1.1.0 Introduction to Integrated Concept and Objective of Material Management :
For running any industry or business, we need a number of resources. These resources are popularly known as 5 M’s of any Industrial activity i.e.
- Men,
- Machines,
- Materials,
- Money and
Management.
- All these resources which are basic inputs, are important but their relative importancedepends upon the particular type of industry and also other environmental factors. Earlier, when many modern machines were not even known, whole activity was around men.
- But now the importance has shifted from men to machines and in the present environment materials are the life blood of any industry or business and for their proper running, materials should be available at proper time in proper quantity at proper place.
1.1.1 Achieving this task of making materials available may not be difficult if they are available in plenty and there are no constraints as regards to cost at which they are arranged.
- In the earlier days when there was not much of competition, cost at which materials were arranged was not a constraint. Producers were able to pass on all the costs to customers and therefore achieving efficiency in managing materials was not a necessary requirement.
- But due to tough competition for most of the Industrial products and limited financial resources, industries have been compelled to find out ways and means of reducing costs if they want to survive in the competitive market.
1.1.2 Basic goals of any industry are survival and earning profits to make an adequate returns on capital employed (investment). The profitability of any organization can be judged by a ratio known as ‘Rate of Return on Investment’ which is defined as profits earned for unit investment ;
Rate of Return (ROI) = Profit / Capital Employed (Investment) where ,
Profit = Total Receipt – Total Expenditure and
Capital Employed = Fixed Assets + Current Assets
1.1.3 Different strategies for improving profitability (ROI) may be as under:-
(i) To increase total receipts : For this either sales have to be increased or the prices of the products sold have to be increased. Both these alternatives are very difficult to achieve in present competitive market.
(ii) To Reduce Expenditure : Majority of the expenditure of any industry is either on men or materials. The relative expenditure on men and materials varies from industry to industry but in most of the industries expenditure on materials is 45% to 70% of total expenditure while expenditure on men will be around 45 to 15% (assuming 15% as miscellaneous expenditures).
- Therefore, two broad areas for reducing expenditure are men and materials. However, reducing expenditure on men is a very difficult task in today’s environment of tight labor laws and strong trade unions. Therefore the other are to be tackled remains reducing expenditure on materials.
- When we talk of expenditure on materials, it is relevant to point out here that there are two types of costs related to materials
o – cost of materials and
o – cost on materials
- i.e. there are always some extra expenditure related to materials which is not actual cost of materials. We can very well tackle these extra costs (cost on materials) without affecting the actual level of consumption and may achieve reduction in expenditure.
(iii) Reduce Investment in Fixed Assets : As investment has already been made, there is very little scope for reducing expenditure on fixed assets.
(iv) Reduce Investment in Current Assets : Current assets consist of mainly working capital and inventory. As a rough estimate, about 40% of current assets are generally tied up in inventories of raw materials, consumables, materials under different stages of production and finished goods. If we could reduce stocks of these different types of inventories. We can very well reduce investments in current assets and improve profitability.
- It is, thus, clear from the foregoing paragraphs that for both survival and for increasing profitability, managing materials plays a very important role and it has been now realized by most of the industries, public as well as private, that ‘materials management’ function can also be a profit centre within the organization because this function has a lot of potential for contributing towards profitability of the organization.
1.2.0 Integrated Concept Of Materials Management :
Traditionally, various activities related to managing materials were looked after by various departments. While purchases were generally arranged by top management with the assistance of a Purchase Agent or Purchase Officer, store keeping and stock control was the responsibility of the production head with the assistance of a store keeper or Stores Officer. Apart from these two main activities, distribution of materials (mostly finished goods) was the responsibility of marketing.
1.2.1 After realizing the profitability potential of Materials Management function, when attempts were made to exploit this potential , it was realized that there were many problems in achieving the objectives due to inherent conflicts amongst various departmental objectives. when a purchasing personnel wants to purchase in bulk to get price discounts, inventory of the stores personnel becomes high. Similarly desire of marketing personnel to have adequate stocks of finished goods in order not to loose any opportunity of sale resorts in high inventory.
- The conclusion is that in the traditional set up one person could not be held responsible for all the functions of materials management to achieve overall economy. Therefore necessity of placing all the functions related to materials management e.g. purchasing, stocking, inventory control and distribution under one department headed by an executive of status at par with other departmental heads, was felt.
- Thus evolved the concept of integrated materials management which can be defined as the function which is responsible for the coordination of planning, selecting sources, 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.
1.3.0 Objectives Of Materials Management :
- The objectives of integrated materials management can be classified in two categories ;
- Primary and
- Secondary.
- These are discussed below ;
1.3.1 Primary Objectives :
Following may be identified as primary objectives which are to be achieved.
(a) To purchase the required materials at minimum possible prices by following the prescribed purchase policies and encouraging healthy competition.
(b) To achieve high inventory turnover i.e. to meet materials requirement of the organization by keeping low average stocks so that the capital locked up in materials is turned over a large no of times.
(c) To incur minimum possible expenditure on administrative and other allied activities related to purchase of materials and also to keep the materials in stock till they are finally delivered to the users.
(d) To ensure that continuity of supply of materials to the users is maintained by avoiding out of stock situation.
(e) To supply materials of consistent quality i.e. of quality which meets user specification and is fit for service.
(f) To keep the wage bill of the department low by ensuring proper distribution of work among staff and not employing surplus staff.
(g) To maintain good relationship with the suppliers of materials and also develop new suppliers for the products for which reliable suppliers do not exist.
(h) To ensure training and development of personnel employed in the department so that good industrial relations are maintained.
(i) To maintain proper and up-to-date records of all stores transactions and purchases.
1.3.2 Secondary Objectives :
(a) To assist technical/design department in developing new materials and products which may be more profitable to the organization.
(b) To make economic ‘make or buy’ decisions.
(c) To ensure standardization of materials
(d) To contribute in the product improvement.
(e) To contribute in the development of inter departmental harmony.
(f) To follow scientific methods of forecasting prices and future consumption of materials.
1.4.0 Possible Conflicts Between Departmental Objectives :
As already mentioned ,it is difficult to achieve all the objectives fully at a given time .Many times we have to sacrifice one objective to achieve the other in the interest of the organization. Thus our objective is to optimize various objectives.
1.4.1 These conflicts are listed below. It will be seen that to achieve one primary objective other objectives are adversely affected.
(a) When we attempt at purchasing the material at lower prices, many times we may have to purchase larger quantities and this will adversely affect our objective of achieving high inventory turnover. Some times we may have to place orders on new suppliers and therefore the quality may not remain consistent and also favorable relations with the suppliers may be adversely affected. Sometimes depending upon price forecasts we may have to wait for purchasing and this will affect continuity of supply.
(b) If we try to achieve high inventory turnover we have to manage with low stock. For this we may have to buy in small lots more frequently and due to many unforeseen circumstances, we may face more often out of stock situation. Obviously our objectives of buying at minimum prices with minimum administrative expenditure and continuity of supply will be adversely affected.
(c) Attempt to keep administrative and other allied expenditure low, may result in poor record keeping and frequent out of stock situations. If we try to reduce expenditure on Inspection organization, this may affect quality if incoming goods. Low expenditure on chasing organization & review system may result in stockouts and overstocks, which will affect our objectives of continuity of supply and high inventory turnover respectively.
(d) For maintaining continuity of supply we have to provide adequate safety stocks and purchase materials at right time irrespective of prices to be paid. This will affect our objective of achieving high inventory turnover and buying at minimum prices respectively. To ensure timely deliveries of stores we may have to provide for penalty clauses in our contracts and this may affect relations with the suppliers. Sometimes when the stocks are very low we may have to relax Inspection-standards for fresh supplies which will affect consistency of quality. We may also have to provide for a proper review system which may affect our objective of achieving low pay-roll costs.
(e) To achieve consistency of quality, we may have to sacrifice on prices and also relations with the suppliers. Tight Inspection procedures may also affect continuity of supply, low pay-roll cost and low administrative costs.
(f) In an attempt to keep wage bill of ‘Materials Management’ Department low, we may have to sacrifice on all the primary objectives to some extent.
(g) Maintaining good relations with the suppliers may affect buying at lower prices and sometimes continuity of supply, high inventory turnover and consistency of quality also.
(h) Objective of development of personnel may adversely affect the wage bill of the department.
(i) Keeping good records may also affect the objective of keeping wage bill low.
1.4.2 It will be seen from the above discussions that it is not easy task to manage various activities related to management of materials. In order to decide, which objective is more important in a particular situation, we require managerial skills and decisions have to be taken keeping overall interest of the organization in mind. This is reason why all the functions related to managing materials should be dealt by one department.
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