MATERIALS MANAGEMENT

Materials management is a process, through which a firm or company is supplied with

goods and services which it requires for succeeding in its goals of buying, movement of
materials and storing. The parameters related to materials management are as follows:

 Planning

 Storing

 Procuring

 Furnishing the appropriate material of true quality

 Coordinating production activities

 Scheduling production activities

Many industries buy the materials and do the following activities with them in a step by
step manner:

 Transport materials into a plant

 Transform materials into parts

 Gather parts into furnish goods

 Sell products or goods to customers

 Transport products to customers

Materials management does the following activities for the materials requirements:

 Planning

 Inventory planning

 Purchasing

 Storage

 Inventory control

 Supply of materials

 Transportation of materials

 Handling of materials

About twenty-five years ago, there wasn’t a strong competition in market and materials
management was not a vital part of an organization. At present, it is a vital activity of
management in production. Important functions of materials management are planning,
purchasing and controlling. The enhanced productivity is its aim and is used to perform the
following:
  To decrease the cost

 To enhance profitability

 In production streamline

 In proper utilization of materials

 In transportation

 In distribution

Definition: materials management is defined as a concept in an organization which plans

and control distinct materials, their supply, their flow from the stage of raw materials to the
stage of finished goods and handover goods to customers as per the needs of customers in
right time.

 This complete process involves the functions right from planning to marketing and
material management is responsible for all these activities.

History of Materials Management:

Materials management became a vital function of management and the department of

materials management was started at the time of World War I in the United States of
America. The advancement of principles of scientific management in the 20 th century by
F.W. Taylor decreased the cost of production and proper utilization of materials was
enhanced. Charles baggage was known as “materials man” because of his book on an
economy of manufacturing and machinery which explains about the functions of
purchasing. Between the years 1970 and 1999 materials management enhanced a lot.

Objectives of Materials Management:

The objectives of materials management are of two types and those are as follows:

 Primary objectives and

 Secondary objectives

1. Primary objectives: the primary objectives are as below:

 Planning about efficient materials

 Buying

 Receiving and procuring

 Storing of materials

 Inventory control

 Supply of materials

 Distribution of materials
  Assurance of quality

 Having a good supplier and customer relationship

 Enhanced departmental efficiency

2. Secondary objectives: there are many secondary objectives and few of them are as
below:

 To make decisions

 Scheduling of efficient production

 Make specifications of materials

 Make standardization of materials

 Assisting in design of product

 Assisting in development of product

 Quality control on purchased materials

 Handling of materials

 Availing value analysis

 Availing value engineering

 Advancing skills of workers in materials management

 Easy flow of materials in organization

 Easy flow of materials out of organization

Apart from these objectives, there few other important objectives in a firm and those are as
follows:

 Enhancing sales via sales promotion

 Maximization of benefit

 Enhancement in service of customers

 Globalization of the sales of product

 Meeting the transformations in technology

 Having a good employer and employee relationship

 Decrease in manufacture cost and other costs

 Objectives of social
Functions of Materials Management:

The functions of materials management are as follows:

 Primary functions

 Secondary functions

1. Primary functions: primary functions of materials management are as follows:

 Materials requirement planning i.e. MRP

 Purchasing

 Inventory planning and control

 Ascertaining and Maintaining the Flow and Supply of Materials

 Quality Control of Materials

 Departmental Efficiency

2. Secondary functions: secondary functions of materials management are as below:

Standardization and Simplification

 Design and Development of the Product

 Make and Buy Decisions

 Coding and Classification of Materials

 Forecasting and Planning

The Structure of the Organization with Materials Management as a Separate Function:

A structure of the organization with materials management as a separate function is

explained with the aid of a diagram and it is as below:

Fig1: Structure of Organization with Materials Management as a Separate Function

The Structure of Materials Management’s Department in an Organization:

Department of materials management is required in a firm or organization to control and

coordinate various activities of materials management and its structure is as below:

Fig2: Organization of Materials Management Department

Types of Materials:

There are three distinct types of materials and those are:

 Purchased materials

 Finished goods

 Work in process materials

Meaning of Integrated Material Management:

Materials Management as a function is responsible for the co-ordination of planning,

Sourcing, Purchasing; Moving; Storing and Controlling materials in an optimum manner so
as to provide a pre-decided service to the customer at a minimum cost.

If the above functions of Materials Management are separately handled a conflict of

interests occurs and there is a need to balance the conflicting objective from a total
organisation point of view so as to achieve optimum results for the organisation.
The organisation which are following integrated Materials Management concept require
the services of professional managers so that they can fulfil the requirements of an
integrated materials management functions which demand an ability to bring together
conflicting and yet inter-related functions.

Objectives of Integrated Material Management:

The fundamental objectives of an integrated material management approach can be

viewed as:

(a) Procuring better value

(b) Obtaining better yield

(c) Reducing investments in stock through Inventory control and material flow.

In an integrated set-up the materials manager who is responsible for all such inter-related
functions is in a position to exercise control and co-ordinate with an overview that ensures
proper balance of the conflicting objective of the individual functions. Integration also helps
in the rapid transfer of data, through effective and informal communication channels.

Advantages of Integrated Material Management:

Following are some of the advantages of Integrated Materials Management:

1. Better Accountability:

By effective centralisation of authority and responsibility for all aspects of materials

function, a clear cut accountability is established. This helps in evaluating the performance
of materials management in an objective manner.

2. Better Co-Ordination:

When the materials manager is responsible for all functions it results in better support and
co-operation in the accomplishment of the materials function. Better co-ordination create
an atmosphere of trust and better relation between the user departments and the
materials management department.

3. Improved Performance:

As all the inter-related functions are integrated organisationally, better performance and
effectiveness is achieved. The need for materials is promptly brought to the notice by
materials planning and purchase department is supplied with stock levels and orders status
by stores department.

4. Adaptability to Computerisation:

The Centralisation of materials functions has made it possible to design data processing
systems. The integrated materials management facilitates the collection, process and
analysis of data, leading to better decisions. Computerisation can be economically
introduced under an integrated set-up.
What is Materials Research?
Materials research is linked to virtually every field of science and engineering. The discovery
and development of new materials enables advances across diverse technologies, from
computer chips to consumer electronics to building materials, energy, and transportation.
The researchers contribute to economic progress by developing advanced materials for new
technologies, by lowering the cost and enhancing the performance of more established
technologies.

The future of materials research is nearly unlimited, with tremendous opportunities in high
performance and novel materials enabled by our ability to manipulate matter at the atomic
and molecular scales. This size scale, which is about the same as that of biological
structures, opens up a whole new world at the interface of materials and life sciences. Our
research community is expanding into this new research frontier.

What is material planning and budgeting?

The materials planning and budgeting function have a prominent place in the
integrated materials management set-up. Material planning is the way of determining the
requirements of raw materials that go into meeting the production needs within the
economic investment policies
Material budgeting refers to the procedure of preparing material or
purchase budget in terms of quantity and money value of materials to be procured
in a specified time period. 
Material budgeting ensures low risk of inventory planning, highest purchase lead
time, low transportation costs and better vendor relations.

Materials Planning
 Need of Materials Planning

Material planning is referred to as a systematic mechanism through which the

requirements of raw materials, ancillary parts and components, spares and the like,
can be determined in advance, as informed by the production system. It is an
integral part of the overall planning activity.
Based on the response of the materials manager to the inventory situation, there are
two forms of inventory systems:
Reactive Systems
Planning Systems
 Of the above two systems, the reactive inventory systems have been replaced by
MRP systems in most of the organizations. Organizations using such systems work
on their present situations, whereas, organizations using planning systems work on
their future considerations of material requirements – the quantity and the time
period.
However, reactive inventory systems are known to be simpler to use and manage in
different aspects, but do hold critical limitations, such as high inventory costs and
unreliable delivery performance. On the other hand, the planning inventory systems
are more complex to manage, yet coupled with several benefits. For instance, this
system assists in reducing stock inventories and the related costs, since it considers
only those items or parts and components that are required.
Dependency upon demand is another crucial factor that is considered to choose
between reactive and planning inventory systems. When there is no dependency on
the demand, the demand for one item is not linked with the demand for others. You
do not need to stock for safety purposes for dependent demand items, since you
may generally know the requirement.

 Factors affecting Materials Planning

Material planning activity can be influenced by several factors, classified into two
categories:
Macro factors
Micro factors
Macro factors: These factors concern the rapid changes in global environment,
such as global price trends, business cycles, import/export policies of the
government, etc., which can influence the material planning. The government’s
credit policy plays a critical role in banks following the guidelines mentioned therein,
during the course of extending financial support to a business enterprise.
Micro factors: These factors concern changes that may take place within the
organization, such as plant capacity utilization, production plan, acceptable inventory
holding, lead times, rejection rates, working capital, delegation of power,
communication, seasonality, etc. that can affect the material planning.

 Tools of Materials Planning

The prime tool or technique of material planning is the Bill of Material

Explosion, illustrated below:
 Figure 1: Material Planning

Material planning is based on the demand planned for end products. Forecasting
tools, such as weighted average method, time series method and exponential
smoothing are some of the widely known methods used for material planning. Upon
demand forecasting, the material planning activity is pursued. Bill of Materials is the
document that details the requirement for a list of materials, unit consumption and
code numbers for each product location. Explosion Chart is a chain of bills of
materials clustered in a matrix, such that the combined requirements for varied
components can be met. Materials requirement can be derived from demand
forecast through explosion charts using bill of materials. Therefore, MRP leads to the
development of delivery schedule of materials and hence, the purchase of those
material requirements.

 Principles and Procedure for Materials Planning

The principles of material handling serve as guidelines to applying sound judgment

and a good checklist for enhanced avenues. Though one principle may conflict
another, the situation being designed is the only determinant of the right. There are
20 essential principles of material planning:

 Principle of Planning: Activities related to material handling and storage activities

need to be pre-planned to get the maximum operating efficiency in every respect.
This planning will consider every action, every storage requirement and any delay in
order to reduce production expenditure.
 Principle of System: The system concept is the core of material handling that
ensures that all equipment for material handling co-function for effectiveness. The
principle of system brings together several procedural steps and integrates them into
 a single system from vendor to the plant and to the customers. The process involves
integrating numerous handling activities into a coordinated system of receiving,
operations, production, storage, vendor, packaging, warehousing, transportation,
shipping and customers.
 Principle of Material Flow: This principle of material flow states the requirement of
an operation sequence and equipment layout to optimize material flow.
 Principle of Simplification: The simplification principle is based on simplifying the
material handling process by using cost reduction formula, such as eliminating,
combining and reducing irrelevant movement and equipment.
 Principle of Gravity: Gravity can be used in different ways for the movement of
materials between work stations. Therefore, wherever possible, use gravity for
material movement.
 Principle of Space: Just like gravity, it is always advisable to make optimal use of
the cubic capacity of the warehouse. Some of the material handling equipments that
fosters space utilization includes overhead conveyors, mezzanines and racks.
 Principle of Unit Size: While choosing a unit load, factors like its strength, cost,
versatility, durability, size and ease of use should be considered, to enhance the
size, quantity or weight of unit loads or flow rate.
 Principle of Mechanization: Mechanization adds control to remove manual moving
system, and instead use mechanical tool set for easy movement of material.
 Principle of Automation: Automated storage and retrieval systems aid in putting
materials into storage racks automatically and removing them whenever required.
Most of the machines are automated as material handling equipment loads and
unloads the machine. Automation is futuristic and therefore, the users of the manual
moving system should consider using automated storage and retrieval systems for
production, handling and storage activities.
 Principle of Equipment Selection: All aspects related to material handling
including the movement and technique to be used should be considered while
selecting the equipment for it.
 Principle of Standardization: The principle indicates standardization of material
handling methodologies, and the types and sizes of handling equipment. The costs
of such systems can be classified into two categories: (1) ownership cost of the
system, including the initial purchase price and maintenance costs; and (2) system
operation costs, including the personnel training costs, energy cost, and direct and
indirect costs related with using the system.
 Principle of Adaptability: Make use of methods and equipment related to material
handling to perform different tasks and applications in the best possible way, where
using special purpose equipment is not validated. For instance, buying standard
 sized pallets to handle a wide array of parts and storage equipment’s to store
different products. This economises the adaptability too.
 Principle of Packaging Weight: Make sure the equipment you buy is not bigger
than required. The term ‘tare weight’ indicates the weight of the packaging material.
Materials are packaged to prevent damage during transportation. Since packaging is
expensive, your goal should be to keep the tare weight to the minimum and save
money.
 Principle of Utilization: Make proper utilization of operators and material handling
equipment. For an effective management of the workload of the labour and
equipment, you need to identify the work requirement, daily frequency and the time
required per movement. Make a plan for optimal utilization handling manpower and
equipment.
 Principle of Maintenance: This principle states that equipment for material handling
should be maintained through periodic and planned preventive maintenance system,
which is quite cheap than emergency maintenance. The program should include
schedules for each of the equipments used for material handling and repairs for
pallets and storage facilities. Missing slats on pallets can damage the product and
create safety issues. Therefore, plan for preventive maintenance and scheduled
repairs for your material handling equipments.
 Principle of Obsolescence: Proper maintenance records need to be in place, to
find out about worn-out equipments and make arrangements for the replacement of
obsolete handling techniques and equipment for improvement in operations.
 Principle of Control: The inventory control system should include material handling
systems to manage the otherwise expensive material costing. Technological
innovations, such as RFID, conveyor, bar code, etc. facilitate the incorporation of
quality inspection, inventory control and item tracking. This also reduces the need for
material tracking physically. A well-structured material handling system enable
incredible savings in operation schedules and considerable enhanced costs,
precision and reliability. Material handling activities contribute to enhancing the
control of production inventory and order handling.
 Principle of Capacity: The use of handling equipment helps in achieving required
production capacity.
 Principle of Performance: This principle indicates that the effectiveness of material
handling performance should be determined in terms of expense per unit handled.
Material handling is executed by labour (the input) and the measurement of output
would be in terms of units of materials moved. Thus, productivity can be enhanced
by increasing the units of material moved or decreasing the labour hours. The
performance can also be measured by the formula:
 Performance includes much more than just labour. The total operational expenditure
should be segregated from the material handling expenses to get a better ratio.

 Principle of Safety: Manual handling is perhaps the most critical component of

material handling. While at the same time, material handling equipment can also
lead to safety issues, and therefore, safety procedures, methods and training should
be considered part of every material handling plan. It is the management’s
responsibility to provide for a safer working environment. Safety considerations are
important for selecting the right material handling equipment and therefore, the
methodology.

Materials Budgeting

 Basic concepts of Materials Budgeting

Direct Materials Budget: Proper material budgeting is of utmost importance, even

when it comes to budgeting direct materials, which add up to the production cost of
an organization. Correct budgeting can lead to better projections of direct material
requirement. Here, direct materials (or simply, materials) refer to the supplies
needed for manufacturing goods, and can also regarded as raw materials, stores,
stock and productive materials.

Materials budget measures the materials to be purchased to fulfill the production

budgetary requirements, and is generally presented in monthly or quarterly formats.

Total requirement for Raw Materials = for production + planned ending

inventory

Raw Materials to be purchased = total requirement – beginning

inventory

It is not possible to estimate the materials budget for every part

component in inventory, as the estimation could be huge. As a matter of
fact, it is customary to either make a rough estimation of amount of
inventory required regarded as the total inventory, or expressed in terms
of commodity type. Further, if you have an MRP software package with a
planning module, you can perhaps create an appropriate materials budget
by either of the means. The inclusion of the production budget into the
 planning module through this software helps create the expected
materials budget for the ensuing period. In the absence of such software,
the materials budget needs to be calculated manually.

For instance, Sharon Ltd. plans to manufacture an array of plastic goods,

while 95% of its raw materials involve the purchase of plastic resin.
Therefore, only one important commodity is of the prime concern here.

Sharon Limited – Materials Budget for the year ended December

31, 2011

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Product A (units) 5,000 6,000 7,000 8,000
x Resin/unit (lbs) 2 2 2 2
Total resin needed (lbs) 10,000 12,000 14,000 16,000
+ Planned ending inventory 2,000 2,400 2,800 3,200

Total resin required 12,000 14,400 16,800 19,200

– Beginning inventory 1,600 2,000 2,400 2,800
= Resin to be purchased 10,400 12,400 14,400 16,400

The planned ending inventory for raw materials at the end of each quarter is projected to be
20%

of the total resin amount during the month, and so the ending inventory differs over a period
of time, and rising as production requirements increase. The planned increase can be
attributed to the fact that Sharon Ltd has difficulties in receiving resin from its vendor in a
timely manner, and therefore, it maintains a safety stock of on-hand inventory. The
purchasing department envisages the global demand to intrigue the resin price, which is
why it includes a slight rise in priced into Quarter 3, carrying it forward to the Quarter 4.

Five Easy Steps to calculate Materials Budget

Step 1: To start with, find out the exact amount of set of products to be manufactured. This
stage is also known as the total order or the order size.

Step 2: Estimate the kind of raw materials you will require to manufacture your order.
Identify the quantity as well as costing for each of the raw material requirements.

Step 3: The quantity identified in Step 2 will determine your total projected costs.

Step 4: The next step is to add costs for scraps or wastes removal, if any.

Step 5: Deduct the value of scrap materials which could be sold after manufacturing.
Material Consumption Budget: This is required after determining the production
requirement. The material consumption budget is based on the volume of production.
Material consumption per unit of output aids in preparing material consumption budget for
various kinds of materials to be used by the output. Budgeted production volume multiplies
with material per unit of output produces the budgeted material consumption which is
thereafter multiplied with the purchase price per unit, and the budgeted material
consumption value is as follows:

Product A Product B
Budgeted Production Units xx xx
Add: Material Consumption / Output xx xx
Budgeted Use of Materials xx xx
Purchase Price Per Unit Rs            x Rs            x
Budgeted Material Consumption Value Rs          xx Rs          xx

Material Purchase Budget: This is required by both manufacturing and

merchandising companies.

For instance, manufacturing companies measures the quantity of materials to

be purchased through production volume and inventory requirement. This along
with the value of materials for the period budgeted and the materials inventory
needed for sustenance. This is determined by considering the consumption for
budgeted production volumes and opening and closing inventory requirement.

Material A Material B
Budgeted Consumption Units xxx xxx
Add: Required Closing Inventory xxx xxx
Total Requirement xxx xxx
Subtract: Opening Inventory xxx xxx
Budgeted Purchase Quantity xx xx
Budgeted Purchase Price Per Unit Rs            x Rs            x
Budgeted Material Purchases Rs          xx Rs          xx

Merchandising companies, on the other hand, prepare merchandise purchase budget,

based upon budgeted sales units as well as on opening and closing stock of merchandise,
and expressed in terms of units as well as price.

Material
Budgeted Sales Volume xxx
Add: Budgeted Closing Inventory xxx
Merchandise Requirement xxx
Subtract: Opening Inventory xxx
Budgeted Purchase Quantity xx
Budgeted Purchase Price Per Unit Rs            x
Budgeted Purchase Value Rs          xx

 Factors affecting Materials Budget

Some of the factors that can critically affect your Materials Budget:

Production Budget should be considered the foremost factor in preparing such

budget.

Material cost is also equally important. You may like to consider purchasing the
material only when its prices are lowest.

There are certain materials that are prone to seasonal fluctuations. And therefore, it
is recommended to procure them only when they are readily available in the market.

The store position and the stock of existing material are also key considerations. If
your business does not have ample space, you should not be buying the stock in
advance.

Management policy, rules and regulations on JIT (Just-In-Time) inventory, inventory

level fixation and EOQ (Equal Order Quantity) are also major influencers to materials
budgeting.

Past policies of the business and that of the competitors’ should also be considered
while you prepare the Materials Budget.

At times, you may also need to consider the fresh stock or easily availability of stock
materials.

Transport costs are very crucial again. If the materials are not available easily, the
management needs to consider sufficient quantity of raw materials for purchase and
thus, transport costs can be minimized.

Other factors, such as cash/credit availability, conditions of vendors, etc should also
be taken into account, while preparing Materials Budget.

 Materials Budgeting and Accounting

It is the job of managerial accountants to work in conjunction with the manufacturing
department to identify the cost of each product manufactured and make an
assessment. Direct materials mainly consist of the most direct costs associated with
the manufacturing or production process. Managerial accountants not only assist the
manufacturing staff in differentiating direct materials from indirect ones, but also
assess the key difference between expected and actual material costs by way of
variance estimation.

Identification

Manufacturing organizations make use of various kinds of raw materials in the

manufacturing process; these are used directly by the manufacturing staff in the
production of the final product. Such materials are called direct materials. Other
materials used by the staff ease down the entire process, through maintenance of
the manufacturing facility, the production equipment or through their use in very low
quantities in the manufacturing process. Managerial accountants are responsible for
working closing with the manufacturing staff to make a difference between direct and
indirect materials.

Cost

Manufacturing organizations need to determine their costs incurred on direct

materials for various reasons, which account for a relevant part of the total product
costs in order to make informed pricing decisions and determine profitability. Direct
material costs that includes shipping charges as well; also help organizations in
making a comparison among suppliers. These costs can be minimized by discounts
that maybe offered by the suppliers, such as quantity or payment discounts.

Direct Material Variances

Direct Material Variances refer to the dissimilarities between actual direct material
costs and expected direct material costs – these can be in terms of usage as well as
price. These variances could be favorable or unfavorable. Nevertheless, they should
be properly examined to understand the cause for such variances.

Direct Material Usage Variance

It measures the variance between the actual quantity of material used and its
expected quantity to be used. Favorable direct material usage variance would mean
that the actual quantity used is less than the expected quantity. Similarly,
unfavorable direct material usage variance would mean the actual quantity used is
more than the expected quantity. Any variances between actual and expected
quantity usage can be attributed to poor quality of materials, problems in equipment
and even not making ample of materials on the manufacturing line.
 Direct Material Price Variance

This measures the variance between the actual price of unit materials used and their
expected price. Favorable variance shows actual costs to be lesser than expected,
and unfavorable variance indicates the opposite. These variances emanate from
vendor price changes or sudden discounts.

Codification
As we read above, it is evident that there needs to be some way to identify the items
uniquely, accurately and adequately. These attributes of identification can be achieved
through proper classification and codification. For instance, we are aware of the PIN Codes
set by Post and Telegraph Department to distinctively and concisely identify different
regions of the country. Codification is referred to the procedure of signifying each item
through a group of numbers and alphabets that indicates the group, subgroup, kind and
dimensions of the items. Most of the organizations from the public and private sectors,
railways, etc. have their own established codification systems. Coding may have number of
digits varying from 8 to 13. Coding symbols can be arranged in various possible ways,
which may have numbers, alphabets, alphanumeric characters, and so on. Nevertheless,
before a coding scheme is decided, a considerate thought should be given to its design,
such that it meets the requirements of the item identification and also satisfies various
users.

Following considerations need to be taken into account while designing codes:

Brevity – Avoid giving long, complex descriptions to the codification system. Therefore, the
codes should comprise lesser number of digits. The size of the code should be based on
the number and types of items, and the number of applications of the related data to the
item.

Logical – The coding system should logically fit the needs of the user and that of the data
processing methods used.

Flexibility – The design of coding should be flexible enough to cope with changes without
altering existing coding. For instance, in a library, the coding is never affected by addition of
new books, and thus, upcoming books can be easily accommodated by the current code
structure.

Exclusivity – The code for each item should be able to represent it exclusively. Similarly,
an employee identification code should identify not more than one employee.
Easy to Understand – The code structure should be set such that it can be easily
understood by its users, and be practical and meaningful.

Right Use of Coding Symbols – A code can have alphabets, numbers or a combination of
both, but at the same time, certain precautions need to be taken in selecting the symbols. If
the characters appear similar to each other, they should be removed. Also, letters that
sound similar should not be used. For e.g. B, C, D, G, P, M, N and T.

Code Layout – The layout for coding should be equivalent in length. For instance, 1-199
should be preferred to 001-199. Codes longer than five characters should be disintegrated
into small segments for human judgments.

Code Capacity – To estimate whether the given code has the capacity to cover all
situations and yet maintain the code exclusivity, the following formula should be used:

C = SP

Where, C refers to possibility of total possible code combinations available, S refers to the
number of unique characters in the set, and P is the number of code positions.

The size of code structure should be decided much before by estimating the need of unique
combinations.

Systems of Coding
Different systems can be adopted for codifying materials on the basis of your choice of use
of coding symbols, comprising numbers, alphabets or a combination of both (often known
as alphanumeric codification). There are primarily two types of systems: Brisch and Kodak.

Brisch System – This is based on numbers starting 0 to 9, and will comprise usually three
blocks, separated by decimals. All blocks get specifically classified materials. The block
from the left indicates the classification of raw materials, packaging materials and finished
materials, whereas, the middle block shows next level classification, like the nature, use,
features and quality of materials, and the last block on the right shows the lowest level
classification, like the quality of materials, its part components, appearance, availability,
prices, source of supply, frequency of use, marketability, etc.

Kodak System – This system was developed by Eastman Kodak Co. based out of New
York. Being comprehensive in nature, it is comprised of 10 digits with numerical code. The
key level grouping is the source of supply. Materials are assigned 100 different
classifications, as per the purchase and procurement considerations. For example, if a bolt
is listed under hardware category and can be availed from hardware vendors, it is
considered a hardware item. But if is available only as a part of the machine, it will be
available under maintenance.
Colour Coding System – Colour codes are a very useful tool used for item identification.
Say, for instance, colours like red, green and blue used for electric cables, red and green for
electric switches, etc. There also exists national and international colour coding system.
Using less number of colours in coding can limit the scope. Nevertheless, colour coding
system is a proven effective item identification mechanism.

Objectives and scope of standardization

Standardization of materials is the subset of codification – the process of signifying each

item through a number whose digits further represent the group, the subgroup, type and
dimensions of a particular item. The first two digits would generally indicate the major
groups, such as if it’s a raw material, oil stationary, etc, and the next two digits would
indicate subgroups, such as type of raw material, etc. The next three digits can represent
the dimensional characteristics of the item, and the last digit of any minor variations.

The broad objectives of a rationalized material standardization system include:

 Standardization objects to bring all items together.

 To allow assembling of any future items in their proper place.

 To classify items as per their characteristics.

 To assign a special code number to each item to evade any ambiguity or duplication.

 To promote variety reduction through codification.

 To formulate a common language for ease of identifying an item.

 To establish key parameters to specify an item.

 To state items according to national and international standards.

 To facilitate data processing and data analysis.

Rationalized standardization has culminated into many organizations reducing their number
of items and in turn, working on a systemic grouping of items similar in nature, thus avoiding
confusion caused due to detailed description of items, because standardization of names is
backed by codification that introduces standardization and simplification. Not only does it
avoid duplication of items, but also results into the minimization of the number of items and
accuracy in record-keeping.

Standardization also allows for easy identification of items in stores and hence, reduces
much on clerical efforts. Items coded as per the sources also enable keeping the items in
bulk while ordering. Therefore, standardization of materials is very crucial right from design,
production, engineering through to inspection, maintenance and materials.
1. What are four objectives of purchasing?

2. List the seven steps in the purchasing cycle.

3. Describe the purposes, similarities, and differences among purchase requisitions, purchase
orders, and requests for quotation.

4. What are the responsibilities of the purchasing department in follow-up?

5. Describe the duties of the receiving department upon receipt of goods.

6. Besides functional specifications, what three other specifications must be determined? Why is
each important?

7. What is quality?

8. Name and describe the four phases of quality. How do they interrelate? Who is responsible for
quality?

9. Describe the advantages and disadvantages of the following ways of describing functional
requirements. Give examples of when each is used. a. By brand. b. By specification of physical and
chemical characteristics, material and method of manufacture, and performance.

10. What are the advantages of using standard specifications?

11. Why is it important to select the right supplier and to maintain a relationship with him or her?
12. Name and describe the three types of sourcing.

13. Describe the six factors that should be used in selecting a supplier.

14. What is the concept of “best buy”?