What is Materials Management?
Materials management refers to a method of planning, organising and controlling activities concerning the flow of materials in an organisation. It is an important function of an organisation which ensures proper planning and acquisition of materials within its supply chain. The materials are required by the organisation to complete its production process. With the change in the economy, technology, society and environment, this function has become more professional and complex.
Table of Content
- 1 What is Materials Management?
- 2 Concept of Materials Management
- 3 Objectives and Importance of Materials Management
- 4 Classification of Manufacturing Materials
- 5 Materials Planning
- 6 Materials Planning at Micro and Macro Levels
- 7 Systems Approach to Materials Management
- 8 Dynamics of Materials Management
Materials management requires the delivery of quality products or services on time at the lower price that imparts a superior value and creates a competitive edge. Various manufacturing organisations use the raw materials in their processes to manufacture the products which are more beneficial and useful for the end consumers than the original raw material.
The wood from trees is transformed into chairs and tables, iron ore is the mineral resource that is extracted for converting into steel, and steel is used in the process of manufacturing refrigerators, cars, utensils, etc. This process of transformation through the methods of manufacturing or production helps in making the society wealthier and eventually leads to a better standard of living.
Concept of Materials Management
Materials refer to inputs to the production process. Most of these inputs are converted to finished goods. These materials can be raw materials, work-in-progress, finished goods, spare parts and components, operating supplies such as lubricating oil, cleaning materials, and others, required for maintenance and repair. Materials management is a basic function of the business that adds value directly to the product itself. It involves all activities related to materials except those directly concerned with designing or manufacturing of the product.
For example, a car manufacturing organisation has to purchase various materials for producing a car, such as wheels, engines and windows. The process through which these materials are sourced, purchased, stored and utilised is materials management. Materials management deals with controlling and regulating the flow of materials in relation to changes in variables like demand, prices, availability, quality, delivery schedules, etc. Thus, materials management is considered to be preliminary to the transformation process.
In the words of Bethel, material management end when the correct finished product in proper condition and quantity passes to the consumer. The movement of materials in an organisation goes through three phases; first raw materials are acquired by the manufacturing organisation.
Secondly, raw materials go through the process of manufacturing and ultimately finished goods reach the end consumers through a physical distribution system. This entire process involves many complex stages which include the process of outsourcing, global sourcing, shorter lead time, price determination, logistics issue, mode of transportation, maintaining a long-term relationship with suppliers, methods of information technology, legal issues, etc.
Objectives and Importance of Materials Management
The main aim of materials management is to procure high-quality products at the lowest possible cost by having accurate information regarding the availability of materials. Materials management contributes to the profitability of the organisation through coordinated efforts of stock control, inspection of the material received in the organisation, transportation, material handling operations etc.
Apart from that, the following are some other objectives of materials management:
- To ensure efficient materials planning and scheduling of production
- To make efficient decisions related to buying or purchasing
- To prepare required specifications and standardisation of materials
- To facilitate product’s development and designing
- To forecast the quantity and demand for materials requirements
- To maintain quality control of purchased materials
- To ensure material handling with value analysis and value engineering
- To develop skills of the workforce in materials handling
- To ascertain a smooth flow of materials in and out of the organisation
Let us understand the objectives of materials management with the help of an example.
ABC Ltd. is an Indian water heater producer. One of the company’s plant is located in Bengaluru. The company faced a number of problems related to materials in the previous month. Some of the events that took place were unacceptable and detrimental to the company’s performance.
These events are as follows:
- The production line was on halt as the pressure and temperature relief valves from its suppliers were shipped to its Kanakpura plant instead of Bangalore. This resulted in a delay of one week.
- 100 units of water heaters were scrapped after it was discovered that the anticorrosion anodes were defective. The anodes were not inspected because the warehouse employees forgot to inspect.
- The warehouse manager over-counted the available inventory of insulation tubes, which resulted in delays in completing finished units.
In the above example, the following objectives of materials management are not met:
- The appropriate time of acquisition and purchasing
- Maintenance of standard quality of materials by the shipping and warehouse department
- Effective inventory management practices
Classification of Manufacturing Materials
Manufacturing organisations that produce goods for sale to customers (including merchandising organisations) generally maintain three inventory accounts based on material. The classification of materials is as follows:
Raw materials refer to goods purchased by the manufacturer to produce finished goods for sale. These can be further divided into two subcategories
- Direct materials: These are materials incorporated in the finished product, for example, steel and wood.
- Indirect materials: These are materials that are not a component of the final product, but used as part of the manufacturing process, for example, light bulbs and containers.
Sometimes, raw materials may be declared obsolete since they are no longer required for manufacturing goods or because they get damaged in storage. The significance of raw materials as an inventory is primarily to mitigate disruptions in production planning, and to reap profit from discounts on bulk purchases, safeguard against market volatility etc.
These include materials that have partly fulfilled the production process. Excessive work-in progress hinders process flow; thereby, minimising the amount of workin-process in the production area. If work-in-progress inventory is allowed to build up between work centres during transit, it creates the possibility of a series of defective units to pile up before being discovered.
Apart from building of defective units, the pile of work-in-process can require extra manpower for accelerating the progress which can put the whole production system off balance. To minimise possible problems created by build-up of work-in-process units, work-in-progress inventory should be shifted from one work centre to the next unit at a time.
Finished goods inventory includes items that the manufacturing process has completed, or items that have been procured in finished form and are waiting for resale. When items are procured in finished form they are known as merchandise.
An organisation needs to an adequate level of finished goods inventory for various reasons, such as:
- Better market penetration: Market penetration requires inventory to be readily accessible at all times so that items can be made available to consumers at a short notice at various locations. Non-availability of inventory at a particular location will allow a competitor to take over, thereby necessitating the holding of finished goods inventory at various sales locations.
- Satisfy customer demand: Depending on the location and size of the market, demand pattern, transport and lead times, holding of finished goods at various locations may be necessary to ensure that suitable product stock is available.
- Overcome transportation and physical barriers: At times, the physical location and terrain of the market along with the condition of the transport network result in long lead times for servicing and require storing of finished goods inventory at nearest locations.
- Plan according to local tax and other government regulations: In countries that do not implement GST, regional state taxes may apply. The rules for these may vary state wise, such as tax rebates for some specific product category. This might lead to an increased demand from neighbouring states and require adequate inventory holding.
- Cope with long production lead times: Holding finished goods inventory is necessary in cases where the production lead-times are long.
- Speculative benefits: In case an organisation foresees increases in industry prices, taxes etc. it might result in an overall increase in product. In such case the organisation is likely to buy and hold huge stocks of raw materials at existing prices. It might also hold up finished goods expecting an imminent increase in sale prices.
- Dodge certain costs: Finished goods inventories sometimes help organisations to decrease sales management and ordering costs, stock-out costs and transit costs.
In a manufacturing organisation, bringing out the perfect output is as important as bringing it out at the right time with the optimal utilisation of resources. Production can probably be deduced as a blend of procurement, manufacturing activities and cumbersome activities which need meticulous planning as in ‘what material to purchase’, ‘when to purchase’ finished product, ‘how best the manufacturing process could be designed’, ‘what could be ideal inventory be’ etc. There is no one solution that fits every organisation.
The needs, processes, requirements and the business as a whole varies from organisation to organisation and the implementation of materials planning in the organisation differs accordingly to align the business. Materials planning alludes at holding the least inventory possible which can cut down costs incurred by the company. In the days prior to the advent of the concept of materials resource planning, great importance was attached stacking and storing a good amount of raw materials (otherwise known as inventory) required for undertaking production activities.
Material requirements planning helps an organisation in the following ways:
- To have the required components and raw materials in-hand for the process of production to run smoothly on a schedule
- To ensure that the process of production is synchronised with the method of Just-in-Time (JIT) by keeping materials and inventory at just the required levels. The required resources should be readily available for keeping the production on track
- To have a proper plan for the production schedules for meeting the demand of the customers on time.
Material requirements planning is basically a part of inventory management that helps production managers in scheduling and placing orders for items of dependent demand. These items are basically components of finished goods, such as raw materials, spare parts and subassemblies. The amount of inventory of these items depends on the level of production of the final product. For instance, dependent demand inventory items in a plant of a bicycle manufacturing organisation might include aluminium, tires, seats and bike chains.
Materials Planning at Micro and Macro Levels
The basis for materials planning is to anticipate the demand for the final products. Materials planning can be defined as a process of determining the requirements of raw materials, components and other items needed for production within the economic investment policies.
It is affected by various micro and macro factors, which are explained as follows:
- Macro factors: These factors include rate trends, business cycles, government’s import and export rules, credit policy and so on.
- Micro factors: These factors include corporate objectives, plant capacity utilisation, working capital, lead times, inventory levels, delegation of power, seasonality, communication system.
Systems Approach to Materials Management
Materials management is perceived as a system of ensuring timely availability of products expected by customers at the best obtainable cost of manufacturing. Any glitches at any stage of production can lead to low organisational productivity. This calls for coordinated actions of materials planning and controlling at various stages of its flow in production or service system.
These coordinated actions address problems that are interdependent and affect each other. For example, the materials management department and inventory department work hand in hand. It is the inventory department that gives signal to the materials management department in case any new orders are to be made. Any problems in the functioning of these two departments can lead to unnecessary delays in production.
Dynamics of Materials Management
The materials management system is a part or sub-aspect of a larger system in an organisation. It aims to provide product or service. An ideal organisation is made up of series of cause-consequence dependent sub systems, i.e., modules which represents division based on functionality and this is a complex process with large numbers of feedback loops which are necessary to keep the operations stick to goal. This interdependence sometimes affects strongly on the final result of behaviour dynamics of organisational business system.
The result of dynamics behaviour of business-production process can be manifested with fluctuation of relevant business variables, such as speed of supplying raw materials, speed of arriving the raw materials, speed of finishing the final products, state of unfinished production, state of finished goods inventory, speed of shipment, state of productive capacities, state of credits, debt, cash-flow, gross income, net income, speed of investment new capacities policies, etc.
Figure shows the business production process dynamics, i.e., organisational production system to be made up of direct or indirect flows influence on some or even all listed indicators (production relevant variables):
Thus, it is requisite to have a prior knowledge of this production process dynamics in order to define relationship between these indicator-variables and between every single module. Furthermore, it is possible to identify ineffective parts of such business organisation system by necessary knowledge of this business-production processes and continuous modelling with system dynamics. Furthermore, with simulation of dynamics processes of production organisation different behaviour of this organisation can be predicted, as response to different stimuli, i.e. test functions.
For stimulus (known as test functions), inputs in such processes in consequence consideration can be taken changes in the markets, such as increase or decrease in credits for sale products or debit of this organisation, introduction of new production equipment, change of supplier of components or materials, etc. Subjecting the production organisation to different scenarios which are stipulated with changes in the market production organisation can become more flexible, adaptive and robust dynamics of materials management can be studied.