CHAPTER ONE: INTRODUCTION

Materials are the key resource in an industrial enterprise; no production is

possible without materials. Materials also form a major constituent of the cost of
the product and, therefore, proper control over their procurement, storage,
issue, movement and consumption is necessary.
Materials include raw materials, components, subassemblies, and supplies.
Whereas most materials are ultimately transformed into finished products,
supplies are usually consumed in the day-to-day operations. Thus materials
became direct costs, while supplies are often charged off as overhead.
The emphasis a firm places upon materials management depends upon the
type of operation it conducts and the importance of materials to the success
of those operations. For many manufacturing firms, materials account for
one-half to three-quarters of their product costs. These high costs of
materials are likely to continue as manufacturing operations become more
specialized and the need for. For service-oriented firms, the proportion of
material costs may be much lower; it may even approach zero.

Definitions of Materials Management

Bailey and Farmer define materials management as the management of
the flow of materials into an organization to the point where those materials
are converted into the firm’s end product(s).
Lee and Noble define materials management as a confederacy of
traditional materials activities bound by a common idea- the idea of an
integrated management approach to planning, acquisition, conversion, flow,
and distribution of production materials state to the finished product state.
Therefore, we can define materials management as the planning,
organizing, sourcing, purchasing, moving, storing and controlling of
materials, form; their initial purchase through internal operations to the
distribution of finished goods or services in an optimum manner, i. e., at a
minimum cost.
The materials management begins with the supplier and ends when the
materials are either consumed or incorporated into some product. The
executives who engage in materials management are concerned with three
basic activities: purchasing, storage of materials and movement.
Materials Management is a function, which aims for an integrated
approach towards the management of materials in an industrial undertaking.
Its main object is cost reduction and efficient handling of materials at all
stages and in all sections of the undertaking. Materials arrangement‘s
functions include several important aspects connected with materials such as
purchasing, storage, inventory control, material handling, standardization
etc.

Importance of Materials Management

Lower prices for materials and equipment: materials offer considerable scope
for reducing costs and improving profit. In majority of industries, materials
and services bought from outside constitute 60% of the cost of the
manufactured product.
In addition to reducing material costs, efficient management is useful for the
following purposes:

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 a. For reducing foreign exchange loss, by utilizing the items imported in an
optimal way and thus, helping in reducing the imports
b. By reducing the cost of finished goods and maintaining the quality, it is
possible for Ethiopian Manufactures to compete better in foreign
markets and earn more foreign exchange for the country
Sound management of materials results increased productivity of capital by
preventing large amount of capital being locked up for long periods in
inventories.
Materials form an important part of the current assets in any organization.
The return on investment (ROI) depends a great deal on the manner of
utilization of materials. The relationship is represented below:

ROI = profit x sales

Sales (Fixed Assets Current Assets)
Fixed assets constitute capital already sunk and the only scope for improving
the return on investment lies therefore in the efficient management of
materials that control of materials assumes great importance.
Thus, the importance of materials management lies in the fact that any,
significant contribution made by the materials manager in reducing
materials’ cost will go a long way in improving the profitability and the rate of
return on investment. Such increase in profitability, no doubt, can be affected
by increasing sales. Increase in the profitability can be achieved by
concentrating on the materials cost that is typically a major Birr item for most
organizations. In fact, as market pressure intensifies, organizations will be
forced to cut down the costs and here the materials manager steps in play
his role.

Objectives of Materials Management

Objectives of Materials Management
There are ten objectives of Materials Management:
To maintain a steady flow of materials to ensure uninterrupted
production. Any disruption affects cost of the product.
To achieve economy in cost of materials by adopting cost reduction
techniques like value analysis, variety reduction, JIT, MRP etc.
To ensure consistency of quality by providing right materials, of the
right quality, in the right quantity and at the right time.
To reduce inventory investment through scientific inventory control
techniques.
To improve corporate image by maintaining good buyer-seller
relations.
To maintain goods records of purchase, stores, traffic, etc. to eliminate the
possibility of corruption.
To preserve/conserve materials in stock so that losses due to
pilferage, deterioration, obsolescence etc. are kept at minimum.
To reduce operating cost by minimizing/eliminating wastage and
improving productivity of materials.
To improve competitive strength of the firm by producing the best
quality products using quality materials at the lowest possible cost.

Functions of Materials Management

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We can broadly identify the following functions under the direction and
control of Materials Manager who is in charge of Materials Management
department:
1. Materials planning and 5. Simplification, codification
programming and standardization in stores
2. Purchasing 6. Inventory control
3. Receiving 7. Materials handling
4. Store-keeping 8. Disposal of scrap and surplus
9. Transportation

Organization for Materials Management

Individuals normally look after the inter-related functions of materials
management. As the activities expand, the functions of each individual
become more and more specialized. The integrated materials management
concept requires central coordination of all these inter-related activities.
Therefore the internal structuring of the various functions as well as the
relationship of the materials management division with the other division-
technical, finance and marketing-in the overall organization becomes critical.
The material management function should be headed by a competent
professional who must be a member of the top management team, as
managing materials is a critical function.

Materials Management in the Overall Company Organization

We have seen the need for an integrated materials management and the
advantages that go with it. It was also recognized that materials
management is a top management function. Some organizations have a
director in the board exclusively in charge of materials and even small
organizations are no exception to the order.
Depending upon the company’s operations and its environment, many
variations of the organization plan are feasible.

Organizing Materials Management

Once the relationship of materials management with regard to other
departments in the overall organizational plan is finalized, the next step is to
finalize the internal structure of the department. The following alternatives
are available.

Organization Based on Commodities

Under this system of organization, items are classified according to their
nature such as raw materials, bought out components, spares, imported
items, finished goods and so on, and they are assigned to individuals.
Depending upon the importance of the commodity group in respect of the
operations of the company, workload will vary between the groups and this
forms the basis for determining the staff in each commodity group. For
example, an automobile manufacturing firm may have commodity groups for
forgings, casting, pressed parts, raw materials, finished bought out items and
civil engineering materials.
The advantage in such a system is that there is no wasteful duplication of
efforts as each commodity is separately handled. The group is intimately in
touch with its respective commodity market and hence it becomes

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specialized Bulk buying and standardization is facilitated in each commodity
group.

Organization Based on Location

When an organization has several plants located in different parts of the
country there are two alternatives. One is to have a centralized organization
located at the headquarters. The other is to have a decentralized material
management setup in each location. These are several reasons favoring the
latter alternative. Firstly, when distances between the plants are significant,
the material management function is impaired when controlled from
headquarters, both in terms of cost and time. Secondly, the plant’s product
lines play an important role. Each plant may require many unique materials
and a materials management department located at the plant will be in a
much better coordination with the plant’s production, finance and marketing
departments.
We can like wise list the advantages of a centralized materials management
department for multi-plant operations. The most important benefit is that
combining the requirements of plants and buying in bulk leads to substantial
reduction in cost. In a centralized set up inter-plant transfer of materials in an
emergency is possible. Also, surplus materials in one plant can be utilized in
meeting the requirements of another plant. Since there is only one
department dealing with various sources of supply, a high order of skill can
be expected.

Organization based on function

Here the materials management department is structured on the basis of
functions such as stores, transport, receiving, purchase and so on. Thus,
stores of different manufacturing division will be under one individual who
will report to the materials manager. All purchasing activities will be again
under one individual who will report to the material manager. This system
which permits specialization in each function is now followed by many
organizations.

Inter-departmental Relationships
Broadly, the materials management will have to work in close
coordination with production, marketing, and finance departments. Only an
atmosphere of mutual trust will ensure that these departments will work
towards the total organizational objectives.
Production will have to keep the materials management department
informed about its plans and schedules so that materials requirements plan
can be planned in advance. In the same way, the materials management
department must keep the production department informed about the lists of
suppliers, availability of new materials and anticipated delays so that re-
scheduling of production could be done and costly stock-outs avoided
The finance department also has to work in close coordination with
materials in anticipating funds requirements, payment of bills to suppliers,
insurance and so on. Such close coordination will ensure prompt payment of
bills and improve relationships with the suppliers.
Marketing department will have to give advance information on forecasts
and special requirements so that planning can be done effectively. Materials

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management through efficient operations can keep the prices at a
competitive level and thus help the marketing department in its operations.

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