Material Management Concepts of material management Kunal Dhandhania- 283011 Neelkanth Bajaj- 283003 Tapan Kanakiya- 283024 Sujal Solanki- 283055 2009 Introduction Importance of materials in organizational performance has been felt for several decades. Only recently have the productions and operations managers found it necessary to develop and organized body of knowledge on this subject. The resulting set of related disciplines is known as material management. Materials are used directly or indirectly in producing a product or service such as raw materials, component parts, assemblies and supplies. Importance of Materials Management Management of materials in most organizations is crucial to their success because: The amount of money spent on materials in higher than other inputs put together (i.e., machinery, labour, energy etc.). Materials offer considerable scope for reducing cost and improving profits. Materials add value to the product. The efficiency of a firm depends upon the availability of right materials in right quantity; at the right time, at the right price from the right source of supply. Materials are life blood of development of humanity. Definition Material Management is 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).” (Bailey and Farmer) Concepts of Material Management The following are the concepts of material management:- Centralization Decentralization Integration Profit CENTRALIZED AND DECENTRALIZED MATERIALS MANAGEMENT: It is required to have better control on the total materials activities in a particular organization. When it is small in its beginning phase it has compact organization were all the functions of materials are carried out together and at one place. The materials department reports to the head of the operations, who can be general manager as per organization. The organization structure is simple as shown in the figure Centralized Materials Management The controls are better and the interdepartmental coordination is good and well defined as long as it is simple. When the company grows and becomes multi product and multi location, the materials department functioning is kept centralized and it continues catering service to all the products groups. This set up is called as centralized materials management. In such a case the organization is as follows. The company has four divisions operating independently. The general managers of respective product group A, B, C and D report to president. For day-to-day materials requirement they depend on the central materials department, who holds total responsibility to provide material to the product divisions. Usually companies, which use similar or identical parts or materials at a number of factories, tend to have a centralized buying organization to exploit their buying power. For example, most chemical, steel, and petroleum companies have a centralized buying organization, both to permit companywide buying of key raw materials and to facilitate handling problems. Advantages of Centralized Organization: Big buying Power is useful. The material requirement of different plants gets clubbed together at corporate level. This generates more quantity. When it is dealt with few vendors it naturally results in good negotiating power for getting lesser price, which improves the profitability of the company. This also results in better vendor service. As against this the vendors get divided in decentralized system. Specialized staff for particular manufacturing processes. There are more number of engineers who get technically specialized in the areas in which they are working. This is not possible in the decentralized style. The buyers get dividend. So they are less for each plant. So in the central materials department for each subject the specialized skills get developed. Specifically the teams can handle the capital goods like plant and machinery and also the construction type projects. Some persons are required at center that has to know the capital investment in the company. It helps to take prudent decisions at the company level. Highly uniform procedures followed in the organization gives benefits of discipline. Common forms, system help to have mobility and quick actions. Consolidating purchases of certain materials as follows could make substantial savings. Stationary items, Regular consumables like chemicals, lubricants, and coolants. Plant maintenance items. Standard off the shelf tools. The coordination is quick and easy at corporate level. The selection of the vendor is possible and it helps to create good vendor relations. The chief purchase engineer has good controls on the activities. The chief of the company is involved in the major decisions. He is aware of the expenditure. This is essential for him since it is materials department through which money goes out of the company. Close look and controls of the chief is absolutely necessary. Disadvantages of Centralized organization: No belongingness to the product of the materials personnel. Budget and expenses have to be in concurrence of the principles, philosophy of the product division. Each division has its own culture, which makes it a successful team. This matching is missing in the centralized system. Less coordination with the operating departments. Many a times it is seen that the response from operating people from divisions is poor. People speak with each other only when there is utmost need. This may not be good situation to get good results. Lack of responsibility and authority. The person in the central department develop attitude to deal with division persons that we are independent and you should not dictate terms. Their hierarchical bosses are different and the services given are different. Boss is different than the person for whom they work is doing their performance appraisal. This brings organizational conflict. Difference in the goals of the business. If there are four divisions a person is giving service, he has to understand the goals of each person. Each person is guided with specific goals of his division. That brings him together as a team. This common goal is responsible to bring success. This is missing in centralized system. Wrong planning by any of the initiator brings all the people in trouble. The buyer collects the requirements from different initiators in the different divisions. They buy the quantity by clubbing requirements. When one initiator overdraws the quantity due to any reason like wrong planning or higher changed production schedule all other initiators suffer for not having enough stocks when required by them. Sometimes someone else also may draw the item, which is not planned for him. For example: 4 planners plan for a screw M8 x 40 long as follow. Planner Quantity 1 25000 2 53000 3 25000 4 40000 Total 368000 The buyer takes action and brings total quantity of 368000 numbers in the stocks and he rests happily in his place. One fine morning planner 2 draws extra quantity of about 130000 numbers due to production change. This brings all the planners in trouble. At times someone else draws the items for some need at their place. Thinking that it is hardware item there is no problem to draw it. In their day-to-day business no one feels that they must draw any item only when they have planned for it. Decentralized Materials Management To get better control on the activities of material management the stage of the growth of the company reaches to such a stage that each group calls for having its own materials management set up as shown in the figure. Here the divisions of products A, B, C and D have their own materials department. Their functions have their own staff, place, rules and reporting system. This set up is called as decentralized materials management. The general managers of respective product groups have their own organizations and they report to the president. The president is not responsible for any materials for any materials activity. This is department than the earlier structure where one common materials department has the responsibility for all divisions and it reports to the president of the company. The companies that makes a number of products with little resemblance to one another tend to have a decentralized buying organization. Good examples are M/S Godrej, M/S Larsen & Toubro, M/S Voltas etc. These companies have purchased departments in each of their divisions that operates independently. It is significant that they make a wide variety of products, most of which are unrelated to one another in terms of technology and markets. The expansion process is quite simple and easy in these cases since there is total independence for each division. The decentralization materials management is flexible and can be adapted to suit the specialized needs of any profit or nonprofit institution. Any of the organizational forms can be expanded almost indefinitely to fit very large as well as smaller institutions. Each Engineer adds, subordinates to reach his span on control Then another layer of engineer is added. When these new supervisors reach the limits of their span of control, still another layer of supervision is added Many small companies have grown to giant corporations by following this process. They may change when this organization goes number of levels deep. The organization becomes cumbersome and bureaucratic It does not respond fast changes. It develops ample red tape in even the simplest transactions. Managements of giant corporations shift to decentralization. They break up the corporation into a number of smaller divisional units, each of which operates as an independent business. Advantages of Decentralized Organization It brings managers closer to the objectives of the business since all the operating persons report to one general manager along with materials head. It permits tighter control of costs. Coordinating of purchasing activity between the persons of the purchase department operating department becomes closer. By this they can understand needs and problems better way. This results in getting good material at better price. The help of the operating department can be obtained easily. At any time personal discussion regarding technical matters can be done. This helps buyer and the supplier. It provides better environment for training future managers. Quick response to the user‟s need is possible. As against this in “centralized system” conveying information of buyer and also user takes time. All the matters work as per the matters “written” on the paper. Everything cannot be always expressed on the paper. In dynamic situations many times verbal matters only can convey meaningful information. It also helps stimulate improvements in products and methods. Frequently buyer, supplier and user can meet, discuss and communicate the points of problems and possibilities of improvements. In the multi plant decentralized system it is possible for buyer to place order on the local or close- by supplier. Close supplier finds easy to transport at reduced cost. This is possible only in case of local supplier. For example: A company in Mumbai expanded operations and opened divisions at Nasik, Malanpur and Hazira. The persons over the period found it difficult to coordinate with Mumbai corporate materials department for their requirements even though the central department was efficient. The respective factory operating persons found better to buy from nicely developing local suppliers. This helped to improve the bottom line of the company. Need of different types of parts and manufacturing processes for respective division is not to be observed by centralized department. To get real advantage the centralized department needs similarity of process and materials and closer distance factory to factory The centralized system is found to get advantage when the divisions are small in size to get and the buyers are few in numbers. It becomes unjustified to manage and control the activities of buying scattered in different divisions. Clubbing these becomes useful to make sizable for functioning. Responsibility and authority have to go hand in hand. The staff of the company must be responsible to the factory seniors and have to tune with them. The authority should be fully with them instead of the outsider like central material management staff. The factory management should be fully aware of the expenses and activities of the purchase staff. In number of companies the coordination is difficult from buyers and the seniors in the relevant factory. Disadvantage of Decentralized Set up: Diluted buying power takes place. Decentralization, however, creates a major materials management problem. One of the advantages of a big corporation over a smaller one is its greater buying power. That can be achieved by centralizing the purchase activities. The purchase engineer can purchase in big lots. In some cases they can buy a major portion of, or even the total output of supplier factories. This results in getting big price concessions. The vendors can provide superior quality, delivery, and service since they are catering to big customer. Details of disadvantages of decentralized department can be seen as we discuss advantages in centralized system. MATERIALS MANAGEMENT AN INTEGRATED VIEW Various components of the management of materials are as: Purchasing Inventory Control Storage and material handling Physical distribution of materials Each of these are equally important & although some division of responsibility and authority is necessary for dealing with them. The decision taken by a Purchasing executive will have to be modified by the consideration of inventory control, the decisions taken by the inventory control have to be taken in the light of feedback provided by the purchasing department; similarly, inventory control has to reckon considerations of storage and handling of materials and vice-versa. Physical distribution and its attendant problems have their own feedback effect on control of inventories of finished goods and therefore on work-in-progress and raw material inventories. In short, there is an interrelationship between the different functional elements of materials management. ADAPTABILITY CONSIDERATIONS: There should be enough adaptability in the system to take into consideration abnormal situations as and when they present themselves. In this connection a frequent interaction with other related departments such as purchasing, logistics, etc. is very essential to achieve goals of the organization. Similarly the purchasing department should be aware of the various components of cost related to inventories, the problems of inventory keeping, so that their job of getting information about the supply market and feeding relevant information back into the organization is facilitated. Adaptability considerations necessitate integration of various components functions of the management of materials. INVENTORY AS A PART OF PRODUCTION STRATEGY: The inventory control department is often a part of production planning and control. After all, inventory of raw materials and work in Progress are kept to facilitate the production function. Therefore, inventories have to be considered along with other cost and problems of production as the objectives is to minimize the totality of production related cost of which cost of materials is one component(and a major component). The whole gamut of production cost includes wages- regular and over time, overhead cost and the cost of materials. Optimizing only the material cost may result in sub optimization of the overall production costs. Due to labour and machine capacity availability constraints, what may appear to be an optimum decision ( given by an inventory control model) may not fetch adequate result for the production function as a whole. Inventory control and material planning should form a part of production planning exercise. The decision about labour allocation, the quantities of different products to be produced at different periods of time in the year, the allocation of machine capacity, and the inventory of Work in Progress, finished goods and raw materials is to be carried may be taken together. Decision of how much to produce and how much to store cannot be taken without a proper understanding of the availability of the storage space, of the characteristics of deterioration of materials, of the risk and costs of handlings materials, of the cost of maintaining components parts and materials in the stores and warehouses. Stores, warehousing, and material handling have inputs in materials stocking or production decisions. ORGANIZATION EFFECTIVENESS: The cost is not the only objective of the materials management function. The primary objective of the materials management function is to ensure a continuous or an uninterrupted supply as far as possible to production, the ultimate objective being that the customer is served to his satisfaction. The organization may use any system but the first requirement is that the suppliers should be adequate for production. To achieve this, it requires appropriate setting of service levels, consideration of sourcing , an effective physical distribution network with adequate number of warehouses and facilities for movement.this helps the organization to produce and deliver its goods on time as per the contracted schedule or as per the demands of the customer. In short, the organization „effectiveness ‟aspects should not be forgotten in the zeal to produce „efficiencies‟. A MULTI-LEVEL INTERACTIVE PROCESS: From purchasing to receipt, to inventory-stocking, to production and storage of in-process and finished goods, to the distribution of the produced goods is one continuous or integrated system of operation where the material flow from the external supply market to the customers of the company. The management of materials will not be effective if this entire flow is not kept in view. Profit The good management itself is the stepping stone for profit of the organization which can be explained with the few points as given below: To take maximum production, the organization should always have the buffer stock in hand. The level of buffer stock to be maintained is based on planning and experience. If this is not done, it might lead to loss of production and labour (Sitting ideal). Our stocking may lead to loss in profit by the way of interest cost. Judging constantly the prices of raw material, the demand supply level and the seasonal factor level also plays an important role in the profit of the organization through material management. Many a times the quantity discount is an important factor in deciding the quantity of a material to be purchased at a given time.