lessons 01-material management

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Materials Management and Integrated Materials Management

UNIT I

6 Materials Management

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LESSON

1 MATERIALS MANAGEMENT AND INTEGRATED MATERIALS MANAGEMENT

CONTENTS

1.0 Aims and Objectives

1.1 Introduction

1.2 Materials Management

1.2.1 Classification of Materials

1.2.2 Importance of Materials Management

1.2.3 Materials Management as a Service Function

1.2.4 Materials Management as a Science or an Art

1.3 Integrated Approach to Materials Management

1.3.1 Functions/Concepts of Integrated Materials Management (IMM)

1.3.2 Objectives of Integrated Materials Management

1.4 Let us Sum up

1.5 Lesson End Activity

1.6 Keywords

1.7 Questions for Discussion

1.8 Suggested Readings

1.0 AIMS AND OBJECTIVES After studying this lesson, you will be able to understand:

Meaning of materials management and its concepts

Functions of materials management

Concepts of integrated materials management

1.1 INTRODUCTION For balanced growth and effective running of the enterprise, it is necessary that material cost and utilization are so controlled that lead to (i) maximization of production, (ii) reduction in the cost of distribution, and (iii) maximization of the profit. Materials management helps in reducing materials cost, preventing waste and improving the capital being locked up for a period, improving the capital turnover ratio and achieving higher profitability.


1.2 MATERIALS MANAGEMENT

Bailey and Farmer define materials management as “the management of flow of materials into organisation to point where these materials are converted into firm’s end product”.

Amber defines it as the “process by which an organisation is supplied with goods and services that need to achieve its objectives. The materials management begins with the supplier and ends when the material is consumed or incorporated into some other product.”

The executives who engage in materials management are concerned with three basic activities – buying, storage and movement.

Lee and Double defines materials management as the confederacy of traditional materials activities bound by a common idea of an integrated management approach to planning, acquisition, conversion, flow and distribution of production materials from the raw materials state to the finished product state.

The following definition of the materials management has been accepted by the International Federation of Purchasing and Materials Management:

Material management is a total concept involving an organisation structure unifying into a single responsibility, the systematic flow and control of material from identification of the need through customer delivery.

Included within this concept are material functions of planning, scheduling, buying, moving and distributing. These are logically represented by the disciplines of production and inventory control, purchasing and physical distribution. The objective of materials management is to contribute to increased profitability by achievement of least material cost. This is done through optimizing capital investment, capacity and personnel, consistent with the appropriate consumer service.

Another definition adopted by the National Association of Purchasing Management U.S.A reads as follows:

Materials Management is an organisational concept in which a single manager has authority and responsibility for all activities, principally concerned with the flow of materials into an organisation. Purchasing, production, planning and scheduling, incoming traffic, inventory control, receiving and stores normally are included.

American Production and Inventory Control Society Dictionary define materials management as under:

Materials management is a term to describe the grouping of management functions related with the complete cycles of material flow, from the purchase and internal control of production material to the planning and control of work-in-progress, to the warehousing to the shipping and distribution.

P Gopalkrishan and M. Sundaes define Materials Management as the function responsible and controlling materials in an optimum manner so as to provide pre-decided service to the customer at a minimum cost.

Thus, materials management is concerned with that management function circumscribed in the complete cycle of material flow like purchasing, production and inventory control, material handing, packaging, traffic and distribution. All these related functions are grouped together and under the direct control of the one line manager.

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1.2.1 Classification of Materials The materials manager is responsible for classifying the materials before they are sent for inspection and entered into the stock ledger. Therefore, brand classification of materials is done according to their nature.

Various items carried in a store are generally divided into the following major types in order to help the materials executives, maintaining the records and laying down the broad principles of preservation and internal organisation of store room.

1. Raw materials

2. Purchased components

3. Work-in-progress

4. Finished Goods

5. Spares

6. Consumables

7. Machinery and Equipment

8. Inflammables

9. Chemicals

10. Furniture

11. General stores

12. Scrap Materials

13. Packing Materials

14. Fuel stock

1.2.2 Importance of Materials Management The importance of materials management cannot be over-emphasized in this complex industrial world. It affects not only a particular industry but the entire economic activity of a whole nation. Material contributes to the quality of the end product. The amount spent on materials is increasing in relation to the expenditure on other inputs. Materials add value to a product. The margin between the values of raw materials and the finished products is known as the value added by production. Conservation of materials and their availability for prosperity is one of the social responsibilities of business hence, materials management is one of the centres of accountability for performance. Reduction in the materials cost by about 5 per cent is always possible through an efficient management of materials. Evidence is there to prove that skilful and imaginative management had been able to save even more than 5 per cent of the total cost of the final product. Materials form the largest single expenditure item in most of the manufacturing organisations. They usually represent 50 to 60 per cent of the total cost of the final product. An analysis of the financial statement of a large number of manufacturing organisations reveals the fact that on an average about 60 per cent of the total expenditure is locked up in materials.

1.2.3 Materials Management as a Service Function Certainly materials permeate almost all the activities of a manufacturing concern. Materials management is a staff function and it serves essentially the production and marketing of manufactured goods. However, Data holds that management of materials “is sometimes line authority as a staff activity.” But he further clarifies that in its immediate concern with materials, a materials management essentially as a staff


function which is usually a service and advisory in nature. In short, materials management is essentially a service function in blend and objectivity.

It is this thinking in the field of management of materials combined with three segments of management which has given rise to the concept of integrated materials management. Indeed, management of materials is not a single function. It is a combination of interdependent functions. It is, therefore, neither treated nor performed in isolation. It never appears in a vacuum. It is a functional management closely associated to the other fields of a business enterprise.

1.2.4 Materials Management as a Science or an Art Materials management is both a science as well as an art of managing materials. It is an application to achieve the desired results. To meet the ends, the management is functionally divided into broad but basic functions known as the three segments of management. They are:

1. Arranging for finance: Making provisions for the operation of the enterprise for which the management has to ensure the availability of adequate finance for a smooth functioning of the organisation without any interruption.

2. Assembly, acquisition, storage and production of materials: This is in fact the function of actual operation of the enterprise. For an efficient and purposeful operation of the enterprise, materials are to be assembled, acquired, stored and produced so that the organisation may move ahead uninterrupted with speed and goodwill.

3. Distribution: The organisation operates for the ultimate consumer. It is the basic function of any management to arrange the distribution so as to get the goods and services reach the ultimate consumer.

It is these basic segments of management which slowly but steadily have crept into the materials management giving rise to the concept of integrated materials management. Obviously management of materials largely depends on (i) adequate availability of finance, (ii) proper procurement, storage, and utilization of materials, and (iii) effective handling, issuance and disposal of incoming and outgoing materials. The integration of all the three segments is necessary in order to achieve the desired results.

Check Your Progress 1

1. Define Materials Management.

………………………………………………………………………………..

………………………………………………………………………………..

2. Materials Management is …………………. and acts ………………….

1.3 INTEGRATED APPROACH TO MATERIALS MANAGEMENT The essence of materials management is the coordination of the various departments of a company. As the Materials department spends large sums of money on the purchase of materials, it is closely associated with the Finance department. Where product designing is involved, construction coordination with the Design department becomes essential because the knowledge of materials substitution comes only from the Materials department.

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The importance of pre-design value analysis needs to be stressed here. Similarly, there should be close coordination with Transport, Quality Control, and Inspection wings of the organisation.

Only an integrated approach to the various problems of materials management can result in optimum benefits. If this integrated approach does not exist, mere application of tools and techniques of materials management cannot result in cost reduction which is the primary aim of materials management. There needs to be greater efficiency in the entire field of materials management and this covers practically all departments.

For example, Inventory control and Production Planning are closely connected. Take for example the effect of rush purchase on costs. Such purchase can be costly and result from bad planning. Effective coordination alone can take care of these problems.

An integrated approach to materials management is only a concentrated and coordinated effort for obtaining greater efficiency in the field of materials utilization and costs.

1.3.1 Functions/Concepts of Integrated Materials Management (IMM) Purchasing: Purchasing department procures materials as per requirements to meet quantity and time specifications. The main activities include:

(i) Selecting acceptable vendors and negotiating with them on purchase terms, price, quality and other related factors.

(ii) Interacting with vendors to develop materials specifications, to control quality and to solve problems involved in receipt and usage of materials.

(iii) Placing purchase orders for materials and service, considering economic levels, blanket or open ordering, make-or-buy consideration, priority of orders and vendor performance.

(iv) Expediting the delivery of materials.

(v) Keeping abreast of prevailing market conditions and knowing about the arrival of new materials that results in cost reduction.

Receiving and Store: The receiving and store functions accept, store, handle and issue materials and process the necessary documents to record transactions.

Their major activities include:

(i) Receipt of materials, verification of quantity, and preparation of material received reports.

(ii) Storage of materials in accordance with pre-specified use of stores by using the right facilities and equipment and practicing a system to enable the easy identification of materials.

(iii) Issuing materials upon authorized requisition.

(iv) Physical check of stocks to verify accuracy of transactions through constant, special and annual inventories.

Production Control: The function of production control is increasingly being considered as a part of the material function.

Inventory Control: Inventory control is responsible for supplying materials to fulfill production plans and schedules and ensuring that it is achieved with minimum required stocks.


Product Distribution: Product distribution receives, stores, select orders, packs and ships finished goods, process the necessary papers to record such transactions and arranges for transportation of inbound and outbound shipments.

Material cost control and cost reduction: As has been stated, materials cost control and reductions are the chief tasks of materials management.

1.3.2 Objectives of Integrated Materials Management Objectives of materials management are listed below:

To ensure an uninterrupted production or operation, by maintaining steady flow of materials.

To affect economies in cost of materials by purchasing materials of the right quality in the right quantity, at the right time from the right source, and at the right price.

To effect the economies in the costs incurred on materials purchased through storage, processing and warehousing till the finished goods reach the customer utility.

To reduce working capital requirements through proper and scientific inventory control.

To be alive to the changes in the market in respect of new products, etc.

To improve the quality of manufactured goods by the use of better raw materials or components and thereby increase the competitiveness of goods put on sale.

To also increase the competitiveness of manufactured goods by reducing their prices through cost reduction and value analysis.

To save foreign exchange through import substitution and economizing on foreign purchases.

To conserve material resource within the organisation, thereby contributing to the conservation of national resources.

Materials Management

Coordinates Activities

Planning and

SourcingBudgeting

Research and Analysis

Indenting and Processing

Receiving Storage

Accounting and

Controlling

Issuing and

Dispatching

Disposing

Figure 1.1: Meaning and Functional Areas of Materials Management

1. Materials Management as a Prime Corporate Function: Materials management plays a key role in the management of the organisation and is considered as a top-level corporate activity. The materials manager directly reports to the Chief

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Executive. Materials management is treated as an important area of management like production, marketing, finance and personnel. For e.g., in process industries, where little is added to the raw materials for their conversion into finished products, the cost of the materials may be as high as 60% to 70% of the product cost.

2. Materials Management as on Operating Function: Under this, the function of materials management is considered subordinate to the production function. The materials manager acts as a subordinate to the works manager. Materials management is considered as a service function to operations and is regulated with the other operations under the control and superintendence of the works manager. The splitting of the material management department will largely depend on the quantum of the work of each section and the need of the organisation. Whether the materials management is treated as a prime function or as an operating function, the nature of splitting of the activities will be more or less the same.

Chief Executive Personnel Finance Material Production Marketing Manager Manager Manager Manager Manager Purchase Receiving Stores Material Traffic Shipping Officer Department Department Handling Section Section

Board of Directors

Figure 1.2: Organisation of Integrated Materials Management

Check Your Progress 2

1. List out the concepts of IMM.

………………………………………………………………………………..

………………………………………………………………………………..

2. Material Management co-ordinates ………………………

1.4 LET US SUM UP Materials management plays a key role in the management of the organisation and is considered as a top-level corporate activity. The materials manager directly reports to the Chief Executive. Materials management is treated as an important area of management like production, marketing, finance and personnel.

1.5 LESSON END ACTIVITY Assume you were asked to develop an integrated materials management to improve the smooth supply of materials. What are the functions you would perform and how?

1.6 KEYWORDS Materials Management: Management of materials in an organisation.

Integrated Materials Management: It refers to the coordination of the various departments of a company.


1.7 QUESTIONS FOR DISCUSSION 1. Explain the importance of materials management.

2. Give the various concepts/functions of integrated materials management.

3. Bring out the objectives of materials management.

Check Your Progress: Model Answers

CYP 1

1. According to P. Gopalkrishan and M. Sundaes, Materials Management as the function responsible and controlling materials in an optimum manner so as to provide pre-decided service to the customer at a minimum cost.

2. a Science and an Art, as a service function.

CYP 2

1. Purchasing, Receiving and Store.

2. Planning and Sourcing, Budgeting, Research and Analysis, Issuing and Dispatching, Indenting and Processing.

1.8 SUGGESTED READINGS P. Saravanavel and S. Sumathi, Production and Materials Management, by Margham Publication, Chennai, 2006.

M.M. Varma, Production and Materials Management, Published by Sultan Chand & Sons, New Delhi, 1993.

P. Saravanavel, Entrepreneurship Development (Principles Policies and Programmes), by ESS PEE KAY Publishing House, Chennai, 1997.

C B Agarwal, Materials Management, by Forward Publishing Company, New Delhi, 1997.

lessons 01-material management

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