CHAPTER 1

Overview of Materials Management

1.1 Definition and Scope of Materials Management
Every organization requires materials for its operation, and there will always be the necessity for
some stores and stocks to be maintained either for immediate consumption, conversion, or re-
use. Manufacturing organizations require a variety of raw and other materials that must be
acquired, stored, and handled. Similarly, service organizations need materials, equipment, and
some stores to run their operations. In both cases enough stocks of materials and equipment have
to be maintained to meet at least short-run requirements. These stocks or inventory are cash in
kind that need at most care. Therefore, their safe custody, upkeep, and maintenance, handing and
proper supply are of great importance.
Almost all organizations, regardless of their nature, are demanding proper and efficient
management of materials. Furthermore, both real and contrived shortage of materials, including
food stuffs, metals, and energy resources, have made materials management an important and
difficult organizational function. The reason is that materials, especially components and sub-
assemblies, have specific uses and have low flexibility. And they need more care in procurement,
storage, handling, and distribution.
Definition
 Material management is the process of planning, organizing, implementing and controlling
the tasks associated with the flow of material to through and not of an organization in an
integrated fashion.
From the above definition we can infer the following main points;
 Material management, as other management branch employ the basic functions
of management:
a) Planning b) Organizing
c) Directing d) Controlling
 All these functions target at the optimum use and allocation of materials.
 Materials should be managed before, during and after the process
Inputs  process  outputs
 Material management (MM) provides an integrated system approach to the
coordination of materials activities and the control of total material costs. It

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 advocates assigning to a single operating department all major activities which
contributes to the cost of materials
 Materials management designed to ensure supply of materials of the right quality, in the
right quantity, at the right time, at the right price, and at the right place acquired from the
right source in order to ensure economy, efficiency, and smooth operation of an
organization.
 Materials management is concerned with the flow of materials from suppliers to production
and the subsequent flow of products through distribution centers to the user. Materials
management is, thus, an activity that involves planning, acquisition, storage, control and
disposition of inputs like raw materials and in-process goods which go into the production
process directly and also capital equipment, tools and accessories, spare parts and other in-
direct materials which are required for everyday operations.
1.2. Scope of Materials Management
Material management applied both in the public and private sector in varying degree dependent
on materials. Effective materials management is necessary for all organizations. Manufacturing
organizations: - for many manufacturing firms materials account for 50% - 75% their product
cost. Service firms: - service firms use fewer raw materials and components.
The main functions that come under the umbrella of material management are:
1. Materials demand forecasting
2. Purchasing: acquisition of the kinds and quantities of materials required by
departments
3. Inventory control: planning and maintains stocks of raw materials, tools, supplies and
other materials, classification
4. Traffic/transportation: includes both incoming and outgoing transportation also
called logistics management (physical distribution)
 traffic control involves
 the selection of carriers
 documentation of shipments
 study of carrier services and rates
 evaluations of carrier performance
 traffic concerned with assessing the total cost of transportation including:
 loading and unloading

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  methods of packaging
 transit time
 developing techniques for reducing overall transportation costs
5. Store and material handling involves:
- Receiving
- In plant materials movement
- Insurance
- Documentation, etc.
6. Disposal of scrap and surplus materials
1.3. Historical Development of Materials Management
The conceptual foundation that gives to the birth of management boom during and after World
War II also gives birth to an entirely new approach and an idea in the management field of what
we understand largely today as Materials Management. Although the concept is of recent origin
and had its root in USA, it has now spread fairly widely all over the world.
The development of materials management can track back to 1920s when the control, repair and
maintenance of materials were the responsibilities of purchasing managers in some industries.
After World War II, Prof. Howard T. Lewis of the Harvard Business School conducted extensive
studies in industrial purchasing practice. Depending upon the size and type of industry and on the
basis of the study, Prof. Howard T. Lewis made recommendation to several airframe companies,
whose operation he had been studying, for the establishment of new managerial position, viz. the
director of Materials. He envisioned the responsibility of this new position to include purchasing,
inventory control, receiving, inspection, warehousing, traffic and possibly other activities.
But its real appreciation goes as far back as world war I. the threat of material of shortage during
the war, the heavy inventorying during the business collapse of 1920-21, culminating in a
prolonged depression following the ‘profitless prosperity’ of 1926-29, all contributed to a better
understanding of the inventory problem. At the same time, improved means of transportation and
communication, a recognition of unnecessary cost-burden, rapid technological changes in both
product and manufacturing process in many industries and a host of other factors came in to play
when industrial, economic and social organization in the USA were undergoing fundamental
changes under the impact of ‘scientific management’.

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The outbreak of the war in 1939 set the US defense forces thinking seriously about increasing its
military personnel and material, and with this in view, entered the market as the single largest
buyer with an increasing emphasis on quality standards.
After this, the concept of material management became acceptable in every organization to give
due emphasis for the material aspect. In a constant attempt towards meeting day-to-day materials
operation, the establishment of functional organization of Materials Management became
indispensable in order to serves achievement of corporate goals and perform materials activities
efficiently, fulfillment of materials program objectives, elimination of waste and duplication of
efforts, and greater possibility of reduction on material cost.
1.4. Importance of Materials Management
In general, materials management (MM) is important for three reasons:
i. customer service
ii. cost reduction
iii. administrative efficiency
1. Customer service
Material management (MM) serves other units/departments of the organization. These services
support the goal of fast process throughout the organization, and include:
 Uninterrupted flow of materials
 Assistance to customers-repair, replants or delivery
 Reduction in parts shortage
 Average transit from warehouse to customer
 Minimum of transportation delays
 Accurate inventory counts
 Good forecast accuracy
2. Cost reduction
The importance of materials management can be realized when it is said that;
 Purchases account for nearly 50% of an organization’s annual expenditure
 Nearly 80% of working capital is find up in the inventory
 5% saving of materials cost will substantially increase the profit margin of an
organization

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Cost reduction effort related to profit and effective material management certainly make a
difference. Specific cost reduction measures include:
 reduction in material costs
 reduction in storage space
 reduction in physical inventory
 increase in inventory turn over
 reduction in transportation cost
 reduction in setup time
3. Administrative efficiency
The last area is administrative efficiency which covers quality of measures related to department
efficiency in operation and development of people.
These measures include:
 Material management budget vs. actual
 Ratio of material budget to sales
 Installation of productivity- enhancing systems
1.5. Organization for Materials Management
By organization for material management, we mean the framework (structure) with in tasks and
responsibilities are discharged.
 It is question of where and how should material management be located in the
organization structure.
 Its position in organization structure depends on type and size of the organization
There are two approaches of organization for material management
1) Integrated structure
 This is a modern approach where all activities of materials headed by a materials
manager with other sub-functions under him/her.
 It integrates of all materials related activities

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 General
M.D Manager

Marketing HR Material Finance & Operating Information

Manager Manager Manger Account Manager Manager
Manger

Purchasing Store & Inventory

Stop & Traffic Materials & Scrap &
warehouse warehouse
control &Transportatio Purchasing Surplus
n study Disposal

Fig 1. Integrated structure

Benefits of the integrated approach:

1) Equal status with other functional mangers
2) Can view the total commitment on his/her department
 produce a policy
 establish procedures and budgets
3) Reports to higher level in the organization thus greater scope to influence broad
divisions affecting his area of operations and interfacing ones.
4) Scope to evaluate the strengths and weakness throughout the whole of the materials
management department
5) Better accountability: though centralization of authority and responsibility for all
aspects of materials function, a clear cut responsibility established
6) Better performance: as all inter-related functions are integrated organizationally,
greater speed and accuracy in communication

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 7) Better service

2. Differentiation /Defused approach

This is a very old approach where individual materials functions are assigned to other functional
areas. The point is that, the responsibility for different, but interrelated functions becomes widely
dispersed throughout the organization structure.
In this approach, assignment of individual functions to other major functions will base on:
I. “Most use” criterion
Example:
 Purchasing might be assigned to the operations department since the major money is
spent for raw materials
 Traffic/transportation: might be assigned to marketing department since he/she would be
responsible for delivery of finished items for business
 Material and purchase study to R & D department
II. Critical relationship criterion
Example:
 Inventory control might be assigned to finance in view of the dollar investment involved
III. Executive Interest Basis
Example:
 Value analysis function might be assigned to Engineering department.

General Manager

Production Marketing Finance Research and

Department Department Department Development

Purchasing & Transportations & Inventory Control & Material Purchase

inventory physical Distribution Purchasing Study

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Fig 2. Differentiation /Defused approach

Advantage and Disadvantage of Differentiation /Defused approach

Benefits/Advantage
 No additional level of management is created
 No need for additional employees, and other resources
 Avoids additional horizontal communications
Disadvantages
 Overseeing of materials in each department
 Subordination of material function
 Expenditure on materials is a higher percentage of a company’s total annual
expenditure. There would be no senior manager at an influential level to control it.
 There would be no one capable of promoting effective and coordinated materials
plan to meet materials needs of different sections of the organization.
 Problem of coordination and communication
 No job specifications
 No employee development

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