Material Management

Unit 1: Materials Management: An Introduction

Materials management is
 a specialized area of management which concerns itself with the management of Material
Resources. What we are attempting to do in managing materials
 is to reduce and control the cost relating to this important resource,
 which normally accounts for
. Cost in materials’ as distinct from ‘cost of materials’.
When we speak of materials management, we are not merely referring to the control of the cost
of materials but of each and every type of cost that is incurred on materials.

1.1 Meaning and Scope of Materials Management

Materials management
 is an essential business function.
 is concerned with planning, acquisition and flow of materials within the supply chain.
 Material is one of the four basic resources.
Now a day with accelerating
 economic, technological, societal and environmental changes,
 Such function has become
o more important,
o more complex, and
o more professional.

Notes Materials management creates a competitive edge by

 delivering quality product(s) or service on time and
 offering lower cost by cutting its own cost as well as cutting purchased item costs,

A.D 2017 E.C. Page 1

However,
It is complex as it confronts various issues including
 outsourcing, global sourcing, size of supply base,
 shorter Lead time, smaller lot size, price determination, mode/carrier selection,
 maintaining long-term relationship with suppliers,
 choosing the right type of information technology,
 legal issues, etc.

The following definition of Materials Management has been accepted by the International
Federation of Purchasing and Materials Management.
“The materials management is a total concept involving an organizational structure unifying
into a single responsibility, the systematic flow and control of material from identification of the
need through customer delivery.”
Included within the concept are the material functions of planning, scheduling, buying, storing,
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

coordinated achievement of least materials cost. This is done through optimizing capital
investment, capacity and personnel, consistent with the
appropriate customer service level.

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

A.D 2017 E.C. Page 2

The different scopes of materials management can be viewed from three perspectives
as discussed below:

As a Basic Function of the Firm:

Materials management is one of the following six functions Notes performed by any firm:
Design : Converts concept into specification
Finance : Acquires and controls capital
Personnel : Manages human resources
Materials : Planning, acquisition and logistics of materials, service and equipment
Production : Converts materials into goods and services
Marketing : Distributes goods and services to buyers

The contents, supervision and importance of materials management differ from industry to
industry.

As a Manager of Outside Manufacturing:

The parts that go into making of end products can come from two sources:
 in-house production or
 purchase from outside.
Earlier, firms themselves produced most parts that they needed for assembly of end products.
Gradually, firms started identifying, cultivating and exploiting their core competencies “doing
the things they knew how to do the best” and outsourcing the rest. This marked a significant
increase in the percentage of purchased parts.

As a Controller of Cost:
Major costs related with material include
 ordering or set-up costs,
 carrying costs,
 logistics costs (transportation and warehousing) and
 shortages or surpluses costs, besides the cost of purchased items.

A.D 2017 E.C. Page 3

1.2 Objectives of Materials Management
Materials management’s considerable effect on profits demands that its objectives be derived
from the general business objectives
 “maintaining competitiveness” and
 “satisfactory profitability”.

The main objectives of materials management are as follows:

 To ensure continuous uninterrupted production or operation or project work by
maintaining a steady flow of materials;
 To achieve the above objective in an efficient and economical manner;
 To effect economies in the cost of materials by purchasing materials of the right
quality, in the right quantity, at the right time, from the right source, at the right price;
 To affect economies in the costs incurred on materials after they have been purchased,
through storage, processing and warehousing, till the finished goods ultimately reach the
customer. These economies contribute towards cost thereby leading to higher profits;
 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; and consequently;
 To improve the quality of manufactured goods by use of better raw materials or
components and thereby the increase the competitiveness on such goods put of sale;
 To increase the competitiveness of manufactured goods by making it possible to
reduce their prices through cost reduction, especially by value analysis;
 To save foreign exchange through import substitution and economizing on foreign
purchases;
 To ensure cooperation among all departments of the enterprise to meet materials
management objectives both at the corporate and functional levels and to ensure proper
coordination in respect of such activities;
 To conserve materials resources within enterprise, thereby contributing to the
conservation of national resources.

A.D 2017 E.C. Page 4

1.3 Significance of Materials Management
Materials management
 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 centers of accountability
for performance.

Materials form the largest single expenditure item in most of the manufacturing organizations.
They usually represent 50 to 60 per cent of the total cost of the final product.
An analysis of the
Materials management determines three cost categories within the company which, in most
cases, have a substantial effect on company profits. In team, these are:
Materials Costs:
These are those costs which arise for the procurement of raw materials, indirect materials,
fuels, semi-finished and finished products (goods), including delivery costs. In the manufacturing
industry they constitute the largest percentage of the costs of Management of Materials.
Capital Costs:
These cover primarily interest which accrues for the capital tied up in the stocks of materials,
semi-finished and finished products (good), including depreciation for value adjustments which
have to make.
Overhead Expenses:
They cover the overhead expenses and/or cost centre expenses of all the separate areas within
materials management, including the sometimes considerable costs of transport and packaging,
electronic data processing and disposal.

A.D 2017 E.C. Page 5

The impact of the materials management department on company profits depends on the
importance of materials costs, the degree of which materials management can control inventories
of semi-finished products and work in process as well as finished goods, and the amount of
personnel assigned to materials management.

Materials management must nowadays make an active contribution to improving profit by

taking advantage of all opportunities for:
 Reducing costs (materials costs, capital costs, overheads), and
 Setting free the capital tied up in inventories and indeed in the whole pipeline from the
suppliers to the consumers in the market.

A.D 2017 E.C. Page 6