Definition & Scope of Materials Management

nction ,often called the famous 5 Rs of Materials Management, are acquisition of materials and services :

y y y y y

of the right quality in the right quantity at the right time from the right source at the right time

From the management point of view , the key objectives of MM are :

ce carrying costs and inventory losses occurring due to deteriorations , obsolescence and pilferage

of materials and services to users quality which permits efficient and effective operation

itive atmosphere in performance and pricing

y of operations and procedures

rvoir of talent

ate a supplier attitude and desire furnish the organisation with new ideas , products, and better prices and service departments

d ensure efficiency and honesty

hat is responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in a

The broad Materials function has the following as identified and interlinked sub functions:

monitoring the performance in relation to production and sales. Purchasing: Basically, the job of a materials manager is to provide , to the user departments right material at the right time in right quantity of right quality at right price from the right source. Materials planning and control: Materials required for any operation are based on the sales forecasts and production plans. Planning and control is done for the materials taking into account the materials not available for the operation and those in hand or in pipe line. This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and

To meet these objectives the activities undertaken include selection of sources of supply, finalisation of terms of pu with vendors, approval of payments to vendors, evaluating, rating and develo

Stores : Once the material is delivered , its physical control , preservation , m efficient handling, maintenance of records, proper locations and stocking is d

Inventory control : One of the powerful ways of controlling the materia It covers aspects such as setting inventory levels, doing various analyses such as ABC , XYZ etc ,fixing economic reporting.

Materials Management's scope is vast. Its sub functions include Materials planning and control, Pu

Materials management can thus also be defined as a joint action of various materials activities directed towards approach to planning, acquiring, processing and distributing production materials from the raw material state to the

In its process of managing , materials management has such sub fields as inventory management , value analysis, moving items. The various activities represent these four functions:

Organization of Materials Management Functions

The overall objectives of an organisation tend to be achieved most efficiently when the organisation is The process begins by dividing the total operation into its basic functional components. Each compone The process is continued until each individual job encompasses a reasonable number of related tasks.

The basic aim is to have a system that is functionalised , has proper control over the activities and is costs. Obviously, the MM organisation is derived from its fundamental objectives. Since Materials ma making it available to the users , a commonly seen organisation of materials management is divided i y Purchasing y Stores y Inspection y Traffic Once the whole Materials Management function has been divided into its different sub-functions as

Administrative : Purchasing administration involves all the tasks associated with the management process, with emphasis on the development of policies , procedures, controls and the mechanics for coordinating purchasing operations with those of other departments. Buying : It addresses to a wide gamut of activities such as reviewing requisitions , analyzing specifications, investigating vendors, interviewing sales people studying costs and prices and negotiating.

Expediting : This is basically the order follow up activity involving various types of vendor relationship work. Reviewing Order status, providing clarifications on transportation, writing and emailing vendors etc.

Special projects (Non routine) : In order to facilitate smooth purchasing in a highly competitive business environment , purchasing authorities have to keep building the capacity to do better by taking up as special projects activities such as vendor development, vendor registration, value analysis, market studies, system studies etc Routine : Purchasing process or procedure involving routine or every day activities such as dealing specific purchase file , placing orders, maintaining records of commodities, vendors etc.

Stores
y

Receiving Bay y Custody

Inventory control y Disposal

Material Planning
In any integrated Materials Management environment, planning for getting the materials is the starting point for the whole MM function. Materials planning sets the procurement function and the subsequent material functions rolling.

Material planning is a scientific way of determining the requirements starting with raw materials, consumables, spare parts and all other materials that are required to meet the given production pla for a certain period. Material planning is derived from the over all organisational planning and hence it is always a subplan of the broad organisational plan. What it does is forecasting and initiating for procurement of materials

Factors affecting Material planning : 1) Macro factors : Global factors such as price trends, business cycles, government's import and export policies etc are called the Macro factors. Credit policy of the government is a critical factor a banks follow these guidelines only while extending financial support to a business entity.

2) Micro factors : These are essentially the factors existing within the organisation such as corporate policy on Inventory holding, production plan, investments etc. For any organisation, factor such as Lead time of procurement , acceptable inventory levels, working capital, seasonality, delegation of power are micro factors. Techniques of planning materials : There are a few techniques used for planning material for the given period. The following two are , however, commonly used : 1) Materials Requirement Planning (MRP) 2) Requirement based on past consumption MRP has ,as its starting point, the annual production plan of the manufacturing concern. Once a firm determines its annual production plan , the over all material requirement , to meet the given production plan, is worked out. It is a detailed analysis encompassing the materials and quantities available for use, materials with quantities not available and

hence needing procurement, the actual lead time of procurement etc.

Since , it is always possible to have a situation where some parts of an assembly are available and some others not available, Bill of Materials is exploded. It is quantifying all the materials (components) needed for various assemblies , all needed as per the production plan. BOM is thus a list displaying the code, nomenclature of an item , its unit and quantity , location of use and also the estimated price of each component. An explosion chart is a series of bills of materials grouped together in a matrix form so that combining the requirements for different components can be made. Once the BOM is ready , the same is handed over to the Purchasing wing which initiates the purchasing acivities. MRP thus keeps in view the Lead time also. Using computers, preparation of BOM through explosion of lists is quite easy and smooth.

Purchasing function , in a business environment , is one of the most critical functions as it provides t the proper place, and the proper price. Company costs and company profits are greatly affected by the

Purchasing Function vs. Purchase department : Purchasing function is a function commonly seen in all those organisations that undertake purchas Purchase department is a unit of an organisation that performs purchasing function.

The purchasing function is usually performed by a specialised and centralised purchasing departm manager to achieve the performance in an economical manner.

Profit making Centre ? Purchasing is responsible for spending nearly half of a company's income for buying the input material

Obviously, any saving achieved by it results into direct saving for the company and all such savings ar

Going by a thumb rule "even 1% saving achieved in Purchasing results in 5% profit for any organisatio Procurement vs. Purchasing It is used to define one of several supply functions involved in logistics activities. In the broadest sense purchasing is a unique function , it differs a bit from procurement in the sense that while procurement ,

The classical definition of objectives of purchasing is to buy m Howeve

To support company operations with an uninterrupted flo

To buy competitively and wisel

y y y

To help keep a minimum Invento

To develop reliable alternate sources o

To develop good vendor relationship and a good contin

To achieve maximum integration with the other de

To train and develop highly competent p

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who are motivated to make the firm as well as their

To develop policies and procedures which permit accomplishment of the preceeding s

The basic objective , in pure prac Purchasing is no doubt a vast subject and

Types of Purchasing: Considering the nature of business an organisation has there could be different approaches and hence Forward Buying Tender Buying Speculative Buying Systems Contracting Rate Contract Reciprocity Zero Stock buying Blanket Order

Forward Buying : Forward Buying as the name suggests is the system under which buying is done with longer term in perspective. It is not meant for meeting the present consumption requirement. It is rather a commitment on part of both the buyer and the seller , normally for a period of one year. Depending upon the availability of the item, the financial policies, the economic order quantity, the quantitative discounts, and the staggered delivery, the future commitment is decided. A few organisations do hedge, particularly in the commodity market by selling or buying

contracts. Forward buying helps a firm in booking capacity of a supplier and thus often results into a safeguard against a competitor acquiring his capacity. It is usually done for Raw materials but is not limited to it. Now a days , with competition becoming globalised such an arrangement is a win-win situation for both , the buyer and the supplier

Tender Buying
With competition growing as ever , Information technology replacing the arduous manual mode of purchasing and transparency in dealings more required than ever, many professionally managed firms have started looking for more sources of supplies, beyond their normal boundaries. Not that Tender buying did not exist earlier. Rather, it has always been considered the only way of buying materials / services in the government and quasi government procurements. What is Tender buying ? As the word suggests , Tender buying is selecting a supply source (supplier) out of many sources available. That is, many tenderers are invited to participate in the tendering process and then one or more than one tender is selected for order placement. Such tenders are also called the Accepted tender/s (A/Ts). The main focus through tender buying is on competition of price and quality. Usually, the best quality (T1 or Q1) is selected after assessment of the technical offers and then the lowest offered price (L1) tender is selected for order placement. Process of tender buying : A typical purchase function starts with the raising of a requisition (Indent / Material Procurement Requisition) for an item which is required for a stated purpose. This requisition is then converted into an enquiry form which is issued to the probable vendors who are asked to respond within a given date and time (called Tender opening date) as mentioned in the enquiry issued to them. The interested vendors respond to the tender enquiry by giving their tenders. Tenders thus received are opened on the Tender opening date at the fixed time. The tenders are then subjected to evaluation with respect to a tenderer's capability, Financial as well as Technical and other criteria as laid down in the tender enquiry. This step also witnesses series of discussions, clarifications and negotiation with the tenderers. Some tenders can be rejected at this stage as they might not meet the requirement of the purchaser. Finally, the tenders which are found suitable are subjected to price comparision and usually the tenderer offering the lowest price (L1) is selected for placement of order.

The process explained above shows a great deal of variations depending upon a company's procurement policy. In some places, the best quality offering tenders are accepted for subsequent price comparision whereas in some other place all the tenderers who meet the minimum requirement are considered accepted for price comparision and order placement. Similarly, in some places the order is placed only on L1 (lowest offered price) whereas in some other places it may not be rigidly followed so. Types of Tenders : Since the tenders are sent to the probable vendors , knowledge of vendors for the item in question is a necessity. It's based on this concept that the types or mode of tendering is decided against a particular purchase requisition. Most commonly used Types of tendering / tender buying are as below : 1) Global Tender : As the name suggests a global tender is floated with a view to elicit offers / response from any vendor situated anywhere in the world. The need for a global tender arises when the purchaser either does not know about the vendors for a particular item in question or when he thinks that a wider choice of vendor is possible through it, irrespective of his nation's boundaries. A few clear reasons are :
y y y y

Lack of information on vendors Only a few vendors known When there are chances of cartel formation among known vendors Anticipation that more response may come

What is of importance in this popular mode is the way a global tender is floated. With internet becoming the most powerful tool transcending the national boundaries ,a wide range of applications are now possible. There are tender portals ( www.tendertiger.com , www.indiatenders.com etc.) on which one can upload the whole tender enquiry and then ask the interested vendors to make offers. Besides,this increasingly popular way of inviting tenders , listing the tender in international trade journals, leading world newspapers etc. are other ways of putting up a global tender enquiry. The idea is to give wide publicity of the tender, worldwide and circumstances permitting ,to place the order on a foreign supplier too. 2) Open Tender : An Open tender too like a Global tender tends to invite tender from any interested vendor. The basic difference assumed between an open tender and a global tender enquiry is essentially the range of its applicability. While a global tender gets the worldwide publicity, an open tender is limited only within a country. Otherwise, the concept remains the same as it also seeks to elicit better or wider response.

Since the Open tender enquiry is limited within the country itself , besides the internet mode , the enquiry is also printed in the national dailies, internal trade bulletins etc for ensuring its wide publicity, within the country. Any vendor who meets the tender requirements can make an offer. Now a days, since e-procurement is replacing the old manual mode of working , one of the most commonly used mode for Open tendering is uploading the tender on the internet. What is of interest now is the narrowing down of differences between the global tender and an open tender. Any content published on the internet is expected to be available to anybody located anywhere in the world unless due to some mechanism such as firewall etc the reach of internet is restricted. 3) Limited Tender : When the issue of tender enquiry is limited only to a selected few vendors ,it is called Limited Tender Enquiry (LTE). LTE is issued when the capabilities of the vendors is well known to the purchaser. It is considered better than Global and Open tender modes as there is always an element of uncertainty in those two modes with respect to the capabilities of the vendors. For issuing LTE , a purchaser maintains a list of approved / registered vendors whose capabilities are checked periodically. 4) Single Tender Enquiry : An STE is issued only when either the item is proprietory in nature, that is only one supplier produces that item or where there may be more vendors but due to certain exigencies it is not possible to devote time on evaluating the vendors' offers / one supplier can ,for sure , fulfill the needs. Which mode to use and when depends on many factors as well a company's procurement policy. For example, for a small value purchase , if the policy does not prohibit, Single tender enquiry or Limited tender enquiry is considered ideal. These are also ideal for high value and frequently bought items. On the other hand, for high value and non frequently bought items / systems , Open / Global tenders are suited. In many government organisations, whose procurements are also called public procurements for the reason that they spend public money for the public cause ,all the tenders are to be invited only through Open / Global tenders.