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Materials Management (2)

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22 views

Materials Management (2)

Uploaded by

deyavilash123
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Materials management is the study of flow of materials through various

operations in a production facility. The American Production and Inventory


Control Society (APICS) has defined materials management as, “the grouping of
management functions supporting the complete cycle of material flow, from
the purchase and internal control of production materials to the planning and
control of work-in-process to the warehousing, shipping, and distribution of
finished products.” Materials management helps in assessing material
requirements at various stages of the production process and in maintaining a
control over the firm’s production and distribution functions.

Necessity of Materials Management A major portion of investment is made in


materials. Though the range of investments made varies from industry to
industry, about 50% of the total capital is invested in materials. Therefore, they
need to be effectively and efficiently managed. For example, if a hospital runs
out of a single item like a syringe, a seemingly insignificant item in its
inventory, it brings most operations to a standstill. Such shortages also delay
service delivery and increase the expenses for the firm. Materials management
is very important for the following reasons:
 Due to scarcity and increasing demand of materials firm should minimize
wastage.
 Material is the only major area for cost reduction therefore should be
effectively managed.
 The quality of the end product or service is dependent on the materials
management.
 Materials management helps in preserving important and scarce resources. 
Materials management helps in obtaining the lowest possible prices for
materials purchased

Functions of Materials Management The materials management process is


explained by three inter-related functions: production control, inventory
control, and materials handling.
Production Control The production control function involves directing and
regulating the movement of goods through the entire manufacturing cycle

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from the process of purchasing materials to producing the finished product.
The purchasing, receiving, raw materials inventory, and production
departments perform this function by providing an adequate supply of
materials for production.
Purchasing department: The purchasing department acquires the required
materials in the right quantity, of the right quality, from the right source, at the
right time, and at the least possible cost.
Receiving department: The receiving department processes the incoming
shipments of materials. In most firms, the purchasing department itself acts as
the receiving department. The receiving department performs tasks like
unpacking incoming materials, checking their quantity and quality, and
generating receiving reports.
Raw materials inventory department: The raw materials inventory
department manages the raw materials inventory, which is the collection of
inputs used in the production process. The department performs tasks like
storing and protecting raw materials, auditing existing raw materials, and
repackaging and labeling raw materials to make them ready for use in the
production process. Most firms use Materials Requirement Planning (MRP) to
manage raw material inventory.
Production department: The production department allows the continuous
flow of goods during the production process without any stoppages. Some of
the functions of the production department include monitoring the flow of raw
materials, determining and adjusting inventory storage capacity, and
identifying material flow bottlenecks.

Importance of Purchasing Purchasing refers to buying of a material or an item


from a company or division that supplies materials. The purchase department
has to purchase the right materials at low cost, develop a network of vendors,
and provide the necessary information about the new products, materials, and
services to other departments. A firm purchases an item only, when the cost of
purchasing the item is less than the cost of making it, when it does not have
the requisite manpower to make the item, when the expected returns on the
investment in manufacturing the item in-house are not attractive and the

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demand for the item (to be manufactured) is seasonal and there is a risk in
storing and maintaining it. Management of purchasing activities is very
important for a firm for the following reasons:
 As the costs of procuring raw materials have an impact on the profitability of
the firm.
 Automated manufacturing facilities have resulted in low labor costs making
the purchase department’s role more significant.
 Competition globally has forced companies to globalize their purchasing
activities

Purchasing Process During the purchasing process, the purchase department


interacts with the production department, the finance department, and the
sellers. The purchasing department deals with purchasing instruments like
purchase indents (or requisitions), requests for quotations, and purchase
orders. Purchase requisitions are made by departmental representatives
stating the quantity of material they need and the date of requirement. After
receiving the requisition from the indenting department, the purchase
department sends requests for quotations to the prospective suppliers. Based
on these requests, the suppliers give quotations comprising the price, delivery
schedule, the mode of transportation, and special conditions, if any. The
purchase department selects the supplier who offers the best quotation and
negotiates the terms and conditions in order to enter into a deal. The purchase
department subsequently issues a purchase order to the supplier.

Organizing Purchasing Purchasing systems are of two types: Centralized


purchasing systems and decentralized purchasing systems. In centralized
purchasing system, all the purchasing activities are carried out by a separate
department called the purchasing department. This system is effective for
organizations which have a number of production sites or many autonomous
production units within the same site which require raw materials with the
same or similar specifications. In decentralized purchasing system, particular
department heads purchase the raw materials according to their
requirements. The method gives departments the flexibility to alter their

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production policy based on their specific requirements. Most organizations
generally use a combination of both types of purchasing systems.
A Purchase Order is a legal document that authorizes the supplier to supply
the goods and represents the buyer’s obligation to buy the materials against
the specified terms. Once the supplier delivers the materials the finance
department releases the payment. There are some variations in the purchasing
procedures of different firms depending on the material required. Nowadays,
many organizations use the Internet for purchasing.

Purchase requisitions: These are made by departmental representatives


stating the quantity of material they need and the date of requirement.

Requests for quotations: The purchase department sends requests for


quotations to the prospective suppliers, based on which the suppliers give
quotations comprising the price, delivery schedule, the mode of
transportation, and special conditions, if any.

A purchase indent from a department within the firm initiates the purchase
process. This is followed by request for quotations from suppliers by the
purchase department. After selecting a supplier, the purchase order is placed
by the purchase department.

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