Chapter One

Introduction
to
Materials Management
 Definition of Materials Management
 Every organization uses, transforms, distributes or sells materials of
one kind or another.
 Materials are one of the vital resources of an organization. If an
organization is to function and operate successfully, it must have
proper and sufficient supply of necessary materials.
 Materials include:
 Raw materials
 Work-in-process
 Finished Goods
 Component parts
 Semi-finished parts
 Fixed assets etc.
 These materials may take different forms, such as raw materials,
machinery, tools, equipment, vehicles, furniture, stationary, fuel,
oil and lubricants, accessories etc.
 Lack of availability of adequate materials:
 disturbs the normal operation or production, and
 causing unnecessary delay of production or work stoppage.
 The dalliance or stoppage of work in turn causes
additional cost such as:
 cost of depreciation of fixed assets,
 salary of permanent employees,
 opportunity costs,
 loss of sales,
 dissatisfaction of customers, etc.
 Thus, effective management of materials is crucial
to the performance of many organizations.
 Traditionally, materials were thought to be cheap, readily available and
abundant.
 Today, however, the realities of the market proved that materials are
scarce and costly.
 In many organizations, materials form the largest single expenditure
item. Studies indicate that materials account about 60-80 percent of
the total annual expenditure of organizations.
 Besides, materials management has a tremendous influence on the
ultimate cost of a product and efficiency of an organization, because it is
concerned with the total flow of materials in the organization.
 The total flow can extend from suppliers to production and
subsequently through distribution to required place at the required
time and by ensuring that these resources are properly handled and
utilized.
 Thus, the importance of materials management lies in the fact that any
significant contribution made by the materials manager in reducing
material cost will help to improve the profitability and rate of return on
investment.
 Meaning of Materials Management
 No single universally accepted definition, same concept.
 Some of these definitions are that materials
management is:
– The integrated function of purchasing and allied activities so
as to achieve the maximum coordination and optimum
expenditure in the area of material (N.K.Nair).
– Is process of management which coordinates, supervises and
execute the task associated with the flow of materials to,
through and out of an organization in an integrated fashion
(A.K.Datta).
– Is an integrated management approach to planning,
acquisition, conversion, flow and distribution of production
materials from the raw material state to the finished product
state (W.Dobler et al).
• When we sum up these definitions, Materials
management can be defined as:
 an organizational concept designed to enhance
coordination and control or the various materials activities
including activity to plan, purchase, store, handle,
distribute, use and control of materials in order to
contribute to organizational success and profitability.
• The specific material management activities include the
following activities:
• Purchasing
• Receiving
• Warehousing and stores
• Materials handling and utilization
• Inventory management
• Inventory control
• Materials requirement planning (MRP)
 Scope of Materials Management

• The scope of materials management varies greatly from

company to company and may include materials planning and
control, production planning, purchasing, inventory control and
stores, in-plant materials movement, and waste management.
• Materials Management's scope is vast. Its sub functions, include
Materials planning and control, Purchasing, Stores and
Inventory Management besides others.
• Basically, under its scope are :
 emphasis on the acquisition/acquirement aspect
 inventory control and stores management
 material logistics, movement control and handling aspect
 purchasing, supply , transportation , materials handling etc
 supply management or logistics management
 all the interrelated activities concerned with materials
 Origin and transition

• The scarcity of materials, which was felt during World War I

in USA to a very large extent and it, has become difficult for
production managers to supply the War goods.
• This has created it necessary to organize the Materials
Management department for managing large inventories in
stores and to analyze the problems arising to control and
economize inventory cost problems and shortage
elimination.
• The materials management was included as an important
function of the management.
• With the development of principles of scientific management
by F.W. Taylor in 20th century, the economic use of materials
in all the organizations was critically felt to reduce the cost of
production.
• The early years of developments in the field of materials
purchase and supply systematically begins from 1850.
Charles Baggage’s book on the economy of machinery
and manufacturing published in 1832 refers to the
importance of purchasing function. Baggage is also
known as “Materials Man”.
• The growth of Rail Road industries by 1866 started in
America. The Book on ‘The Handling of Railway Supplies
and their Purchase and Disposition’ in 1887 discussed
the purchasing issues. Purchasing gained importance
during World War I. Howard T. Lewis was a purchasing
professional from 1905 to 1945. He developed
importance of sound procurement to company
operation.
• The concept of materials management was widely spread
during World War II.
 Professor Howard T. Lewis of the Harvard Business School made
the extensive studies in Industrial Purchasing Practice.
 W.N. Michelle, N.F. Harriman, L.F. Buffy, Donald G. Clark, Edward
T. Gushee, Russell Forbes, Stuart F. Hewritz and George A.
Reward had contributed largely to purchasing and materials
management in procuring, receiving, inventory control and
supply.
• World War II introduced a new period in purchasing history.
 The emphasis on obtaining required and scarce materials
influenced a growth in purchasing interest.
 In 1933, nine colleges offered courses related to purchasing
which was increased to forty-nine colleges in 1945 in America.
The membership of the National Association of Purchasing
Agents increased from 3400 in 1934 to 5500 in 1940.
• The post-war period saw the development of the value
analysis technique, pioneered by General Electric
Company in 1947 on the evaluation of which materials
or changes in the specification and design would reduce
over all product cost.
 From 1947 to 1960 were 13 years on further developments in
materials management.
 Firms initiated dramatic growth of the materials management
during 1960-1970.
 The Vietnam War resulted in upward price and materials
availability pressure.
 During 1970 Firms experienced widespread materials
problems related to ‘oil shortages and embargoes’.
• The purchasing strategies and behaviors that evolved
over in 1980 gave rise to foreign global competition.
• The global era of trading in between 1970 and 1999 for
materials management increased.
• Purchasing approaches beyond 2000 GC reflects a changing
emphasis towards :
 the improvement of quality of materials, supplier relationship,
more co-operative approach, long-term strategies of cost
management and database materials management systems for
materials planning and utilization in industries to bring about
overall improvement in production systems, in-cost reduction
through economy and increased sales.
• In order to serve the corporate goals and perform materials
activities efficiently, a functional organization of the
materials management must be established to fulfill the
objectives of materials program, elimination of materials
wastages and duplication of efforts to do so in every
organization.
 Importance of materials management in corporate policy
Objectives and Functions of Materials Management
• The objectives and functions of materials management can be
categorized in two ways as follows:
(I) Primary objectives
(II) Secondary objectives
They are discussed below:
I) Primary objectives can be classified as:
i) Efficient materials planning
ii) Buying or Purchasing
iii) Procuring and receiving
iv) Storing and inventory control
v) Supply and distribution of materials
vi) Quality assurance
vii) Good supplier and customer relationship
viii) Improved departmental efficiency
II) Secondary objectives
i) Efficient production scheduling
ii) To take make or buy decisions
iii) Prepare specifications and standardization of materials
iv) To assist in product design and development
v) Forecasting demand and quantity of materials
requirements
vi) Quality control of materials purchased
vii) Material handling
viii) Use of value analysis and value engineering
ix) Developing skills of workers in materials management
x) Smooth flow of materials in and out of the organization
• The basic objectives of management in an
organization are:
1) Sales increase through sales promotion
2) Profit maximization
3) Improvement in customer services
4) Globalization of its product sales
5) Meet the technological changes
6) Good employer - employee relationship
7) Selection of alternative materials
8) Reduction in manufacturing and other cost.
9) Social objectives
 I) Primary Functions

i) Materials Requirements Planning (MRP)

 The MRP is a technique used to plan the materials starting
from the raw materials, finished parts, components, sub-
assemblies and assemblies as per Bill of Materials (BOM)
to procure or produce them to support a Master
Production Schedule (MPS).
 The latest technique used is called Just in Time (JIT) is
referred practically to no inventory.
ii) Purchasing
• All the organizations need an efficient and economic
purchasing and procurement of its various supplies of
materials from the suppliers. The materials management
department has to perform this function of purchasing
and procurement of materials very efficiently.
iii) Inventory Planning and Control
• The modern concept of inventory planning is that the
materials should be purchased and brought in the
stores just before it enters the production or sold out
so that inventory cost is negligible. The zero inventories
are the ideal planning.
iv) Ascertaining and Maintaining the Flow and Supply of
Materials
• Insufficient or zero inventories many times create the
situations of stock-outs and leads to stoppage of
production. Failure of materials handling devices is also
responsible for interruption of material supplies.
Alternatives or emergency supply systems can be used
for assuring production lines to continue.
v) Quality Control of Materials
The quality of the product manufactured by the
organization depends upon the quality of the
materials used to manufacture that product.
It is a very important and necessary function of
materials management to purchase the right
quality of materials.
The inspection, quality control, simplification,
specification, and standardization are the activities
which are to be followed for the measurement of
quality of the materials.
The quality assurance is decided by inspection and
checking.
(vi) Departmental Efficiency
• The objective of this function is to ensure the
efficiency of the system adopted.
• If the system and procedure adopted for materials
management are inefficient or faulty, none of the
objectives mentioned above can be fulfilled.
• In order to maintain activities as per planning an
efficient control is necessary in the department over
each and every process.
• Management Information System (MIS) and feed back
control at every stage of working must be adopted to
control and make the management and employee
work as efficiently as possible to achieve the best
results.
 (II) Secondary Functions
• The standards and specifications of various types of
materials are fixed by design and technical department of
the organization and they are followed by production
department.
• Standards define the quality, reduction in sizes and variety,
interchangeability of parts and products. It ensures efficient
utilization of materials and reduces wastages. Standard
materials are always available at reasonable cost. It also
helps purchasing department in selection of materials and
vendors. If less variety of items purchased and put in the
stores the types of inventories will be reduced and in this
way the cost of carrying the inventories in the stores will be
reduced. The objective of this function will be to produce
standard product reducing the overall cost of the product.
(ii) Design and Development of the Product
• The variety in product and functionality are the
important factors to promote the sales of a
product. The new techniques of designing a
product using Computer Aided Design (CAD)
has made possible to develop variety of
products at faster rate. The new technological
development in manufacturing using Computer
Aided Manufacturing (CAM) can produce
variety of products at much faster rate with all
types of flexibility in the manufacturing as
compared to conventional methods.
(iii) Make and Buy Decisions
• These types of decisions are the policy decisions of the
management. When a company grows fast, its sales
increases at rapid rate then it becomes an important
matter to decide whether the company should buy
the parts and components or increase and establish
its facilities to cope up with the increased demand
and sales. It will help in selecting the suppliers to buy
the items at reduced cost. The material evaluation, its
availability, alternative materials selection,
procurement and inventory control are the functions
influence the make and buy decisions.
• The make and buy decisions are largely based on cost
economics and cost benefit analysis.
(iv) Coding and Classification of Materials
• It uses its own methods of classification of materials
used to manufacture the product or a company selling
various goods.
• ABC analysis is one of the simple and standard
method used by most of the firms for classification
and storing their variety of materials. (Will see in
detail on Chapter 4)
• The materials are recognized to purchase and store as
an inventory by its codes and nomenclatures/catalog.
• The various methods of coding are used by every
organization to control the variety of materials and its
quantity and price rates.
(v) Forecasting and Planning
• MRP is based on correct forecasting of sales and
demand of the products in the market.
• The market fluctuations are to be observed to
control production of the organization.
• The various methods of forecasting are available and
the materials management department can choose
the one which gives the best results to the company.
• Forecast of future demand of sales sets the planning
of materials supply.
• Analytical methods are adopted for systematic
forecasting and planning to procure the various
materials required for production.
 The Concept & Need for Integration Materials Mgmt
• Materials management concept is to manage resources in
an integrative way for national economic development.
This is possible with the development of MIS,
technological innovations and selection of economic and
newly-developed materials for manufacture.
• It is the management’s responsibility to develop the
materials management system, which will find the ways
and means for most efficient and most effective use of its
resources using new technological processes, methods
and ideas.
• The various resources to be fully utilized are men, money
and materials and therefore there is importance of
materials management.
The integration of materials management
functions is necessary in the following ways:
• Materials management will take decisions for
purchase of materials.
• The centralization of authority is necessary.
• It will co-ordinate all the functions.
• Speedy and accurate decisions are needed.
• Data analysis through Electronic Data
Processing (EDP) and use of computers is
necessary.
• Opportunity for growth must be emphasized.
• As organizations grew, specialization and
diversification of activities of MM increased (e.g.
materials planning, purchasing, receiving, stores,
distribution, inventory control and surplus, scrap
and waste disposal).
• The responsibility for different, but interrelated
MM functions were widely dispersed throughout
the organizational structure, creating problem of
coordination and communication.
• Thus, the integrated materials management
concept and its related form of organization have
evolved in response of this problem.
Integrated materials management:
• Provide an integrated systems approach to the
coordination of materials activities and the
control of all material costs.
• Minimizes confusion
• Advocates for the need of assigning all major
materials management activities to a single unit
Basic objectives
• Optimizing organizational performance and
communication
• Greater coordination and better control
Benefits
• Integration of organization
– Establishing the entire materials functions together under one
department
– Reducing conflict and encourage complementary groups to work together
as a team.
– Increased awareness and improved communications
• Integration of individual manager objectives
 materials manager becomes the sole decision-maker for materials as they
flow through the organization.
• Improvement of the credibility of the materials management organization to
help to reduce costs and minimize confusion and to crate an atmosphere of
mutual trust and cooperation.
• Improved materials control.
The responsibility of control of materials rests upon one specific
department.
• Reduction of duplicated efforts
_One department will perform materials management activities.
• Better communication between the various materials sub-functions and
other company functions.
Problems of MM
• Lack of qualified managers
Lack of capable managers with broad experience and
knowledge of various sup-functions. This problem is
alleviated through improved education and cross
training of personnel within the materials organization.
• Insufficient upper management support
Upper management’s understanding and continuous
support is vital.
• Improper planning and implementation
• Lack of credibility
Due to inadequate service or information, delay of
delivery and shortage of materials.
Organization for Materials Management
• The primary objective of any MM organization is
to help maximize company profits by optimizing
total costs associated with materials while
maintaining a high level of customer service.
• The MM organization structure should include all
functions related to materials activities.
• The design of the structure must provide a room
for both immediate and future needs.
• The following is an example of the ideal type of
organization for MM.
Position of materials management function in a company’s
organizational structure
• The importance and level of materials management for
many organizations is largely determined by:
 Availability of materials: Major materials required can
be readily available in a competitive market or key
materials can be bought in a volatile market subject to
periodic shortages and price instability. In the later case,
top management involvement may be necessary.
 Absolute dollar volume of purchase: If a company
spends a large amount of money on materials it needs
top management decision.
 Percent of product cost represented by materials: If the
percentage of product cost represented by materials by
materials is significant it needs top management
decision.
 Types of Materials
• The various types of materials to be managed are:
i) Purchased materials: They are raw materials,
components, spare parts, oils, grease, cotton waste,
consumables and tools.
ii) Work in process (WIP) materials: These are semi-finished
and finished parts and components lying on the shop
floor.
iii) Finished goods: These are the final products either
waiting to be assembled in the assembly lines or in stores
which are stocked for final delivery waiting to sell.
• The various costs involved in these materials are basic
price, purchasing costs, inventory carrying cost,
transportation cost, materials handling cost, office cost,
packing cost, marketing cost, obsolescence and wastages.
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