Purchasing & Materials Management

Prof .Akshay Joshi

Unit 1 A

Management in relation to materials

Materials : Key area of management along with
production, marketing, finance & personnel. Materials have acquired an independent position in many organizations. Materials management is one of the areas covered by the whole process of management.

It is necessary to control material cost, material supply& material utilization so as to: Maximize Production. Reduction in cost of production& distribution. Profit Maximization.

Thus materials management is a distinct process of management covering" whole range of functions involved in conversion of raw materials & ancillary supplies into finished products & services.
MBAS SHOULD STUDY THIS SUBJECT.

Definitions:

Materials management is a total concept

involving an organizational structure unifying into a single responsibility, the systematic flow & control of material from identification of the need to customer delivery.

[international federation of purchasing &

materials management]

Materials management is an organizational concept in which a single manager has authority & responsibility for all activities, principally concerned with the flow of materials into an organization. [national association of purchasing management (usa)]

The function responsible for the coordination of planning, sourcing, purchasing, moving, storing& controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a minimum cost.

Functions of management applied to materials

Posdcorb P= PLANNING O= ORGANIZING S= STAFFING D = DIRECTING C = COORDINATING R = REPORTING B = BUDGETING

SEVEN FUNCTIONS OF MANAGERS.

[ Luther gulick ]

Planning:
1)

2)

Decide which, when & how much materials are needed. Planning tools: For materials planning. Forecasting : making an educated guess of future demands based on past consumptions. Well suited for estimating the requirement of raw material of a particular type. Material requirement planning (MRP) : Tool for estimating the material requirements of components of different types to produce final assembly of finished equipment. When demand for finished product is forecasted, the demand for subassemblies & components for making of subassemblies is calculated by MRP.

Organizing :

Developing hierarchical structure which describes various positions of personnel & their reporting relationship in terms of responsibility, authority,& accountability. Indicated on an organization chart forming a pyramidal structure classically. Good organization structure is important, so that no confusion remains in the minds of managers with respect to roles and responsibilities. Clear flow of information from top to bottom and vice versa.

Staffing:

Recruiting and retaining of suitable individuals in various positions in the unit. Management assesses future needs and makes necessary arrangements to meet them. Indirect involvement of materials manager as the people under his supervision and control are concerned. Direct responsibility of the personal department.

Directing:

Signifies communication from top to bottom. Materials manager receives instructions from top management about his broad objectives. They are: Low price of materials. High inventory turnover ratio. Continuous supply of material . To minimize the cost of procurement plus storage of material. Development of personnel in the materials department.

Controlling:

e Central position for materials manager linked

with suppliers, sales persons, production department, design and development department. Direct link with top management. Link with finance for procurement of capital goods & equipment-make or buy decision through breakeven analysis. Direct link with production as he supply materials needed in assembling and prod. Dept. Link with marketing & sales dept. due to role in material handling & traffic responsible for delivering finished goods to ultimate customer. Commanding position to control things effectively & make things happen.

Coordinating:
Interrelating with various entities and processes of work.

Reporting:
To those to whom the manager is responsible as well as subordinates through records, research and inspections.

Budgeting:
Fiscal Planning, Accounting and control.

Areas of Materials management

1. 2.

3.
4. 5. 6.

7.
8.

Materials management consists in managing material things with the help of people assigned to do jobs leading to the accomplishment of predetermined objectives. AREAS: Planning and Sourcing. Budgeting. Researching & Analyzing. Indenting, and Procuring. Receiving, Storing & Preserving Accounting & Controlling. Issuing & Dispatching. Disposing.

Engineering specifies

Finance Pays the bill

Materials management Buys Plans & schedules Moves stores

Marketing sells Production Transforms Into Products

Objectives of materials management

The managers most basic job is to focus the efforts of his subordinates on the objectives of the enterprise. In materials management, this boils down to supplying material at lowest possible cost. To achieve this fundamental objective, the materials manager take into account both the long and short-term effects of his actions. He must also consider the impact of his operation on the cost of other activities within the organization. - Dean S. Ammer.

Primary Objectives: Contribution directly made by the materials function. There are nine primary objectives: 1)Low prices: Obtaining the lowest possible price for purchased materials. If prices of the purchased items is reduced, operating costs are reduced & profits are enhanced. To achieve this, the purchase manager must be aware of current market prices. Negotiate with on the supplier and invite quotations before finalizing on the supplier. Market prices are available from secondary data in the form of brochures, catalogues. 2)High inventory turnover: Inventory turnover = sales/average inventories.

When inventories are low in relations to sales, less capital is tied up in inventories. It increases the efficiency with which the company's capital is utilized, so that return on investment is higher. Storage & carrying costs of inventories are lower when turnover is high. Inventory turnover ratio in India = 5 to 6. (few raw material to finished products conversion cycles) In Japan=30 (Just-in-time purchasing & manufacturing; high inventory turnover cycles) .

3)Continuity of supply: Disruptions in the continuity of supply, excess costs are inevitable. Production costs go up. Particularly important for highly automated processes, where costs are rigid & must be incurred even when production stops because of lack of materials. Achieved through intelligent use of lead time estimate & a certified supplier whose material is not inspected but loaded straight on the production line. Ex- employees of the organization who start their ancillary are right suppliers as they know the know of the company.

4) Consistency of Quality: Materials department is responsible for the quality only of the materials & services furnished by outside suppliers. When materials purchased are homogenous & in a primitive state (ex. Sand & gravel), quality is rarely a big problem for material personnel. But when product is in highly advanced stage of manufacturing & specification are a tremendous challenge for suppliers to meet then quality is the most important objective of materials mgt. Quality should be verified for specification & performance in a rigorous manner.

5) Low payroll cost: Common objective of a company is low payroll costs. Lower the payroll, higher the profits- all other factors being equal. But no dept. can do its job without a payroll, the objective of a low payroll must be viewed in a proper perspective. Cost of order processing: C = (L+ OH)/N L = Annual labor costs & salary OH = office overheads per year N = No. of orders placed for various items per year.

6) Favorable supplier relations: Manufacturing firms

rely on outside suppliers to a far greater degree than recognized. Industries purchase up to 95% of their items from venders now a days. Thus favorable supplier relations are extremely important. A Co.s standing in business community is determined by the manner in which it deals with its suppliers. Suppliers can make direct contribution to a Co.s success. Product development & research efforts can be of tremendous assistances to their customers. Supplier should be regarded as trading partners. Efforts to stimulate superior performance through from supplier through joint cost reduction projects, a willingness to share new processes & ideas help in building ties from suppliers.

Good supplier relations involve inviting the supplier to the plant & seeking his advice & have early supplier involvement. Can contribute to design modifications & improvements. Executives from industry should visit the suppliers plant to know more about his business problems. Major problems of sudden shift in demand for materials, requiring either rapid cancellation of existing commitments or extra output to prevent shortage. Cooperative suppliers may be helpful in sorting such problems.

7) Development of personnel : Every dept. in the co. should be interested in developing the skills of its personnel. Each dept. head should make a special effort to locating in junior posts with persons having leadership potential for co.s sustained success & growth. Motivational techniques such as job enlargement, job rotation & job enrichment should be used. 8) Good Records: Primary job of materials mgt. They are necessary & useful; help in doing a better job. Good records are primary objective in purchasing & traffic phases of materials management as in accounting.

9) Minimum total variable cost: A materials dept. must see to it that ordinarily the purchase batch quantity should result in minimum total cost of inventory carrying and procurement cost . Secondary Objectives: They are indirect, & result from the materials department acting in service or staff capacity to another department in achieving its objectives.

1)Favorable reciprocal relations: A co. buys deliberately from its own customers as much as possible. Involves balancing of the advantages & disadvantages of using ones buying power as an instrument of sales. Similarly, suppliers will use their own buying power as a sales tool. ex: industry X produces alumina abrasive & apart from its own use supply it to industry Z. Industry Z produces silicon carbide & supply to industry X. There is a pact between the two firms not to supply to any other co. at a price prevailing between these trading partners. (abrasive grinding wheel industry)

2) 3) 4) 5) 6) 7) 8)

New materials and products. Economic make-or-buy or outsourcing. Standardization. Product improvement Interdepartmental Harmony Forecasts Acquisitions

Importance of Materials management. Roles of Materials Manager. (students assignment)