MATERIALS MANAGEMENT

Importance of materials management :-

1. Materials input is very important as excess material as inventory
causes costs to the company and shortage of material results into
stoppage of conversion process and subsequently shortage of
finished goods leading to customer dissatisfaction
2. Out of 5Ms, that are inputs to a conversion process, material is
substantial in terms of its contribution to product cost, and current
assets.
3. 51.1% of product cost is on account of materials. Hence the largest
contributor to product cost. This marks out materials function as the
largest potential avenue for productivity improvement.
4. Materials account for 70% to 80% of working capital. Effective and
efficient management of materials can reduce substantial burden on
the finances of company.
5. Accounts payable are mostly to materials suppliers. Hence the
importance in management of finance of the company.
6. Quality of the Input and product quality: When the companies
become leaner and leaner, it is crucial that inputs should remain in
the plant only as long as the Through Put Time demands, and the
output product should be Right First Time. The quality of inputs plays
a vital role in this situation.
7. Management of materials is crucial in a Just In Time company.
Production process needs very strong materials management support
to gear up to face challenges of current market
8. Materials management provides information about availability of
new products and services in the market which leads to cost efficient
changes in the process
Types of materials :-
refer to types of inventory.

Functions of Materials Management :-

[What is a function? Every person , organization or a
distinct part of an organization has to perform a set of tasks
in order to deliver customer expectations satisfactorily. These
sets of tasks are called functions of that particular entity.]
Materials Planning & Control –
This is the primary function of Materials Management.
The market forecast is converted into production schedules by
production planning and control. Materials management
prepares the materials plan to meet the production schedule.
The plan is then implemented and controlled.
1. Procurement –
Procurement function begins with sourcing the supply after
short listing suppliers. An effective method is to rate the
vendors on the basis of performance and choose the best.
Purchase order is placed on the source and the material is
procured from the source. Procurement activity includes
preparation placement of purchase order, follow up,
transportation and handling.
2. Handling –
 The material which reaches the company premise is to be
unloaded, moved and positioned as per the storage plan .
3. Storage & Preservation –
The procured material is to be stored and preserved against
internal and external deterioration and theft. Against the
authorized demand the material from the store is retrieved and
issued.
4. Inventory control –
Inventory control function controls the inventory levels to
ensure shortage free and excess free stock to check the costs
and ensure customer satisfaction
5. Vendor development –
The company makes the chosen vendors effective and
efficient by providing necessary inputs of training and
information. The suppliers systems are audited to ensure
adherence. A good vendor is an asset as he makes his
customer more effective and efficient
6. Vendor rating –
Vendor rating is used as a tool for narrowing down the
supplier base for productive management of materials function.
The same system is used continuously to assess strengths and
weaknesses of short listed vendors for their effective
development.
7. Waste control –
Procuring standard material and continuously trying to
improve yield is waste reduction and control function. When a
 product is processed two types of wastes are generated. One
type of waste is called as standard scrap. This is accepted as
unavoidable. Product that is not right first time is scrap and
thereby waste. Non moving obsolete material is another waste
that cripples organization. Material management should
address these wastes and not only should control but reduce
the wastes.
Value Analysis –
Continuously trying to improve the value of the product
mainly by material substitution is a function of the materials
management .
Integrated Materials Management : -
As we have seen earlier, materials management performs
various functions to reach their well-set objectives. These
functions are performed by business organizations since a very
long time as trade and business have been taking place much
before scientific management was thought of.
Traditional Approach -
Traditionally the organizations performed their
functions aiming to achieve excellence in respective areas.
Every function tried to sub-optimize their individual function.
This approach created some excellent buyers, some
excellent movement managers, and some very good
storekeepers, but often this functional excellence was at the
cost of each other. Impact of excellence of one area on other
functions was not taken into account. Performance of this
kind did not bring cost benefits to the parent organizations
that continued to suffer cost burden. Organizations
wondered why do they struggle under the cost burden in
spite of such talented managers being their employees, like
some times we wonder why our rivals win the Cricket World
Cup when we have such great individual performers!
Integrated Approach -
 This approach ties all functions together, like a compeer’s
baton, orchestrated to achieve company goals. Various
functions now come under one control, focus always being
on the final outcome. Initiatives for individual excellence are
undertaken only after ascertaining their favorable impact on
final outcome. The big picture should never be lost sight of,
while trying to solve the jigsaw puzzle. The common thread
that binds various functions into a winning combination is the
focus on the big picture or the organization’s gain. Unity of
command balances conflicting interests of individual
functions under integrated approach to materials
management.
Profit Center Approach -
When every integrated function of management works
like a profit center in an organization, entire becomes a
strong integrated whole forging ahead in business,
maximizing the profits rapidly.
We easily understand concept of profit and its driving
force in business when a product is sold for a price higher
than the cost. One should remember the universal equation,
Price = Cost + Profit. But when sale does not occur,
visualizing profit may become a bit difficult.
Keeping the above equation in mind, as price is
controlled by market, any saving in the cost results into
profit. Every competitor closely follows the above equation
and identifies the resultant cost after keeping the profit
needs of the company intact. This cost is called target cost
 for competitor. Any successful attempt to reduce this cost
without harming the QCD objectives of the company results
into profit. Now split the target cost of the product into its
components developing a fishbone diagram for product cost.
A certain cost package gets attached to every individual
integrated function and any reduction in this package results
into profit for the company. Fix the identified cost package to
materials management and make materials management
accountable for reduction by a percentage. This is the profit
that materials management is responsible for. Make them
earn this profit for justifying their existence in the
organization. Like a business has to earn profit to justify
existence in competition. This approach makes individual
functions accountable for every cost and drives them to
innovate ideas to add value continuously as the competition
pushes the price to new lower levels, thereby making the
company stronger organization .

Case study:-
A company with a turn over of Rs.100 crores, makes a
profit of Rs.10 crores [10%] Cost of materials is Rs.60 crores,
Other expenses are Rs.30 crores. How can you increase profit
by 30%? [Rs.3crores]?
To increase the profit by 10% one has to raise the sales
by 30%. The company will have to make and sell 30 crores
worth products in a tough market like the one which exists
today. But keeping the profit center approach in mind, if we
 reduce the materials cost[Rs.60 crores] by just 5% same
objective can be achieved.
Return on Investment: an approach to measure profitability

ROI= Profit/Sales Sales/[capital assets + current assets]

As materials managers if we consciously reduce current

assets company’s profits will rise which will be indicated by the
ROI. We should always remember that inventory forms 80% of
current assets of the company.
Benefits of Integration :-
1. Better Accountability –
Accountability for materials is now specifically fixed to
one position. No man’s lands of cost between various
functions are now addressed effectively by integrated
materials management function.
2. Coordination -
Various functions are now streamlined. The inter
departmental conflicts are balanced. As a result various
functions work like a team under the control of Materials
Manager.
3. Better performance –
Performance of Materials management improves on
account of the first two results of integration. Accountability
reduces costs and teamwork improves productive
performance.
 4. Adaptability to EDP –
Computerization requires preparatory work that calls
for integrated efforts where there is no scope for conflicts.
Internal conflicts make computerization untenable
5. Other advantages -
Present & Future: At present industry in our country is
passing through the transition from traditional systems to just
in time like production. Just In Time needs dependable
procurement systems. Only an integrated materials
management function can provide such support to
operations.

 Definition and scope :-

 Definition –
Coordination and planning of all functions for controlling
materials in an optimum manner to meet customer expectations
at minimum cost.
 Scope -
Materials management works closely with Production,
Finance, Engineering and Quality control in the process of
performing the functions to meet the objectives of customer
satisfaction.
 Materials management and Production –
As we saw earlier JIT system needs very reliable
procurement and delivery systems for inputs and outputs.
Production department is the internal customer for Materials
management. Hence very close interaction with production
 department is primary to meet internal customer expectations
and customer delight. Only this ensures unfailing satisfaction
and delight of the external customer.
Scope of materials management function decisions
includes suppliers, subcontractors, production support
warehouses, transportation service providers and internal
departments subordinate to the function.
 Materials management and Finance –
Timely payment to suppliers is important for the smooth
working of the supply chain which is fundamental for strong and
dependable delivery system. Close interaction with finance
function is needed to ensure the above.
 Materials management and Engineering –
Materials Management in the course of discharge of their
functions plan activities involving change in material inputs.
This obviously has an impact on design of the product and
process of manufacturing. Hence a close working is necessary
between Materials management and Engineering.
 Materials management and Quality control –
For the same reasons that as above, close working is
necessary between Materials management and Quality control.
 Organization & control
 Materials Management is growing in stature on account of
changes in management thought process. Materials function
has moved into board rooms which is an evidence of its
importance in corporate structures.
Materials Management & Corporate Organization structure
A materials director is usually on the board to give overall
directions to the material function in corporate bodies. This
provides unity of command and thereby uniform direction.
 Materials Management & Other functions of
Management
Materials Management function is in par with other
functions of corporate management so that it can effectively
interact with other functions for organizational effectiveness.
Some of the conventional structures of materials
organization are discussed below :-
 Internal Organization of Materials Management
Internal organization is structured on the need of the
organization keeping in mind the strengths and weaknesses of
individual structures.
 Internal Organization based on Commodities -
An organization needs number of inputs[commodities] for
running the conversion process. Materials organization can be
structured internally with focus on the individual commodities. A
sub function can be created for dealing in an individual
commodity in order to provide adequate focus.
 Internal Organization based on Location –
 An organization with multi plant locations structures its
materials organization with focus on plant level. Every plant will
have a materials function that receives overall direction from
the top management. The materials function in the plant
coordinates materials sub functions of that plant.
 Internal Organization based on Function –
At the corporate level, materials function is set up with
respective sub functions. These individual functions coordinate
their respective sub functions in various plants or divisions
providing function wise expertise to the entire organization.
Concept of Centralization & De
centralization -
As we were discussing earlier it is the need of the
organization triggered by product, process and market that
ultimately decides how the control should be exercised on the
material function. The control may be centralized or
decentralized fully or in parts keeping in mind overall need.
Management education can provide knowledge about available
options in practice but the choice rests with the corporate
management. New options can be developed to satisfy specific
needs conceptually combining various available options.
Centralized control keeps most of the decision making
at headquarters level delegating only routine level decision
making. Decentralized control delegates decision making to
unit level enabling the units to respond to their respective
environment.
Advantages of Centralization -
1. Combining the requirements of all units to buy in bulk and
gain benefits of bulk buying.
2. Interplant transfer of material to deal with emergencies in
individual plants. And interplant transfer to utilize surplus
material available at some plant and thereby reduce overall
inventory cost for the company.
3. Benefit of specialized skills of one individual at the corporate
level to all the units or plants. Buying needs specialized skills
specific to the commodity in market specially buying is in large
quantities. Knowledge of the market is essential to anticipate
market trends in terms of price and availability.
4. Benefits of unity of command.
5. Centralized material research resulting in savings for the
company.
Advantages of Decentralization -
1. Decentralization overcomes problems posed by significant
physical separation between Plants and Central Office. These
problems can occur due to information flow. They may occur due
to lack of sensitivity to environment due to physical separation
2. Uniqueness of product line requirement of each Plant: When
individual plants areengaged in production of different products,
their requirement is product specific and thereby unique.
Decentralized control can deal with the requirements effectively,
independently.
 3. Better coordination with production & other functions of the
plant: Production is the internal customer of material management
function. Decentralized control enjoys the benefit of being close to
the customer. There is also the need to interact with various other
functions in the plant. Decentralized control can take decisions
based on these interactions effectively.
4. Supportive to the concept of Profit Center: the concept of profit
center as discussed earlier is applicable to each plant and the
management functions within. A decentralized material
management function can effectively work as a profit center and
support the plant as a profit center within the corporate body.
Materials management function for project form of production
Materials need of projects is unique as the features of a project are unique. These are
discussed below to understand the uniqueness of materials needs.

 Types of Projects :-
Some of the project types are mentioned below. Most
of these projects are sponsored by Government and
implemented by organizations in public and private sector .
1. Erection of Steel Plants, Refineries
2. Laying of Pipe Lines
3. Building of Bridges, High ways, boring of tunnels
4. Laying of railroads

 Features of Project form of

production :-
1.Non repetitive activities
2. Specific and Critical performance objectives
 3. Cost objective
4.Time objective, delays invite heavy penalty
5. Projects are monitored and controlled with the help of OR tools
like PERT/CPM
6. Long time spans
Materials Needs of Projects :-
1. Timely Requirement of Materials to meet PERT/CPM
needs .
2. Unconventional Storage, conventional storage
arrangements are not available on most of the project sites .
3. Interchangeability of Materials and equipment between
projects as companies are engaged in similar types of
projects .
4. Ability to forecast Costs within the span of project as materials
are needed at different stages of project. Material budget is to be
prepared taking into account above need. Cost overruns are
unacceptable in commercial projects.
INVENTORY MANAGEMENT :-
What is Inventory? -
1.Inventory is an unused asset, which lies in stock without
participating in value adding process.
2.Unused equipment, raw material, WIP and Finished goods,
consumables , spare parts, bought out parts, tools and tackles,
gauge and fixtures etc.
 3.In India 9 to 12 months of sales quantity lies in the form of
Inventory [R/M, WIP, Bought out parts and Finished goods] as
against a few days in Japan and a month in the US and Europe
4.Huge amount of NPAs in our country, Banks, PSUs
5.If we look around in our facilities we find stocks lying unused for
years catching dust and rust in the form of plant and equipment,
raw material, WIP and Finished goods.
6.In our country inventory is always viewed as asset [working
capital], in fact, though it is called an asset, it is a big liability
7.Reluctance to scrap useless inventory in time is one of the
reasons why we carry huge stocks
8.Inventory is biggest source of waste
9.Japanese companies focused their attention on Inventory
through now well known concept of 5S
TYPES OF INVENTORY :-
1. Manufacturing: R/M, components, WIP, F/G.
2. MRO: Maintenance, repairs and operating supplies.
3. Tools and fixtures
4. Inspection gauges and instruments
5. Location inventory: inventory at a fixed location
6. In transit inventory: inventory in the process of transfer or under
going transportation and waiting to be transported. This is also
known as pipeline inventory

 FUNCTIONS OF INVENTORY :-
1. Inventory overcomes obstacles due to geographical separation
between suppliers and customers. Manufacturing facilities are
 located at places that make manufacturing economical. This fact
geographically separates manufacturing and market.
2. De coupling from uncertainties of market
3. Overcomes obstacles due to poor infrastructure
4. Balancing supply and demand: seasonal production and year
round consumption [agricultural products], seasonal consumption
and production during some other season [woolen garments and
umbrellas].
5. Buffer uncertainties of lead time and demand
6. De couples internal processes. Two machines running
sequentially are separated by inventory to make them independent
of each other.

 Costs of carrying inventories -

1.Capital cost
2.Taxes, insurance
3.Obsolescence
4.Storage: handling, space, maintenance, security
5.Opportunity cost
6.Cost of bad quality

 INVENTORY CALCULATIONS :-
 Economic order quantity–
Please , refer to your class notes .
Assumptions of Wilson’s lot size formula or Classical EOQ model -
Demand is at a constant rate and continuous
1. Process is continuous
 2. No constraints are imposed on quantities ordered, storage
capacity, budget etc.
3. Replenishment is instantaneous
4. All costs are time invariant
5. No shortages are allowed
6. Quantity discounts are not considered
Limitations of Classical EOQ model -
We have seen that Classical EOQ model made
assumptions that are really not realistic. When the model
is put to practical use we find that so many adjustments
are needed to be made. Hence EOQ model is formulated
under some limitations. If we are not conversant with
these limitations, managerial application of this concept
can be counter productive.
Major limitations are some of the assumptions made -
1. The demand or usage is predictable .
2. The demand or usage is constant .
3. The price of the item remains constant through out the
procurement cycle .
4. Materials in many processes are flow controlled ie, materials
move in pipe lines starting and stopping depending on
operational requirements .
If the concept of EOQ is applied without taking into
account the limitations results can be disastrous.
Adjustments to EOQ -
1. Volume transportation rates –
 EOQ model does not consider cost of transportation
of goods from vendors place to the purchaser.
Transportation costs are sensitive to weight of consignment.
If the quantity suggested by EOQ model does not get
favorable transportation cost, summation of inventory cost
and transportation cost may be detrimental to the interests of
the organization. Hence we should always evaluate batch
sizes from total cost perspective. In the traditional approach
when inbound logistics are totally vendor’s responsibility, the
company never used to worry about this aspect. But as the
concept is now enlightened and minimization of the costs in
the supply chain is the focus, this aspect is very significant
Annual demand 2400 U
Unit value $ 5.00
Inventory charge 20%
Ordering cost $19.00 per order
EOQ 302 U
Shipment rate R1 [applicable $1.00
to EOQ quantity = 300 U]
Shipment rate R2 [applicable $.75
to 480 U quantity]

Alternative 1 Alternative 1
Q [EOQ] = 300 Q = 480
Inventory carrying $150 $240
cost
Ordering cost $152 $95
Transportation $2400 $1800
cost @ $1 per U
Total cost $2702 $2135
 2. Quantity discount –
Impact of quantity discounts is seen if we look at the
costs by doing summation of inventory costs and relief
derived out of quantity discounts. Quantity discounts can
upset the benefit of EOQ if we don’t evaluate the situation
from total costs perspective.
3. Other EOQ adjustments -
a) Production lot size –
Buyers EOQ and suppliers EBQ some times do not
match. Then some adjustment will have to be made to the EOQ
to make it practicable.
b) Multiple item purchase –
When a combination of several products are sourced from
a supplier, the impact of quantity discounts and transportation
costs will be different from that for individual product. So
adjustment is required to EOQ from the angle of total cost for
the combination of products
c) Limited capital –
Budgetary allocations play a significant role in buying. The
budget has to satisfy the requirement of entire product line. So
the EOQ of various items requires adjustment
d) Private trucking –
If the company uses private transport for procurement,
getting a full truck becomes significant from cost perspective
e) Standard package –
 When a standard package is used for transportation, if
EOQ suggests one and a half package then transporting half
package becomes more expensive than transporting two
packages with enhanced order quantity.

 ABC Analysis -
80 – 20 rule, also known as Pareto’s rule – Pl. refer to
your class notes
 Benefits of ABC Analysis -
1. Identification significant 15% to 20%items responsible for 80%
of value for close management control – selective management
control
2. Effective management of inventory – results in short span of
time
3. Allocation of management resources to significant items,
reduction in clerical work and time.
4. Helps in selection of appropriate inventory control models or
systems. E.g. ‘Q’ model or ‘P’?
5. Helps in formulation of inventory policy
 Limitations of ABC Analysis -
1. An exhaustive analysis of all items in the whole organization is
required to make ABC analysis a useful effort. A, B, & C items
should be identified for the whole organization for which data
regarding consumption pattern, lead time and its fluctuation of
all items is necessary. Only then the benefits can be felt. To
carry out this exercise high degree of standardization and
 codification is primary. This exercise is obviously time
consuming.
2. Focus is only on money value, criticality of the item is not taken
into account.
3. Price of an item is assumed to be same through out the year. In
practice it is unlikely to be so.
 VED Analysis -
Vital, Essential & Desirable items– Pl. refer to your class
notes also pl. refer your notes for the matrix for ABC & VED
items in the store.
 FSN Analysis –
Fast moving, Slow moving & Non moving items– Pl. refer to
your class notes

 INVENTORY POLICIES :-
P Model, Q Model, Optional replenishment Model– Pl. refer
to your class notes .
Comparison of Indian & Global industries -
Comparison Japanes US/Euro General
factors e pean co. Indian co.
compani
es
1.Cycle time 0.5 to 2 1 to 2 3 to 6 years
from production years years
to development
2. inventory A few One 9 t0 12
level days of month of months of
 sales sales sales
3. output per Rs. 32 Rs. 12 Rs. 2.5
employee Lacs Lacs Lacs
4. rejection rate 3 to 4 30 to 40 8 TO 20
PPM PPM RPH
5. quality cost 3% TO 5% TO 35% TO
with respect to 5% 10% 45%
sale