to a single
work unit

According to Nair (1985) grouping material related activities and production control unit under a
single unit bring the following advantages:

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Procurement at the right time. The principal objective of materials management is to obtain raw
materials, tools, general supplies, etc., at the right time. This involves recoupment on time by
stock control; processing the purchase order and follow up by purchase section; sending shortage
reports by stock control as well as by stores at different levels; clearing the goods from docks,
railways or road transport offices in the case of purchases from distant sources; checking and
taking materials into stocks by stores, etc. the combined setup brings about greater coordination
and increased sense of responsibility with regard to getting materials at the right time. The
separate functioning of the sections means divided responsibility and in the day to day working,
the store keeper and the purchase officer often go in for mutual criticism for procurement delays
and other shortcomings.

Lead time and stock levels. Variations that may occur in delivery time, its effect on stocks and
production, the necessity of adjusting the minimum and maximum levels on stock control cards,
etc. will be better appreciated and more effectively tackled by a common department head than
by a separate purchase officer.

Cost reduction and productivity. The opportunity for cost reduction is better when materials
related activities are performed in unison rather that separately. Materials cost reduction calls for
the adoption of one or more of the following: competitive bidding, negotiation, value analysis,
standardization, simplification, bulk purchase, control of costs of transporting and carrying of
inventory, reduction of obsolescence, etc. when such activities are handled by separate units,
coordination and balancing of trade offs become core problems. For example, procurement cost
and carrying cost pull to the opposite direction that the efficiency of the procurement unit may be
dashed by the inefficiency of store unit. Hence, the performance of units should be viewed as a
whole rather than individually.

Purchase of right quantity. The materials management unit may determine and decide on the
optimum quantity of purchase through the consideration of overall cost impact. Apart from this,
procurement units consider the availability of storage space before purchase decision is made.

Inventory reduction. This calls for better coordination among the store, procurement and
production units not only through information exchange but also through timely response.

Standardized classification and codification of materials. Due to an interface created among

the store, procurement unit and materials control owing to the fact that all are under the same
unit standardized materials classification system can be adopted.

Knowledge and skill development. The unit head and the employees will have versatile
knowledge and know-how pertaining to materials activities and possess overall and strategic
insight.

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 Quicker issue of arrival and return of rejects. The materials unit head and the procurement
officers are in a better position to feel the need for urgency of orders coming from stores that
timely execution of orders is highly likely.

Reduction of correspondence. The need for much formal correspondence relationships reduce in
a combined set up.

The modern approach still take different versions in that some companies establish a separate
materials management unit, others mingle it with finance and still others mingle it with human
resource management unit. In addition, there is also a wide variation on the question of
determining sub units that should come under materials management unit except those of
purchasing, store and material control units. Specifically, there are opposing arguments on the
inclusion of production control sub unit and inspection sub unit to the materials management
unit.

Some argue that production control sub unit should be in materials management unit for the
reason that the materials unit is responsible for controlling the acquisition, consumption and
proper utilization of materials. The material unit has a stake in production planning as substantial
portion of firm’s fund is spent on raw materials. Others counter reason in that even though
production control deals with planning the quantity and timing of inventories to be loaded to
production people, this function is purely confined within the scope of production and
manufacturing activity.

Even though it is customary to et inspection sub unit under the materials unit, there is strong
opinion against this set up for three reasons. First, the decision of inspectors may be influenced
by the materials unit head if the inspection sub unit is under the materials unit. Second, as
inspection requires a composition of large number of staff with specific technical knowledge, it
is uneconomical to appoint technical people solely for inspection purpose. Third, the inspection
unit makes a countercheck on the quantity received by the receiving unit. ….

Chart 2 shows the modern approach of materials management organization

Chief executive Office

Production Human resource Materials Finance Marketing

/operation manager manger manager
manager

Stock Purchasing Receiving/in Production Stores 20

Transport
control spection (?) control (?)
(?) There are arguments against restructuring inspection and production planning sub units under
the materials manager.

1.8.2 Stages in organizing materials activities

The rational of materials management may be better comprehended through understanding the
growth of small firm through three separate stages. These are

1. Complete integration

In small firms materials activities of purchasing, inventory, store and traffic are performed by
one person the general manger or the owner. In this case, material activities are completely
integrated.

2. Evolution of independent function

When the firm’s businesses increases and additional personnel are added to the organization,
it becomes evident that certain benefits would accrue if individual functions such as
purchasing, stores, traffic, inventory control and quality control were separated. This created
coordination problem.

3. Reintegration of materials activities

When firms get bigger and bigger in size, the coordination problem gets intensified that it
calls for immediate solution. This leads to the integration of materials activities by
restructuring them under the material management unit. Such restructuring marks the
adoption of the concept of materials management.

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