MATERIAL MANAGEMENT

DR. Vinoth Kumar V

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 Material Management
Organization-big/small, depends on materials and services from other organizations.

Branch of logistics that deals with tangible components of a supply chain.

Materials used as inputs, such as raw materials, consumables & spares, are required
to be purchased & made available to the shops / users as & when needed to ensure
uninterrupted production.

Management of input materials for maximizing materials productivity-adds

profitability.

Material cost-Ex. cement, sugar, chemicals, iron and steel, etc., the materials cost
forms a very significant portion of the overall cost of production.

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 Definitions
“As that function of business that is responsible for the
Coordination of planning, sourcing, purchasing, moving, storing
and controlling materials in an optimum manner so as to provide
service to the customer, at a pre-decided level at a minimum
cost.”

“An integrated management approach to planning, acquiring,

processing and distributing production materials from the raw
material state to the finished product state”.
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 OBJECTIVES OF MM

Acquisition of materials and services of the right quality, in the right

quantity, at the right time, from the right source.
Buying at the lowest price, consistent with the desired quality and service
Maintaining a high inventory turnover, by reducing excess storage, carrying
costs and inventory losses occurring due to deteriorations, obsolescence
and pilferage
Maintaining continuity of supply, preventing interruption of the flow of
materials and services to users
Maintaining the specified material quality level and a consistency of quality.
This permits efficient and effective operation
Developing reliable alternate sources of supply to promote a competitive
atmosphere in performance and pricing
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 OBJECTIVES OF MM
Minimising the overall cost of acquisition by improving the efficiency of
operations and procedures
Hiring, developing, motivating and training personnel and providing a
reservoir of talent
Developing and maintaining good supplier relationships in order to create a
supplier attitude and desire furnish the organisation with new ideas,
products, and better prices and service
Achieving a high degree of cooperation and coordination with user
departments
Maintaining good records and controls that provides an audit trail and
ensures efficiency and honesty
Participating in 'Make or Buy' decisions
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 Classification of Materials
The materials consumed in production process can be basically classified as:
*Direct Materials *Indirect Materials

Raw materials Capital goods

Components and parts Construction materials

MRO Hard goods/soft goods

Work-in-process goods Fuel and lubricants

Finished goods Stationery goods

Resale goods Packing material
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Function of Materials Management

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 Factors affecting Material Planning

Macro factors:
Global factors such as price trends, business cycles, government’s
import and export policies etc.,
Credit policy of the government/ banks

Micro factors:
Organization’s policy on inventory holding, production plan,
investments etc.,
Lead time of procurement, acceptable inventory levels, working
capital, seasonality, delegation of power

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 Integrated Material Management
A Material Manager 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 fulfill
the requirements of an integrated materials management functions which
demand an ability to bring together conflicting and yet inter-related functions.

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 Integrated Material Management

The major resources are the manpower, materials and money, and hence, the
critical importance of materials management. Out of these three resources,
materials should be managed through proper integration to achieve the
following functions:
Decide on the purchase of materials
Ensure the centralization of power
Coordinate all functions of the departments
Ensure quick and accurate decision-making
Administer data analysis by Electronic Data Processing (EDP) and use of
computing technology
Emphasize on the opportunity for growth

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 Integrated Material Management

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.

 Advantages
 Better Accountability
 Better Co-Ordination
 Improved Performance
 Adaptability to Computerisation

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 Advantages of IMM
1. Better accountability
2. Better coordination
3. Better performance
4. Adaptability to EDP
5. Procurement at the right time
6. Improved inventory control
7. Increased productivity
8. Control of price
9. Improved inventory control
10. Dead stock
11. Effective classification and
codification
12. Heavy packages
13. Assurance of verifying right
materials
14. Better focus on urgent material
15. Quick return of defective
16. Better utilization of stores space
17. Reduced paperwork
18. Reduced correspondence
19. Ease for accounting department
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 Material Management-Profit Center

Initially treated as a Cost Centre as major income is spent on Materials

Spending money - materials / holding inventory, blocking money & space
 Selling Price = Manufacturing Cost + Profit

Later recognized that Materials Management can provide opportunities

to reduce manufacturing costs-Profit Center
Current competitive pressures in the market
 Selling Price – Manufacturing Cost = Profit

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 Material Management-Profit Center 15

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 Material Management-Profit Center

Cost savings possible in Purchasing thru:

a) By obtaining materials at lower prices :
 Development of new sources
 Price negotiations with vendors
 Using modern techniques like cost-price analysis to determine the right or
reasonable price for the materials
b) By managing cost:
 c) By reducing the cost of packaging
 d) By optimizing the transportation costs
 e) By ensuring the right quality of materials
 f) By value analysis
 g) By import substitution

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 Material Management-Profit Center

Materials Manager can make a direct contribution in increasing Profitability

in the following ways:
a) By deciding inventory norms rationally and through control systems. Inventory
Turnover can be maximized which in turn will maximize current Assets Turnover and
ROI
b) By proper planning and control of Spare parts, capacity utilization can be increased
which will increase the turnover of Fixed Assets and consequently increase ROI
c) By developing dependable sources and purchasing quality materials at competitive
prices, materials cost per rupee of sales can be brought down which will increase Profit
Margin and in turn ROI
d) By developing proper systems and control on issue of materials, the consumption
can be minimized, resulting in reducing the materials cost, which will increase the
Profit Margin and also ROI

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 Material Manager-Profit Center Scenarios

• Once materials “transfer” prices established, they are fixed until the company adjusts prices of end
products.
• If the system calls for an initial markup of, say, 5 percent over direct cost, then an item that is
purchased for $1 would be transferred to manufacturing for $1.05.
• If the supplier raises the price of $1.01, the materials management gross margin on this item is
squeezed to $0.04.
• Similarly, if the materials manager gives his staff a boost in salary, his profits are squeezed. Price
relief comes for him (as for other profit centres) only when the outside free market permits it.
• For example, if the company is able to boost prices of all its products by 5 %, then the materials
manager (and other profit centre managers) may boost his prices by 5 percent. A $1.05 item may
be increased to $1.10.

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 Material Manager-Profit Center Scenarios

• Materials management gets to “keep” all reductions in purchase prices it can

achieve.
• If it succeeds in finding a supplier who will sell the $1.00 item for $0.99, its
unit profit increases by $0.01.
• The transfer price to manufacturing remains unchanged. (And if the new
supplier fails to deliver, or his quality is not good, the costs of failure are
chargeable to the materials manager.)
• Costs can also be reduced (or increased) by a design change. If the materials
department initiates such a change, then it can keep the extra profit. If other
departments initiates it, they get the profit.

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 Material Manager-Profit Center Scenarios

• Materials management is fully responsible for all supply failures.

• Any extra costs or lost profits incurred in manufacturing or marketing because of a
materials failure can legitimately be charged back to the materials manager.
• Ex: If the shop must work on a holiday because of late delivery of purchased materials,
then the overtime premium pay is a purchasing and not a manufacturing expense.
• If purchasing buys a casting that proves to be defective after several manufacturing
operations have been performed on it, this extra cost is chargeable back to materials
management and would reduce its profit (since foundries usually warrant the casting itself
but not the cost of operations performed on it).
• This ground rule could temporarily cause the organization to become a loss centre instead
of a profit centre, but that is a risk which such unit runs.

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 PURCHASING

 Purchasing refers to a business or organization attempting to acquire goods or services to

accomplish the goals of the enterprise.
 Though there are several organizations that attempt to set standards in the purchasing
process, processes can vary greatly between organizations.
 Typically the word “purchasing” is not used interchangeably with the word “Procurement”,
since procurement typically includes Expediting, Supplier Quality, and Traffic and Logistics
(T&L) in addition to Purchasing.
 Purchasing managers/directors, and procurement managers/directors guide the
organization’s acquisition procedures and standards.

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 Objectives of Purchasing
To support company operations with an uninterrupted flow of materials and
services.
To buy competitively and wisely
To help keep a minimum Inventory
To develop reliable alternate sources of supply
To develop good vendor relationship and a good continuing supplier
relationship
To achieve maximum integration with the other departments of the firm
To train and develop highly competent personnel who are motivated to make
the firm as well as their department succeed
To develop policies and procedures which permit accomplishment of the
preceding seven objectives at the lowest reasonable operating cost
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 PURCHASING FUNCTION
• The Purchasing function is concerned with acquiring goods and services for use by the organisation. These will
include, for example, raw materials and components for manufacturing and also production equipment.
• In buying goods and services, purchasing managers must take into account a number of factors – collectively
referred to as ‘the Purchasing Mix’, namely, Quantity, Quality, Price and Delivery.

• Quantity. Buying in large quantities can attract price discounts and prevent inventory running out. On the other
hand, there are substantial costs involved in carrying a high level of inventory.
• Quality. There will usually be a trade-off between price and quality in acquiring goods and services.
Consequently, Production, R&D and Marketing Functions will need to be consulted to determine an acceptable
level of quality which will depend on how important quality is as an attribute of the final product or service of the
organisation.
• Price. Other things being equal, the purchasing manager will look for the best price deal when procuring goods
and services, although price must be considered in conjunction with quality and supplier reliability, in order to
achieve best value, rather than lowest price only.
• Delivery. The time between placing an order and receiving the goods or services, the lead time, can be critical for
production planning and scheduling and also has implications for inventory control. Suppliers must therefore be
evaluated in terms of their reliability and capability for on time delivery.
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 PURCHASING POLICIES

Clear policy on purchasing should be laid down by the top management

reduce the number and complexity of the purchasing decisions

Purchasing policy to be considered based on the level of stocks

Purchasing policy subject to wide price fluctuations

Purchasing policy entering into short- or long-term contracts

Ex: Refer the PDF for sample.

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 PURCHASING POLICIES

1. A definition of authority and responsibility of purchasing

2. Relationship with vendors and suppliers
3. Treatment of sales representatives of vendor or supplier firms
4. Proper handling of competitive bidding
5. Proper handling of vendor technical service and design work
6. Reciprocity
7. Employee purchases
8. Ethical practices in purchasing

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Purchasing Cycle

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Purchasing Procedures

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 PURCHASING TYPES

Forward purchasing
Tender purchasing
Speculative purchasing
System Contract
Rate Contract

Reciprocity

Zero stock buying

Blanket order

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 ORGANIZATION OF THE PURCHASING FUNCTION
A purchasing organization can be either a distinct company in charge of buying goods and
services for multiple companies simultaneously (i.e. Group Purchasing Organization) or a
business department within a company in charge of buying goods and services for this same
company.
Following are the responsibilities:
1. Making purchases for all departments in accordance with applicable laws and regulations,
including the requirements of Purchase and Contract when applicable, good purchasing practices
and ethical principles;
2. establishing and enforcing a system for approving and accounting for purchases;
3. maintaining appropriate records on price quotations of supplies most frequently purchased;

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 ORGANIZATION OF THE PURCHASING FUNCTION

4. maintaining other supplemental data to assist in making purchases at the

most economical prices possible;
5. maintaining E-Procurement compliance and making purchases through the E-
Procurement Service to the extent appropriate to maximize savings and
efficiency in the purchasing function;
6. establishing a practical degree of standardization of equipment, supplies and
materials with sufficient flexibility to meet unique needs of the buyer;
7. operating a central inventory warehouse;

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 ORGANIZATION OF THE PURCHASING FUNCTION

8. supervising the receiving of all materials, including establishing procedures to

ensure received goods are properly inspected, counted and documented;
9. maintaining lists of potential bidders for various types of materials,
equipment and supplies;
10. providing information regarding bidding opportunities to vendors;
11. providing information and service to companies that wish to make
purchases; and
12. maintaining current information on all applicable laws, regulations, board
policies and administrative procedures.

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 Department as in Organization

In majority of organizations, the purchasing manager makes an excellent and

effective materials manager provided he has the skills and authority.
Materials Management with:
Production Department
Marketing Department
Finance Department

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Department as in Organization

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 Centralized vs Decentralized Purchasing
Centralized purchasing purchases are made at one central point for the whole
organization and material is issued to respective departments or jobs as and when
needed. (Hub approach)
Centralized purchasing is suitable in cases where the organization runs one plant. It
will bring about economies of purchasing and buying in small lots will avoid.

Decentralized purchasing is just the reverse of centralized purchasing. This is suitable

for organizations running more than one plant. Under this type, each plant has its
purchasing agents.
In other words, every department makes its purchases. This also calls localized
purchasing. Also, Decentralized purchasing is quite flexible and can quickly adjust
following the requirements of a particular plant.

Hybrid model
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Centralized vs Decentralized Purchasing

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Centralized vs Decentralized Purchasing

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THANK YOU

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