Materials Management

Materials management [MM] forms a part of the core of an Organization & has a very broad span of
operations. Procurement of raw materials/conversion to finished goods, distribution of saleable goods and
offering of after-sales services comes under the umbrella of MM.

Why is the MM function so critical & important? The answer lies in the fact that materials account for more
than 50-70 % of the total cost of a product, which goes as high as 98 % in the case of jewellery industry.
EFFICIENT MANAGEMENT of this function would enable an organization to manage their bottom-line
without much extra effort as illustrated below:

Assume that the total sales of an organization are Rs.10 crores, of which materials a/c
for Rs.6 crores, labor & overheads for Rs.3 crores, this leaves us with a profit of Rs.1 crore, which is 10%
of the turnover. Now imagine that we have to increase the profitability by Rs.30/- lakhs, this would entail
an extra sale of Rs.3 crores, which is a very Herculean task considering the market conditions / demand
for the products etc. On the other hand if we are able to reduce our raw materials cost by 5% in the
existing scenario by improving upon the production process/slight modification in the product design or by
using a substitute material or a combination of these strategies, we could still add the desired amount to
the BOTTOMLINE WITH THE SAME VOLUME OF SALES.

IN THE SAP R/3 REGIME, MM is pegged below FI/CO in the hierarchical order on account of its
importance as outlined above. The MM function is subdivided into the following sub-heads for better
understanding & control [1] consumption based planning [2] purchasing, [3] inventory management (raw
materials/finished goods etc) [4] valuation and account assignment, [5] warehouse management, [6]
invoice verification to advise the finance dept for release of payment.

The MM function can be broadly described in a nutshell as under:

The materials budget is prepared based on the forecast/budget prepared by the

Production planning dept, which in turn has been prepared based on the SALES BUDGET. While
preparing the materials budget due consideration is also given to needs of plant maintenance department
and the servicing spares needed for after sales service. For the ease of operations, all Materials used by
an organization are categorized into different groups, assigned proper codes for identification, which
helps compile the MATERIALS MASTER DATA. The suppliers’ details are maintained separately in the
VENDOR MASTER RECORD. After preparing the itemized materials budget, it is converted into a
financial document by assigning proper values to each item and forwarded to the Finance dept for
approval. The finance dept then accord its approval to the materials budget based on the Financial
Policies of the organization, giving due consideration to inventory carrying costs / general market
conditions, chances of obsolescence of the material etc. After the approval of the Finance dept, the
costing dept comes into picture which then co-ordinates with the MM dept for smooth operations. The
time frame for procurement/production & servicing requirements are all considered while issuing orders
as also the vendors’ characteristics viz. adherence to supply schedules/supply of std material as per
specification/economical pricing etc.

The expected qualities of a MATERIALS MANAGER are enlisted below:

• Outstanding & impeccable integrity.

• Intimate knowledge of the raw materials required / used in the production process and the
general production flow in the organization.
• Thorough understanding of organizations financial policies & their impact on materials
management.
• Up-to-date knowledge of the sources of supply, latest market trends by maintaining a thorough
database of catalogues/trade magazines/tech journals.
• Good understanding of various statutory /commercial laws of the central/state govt, local bodies
as applicable to the raw materials/finished goods of the organization.
 • Fundamental understanding of CONTRACTS ACT/SALE OF GOODS ACT/EXIM-POLICIES of
the GOVT.
• Knowledge of general insurance laws pertaining to transport/storage of goods of various classes.
• All standards pertaining to the materials used by the organization and their equivalent substitutes.

A simple flow chart of the activities of the MM dept is depicted below:

Purchase requisition-Request for quotation-Comparison of quotations-Issue of

purchase order-Goods receipt & invoice verification Posting of Invoice for release of payment.
The purchase function can be centralized or decentralized, depending upon the management policy.
Purchasing power / authority is always well defined leaving no room for ambiguity. Although centralized
purchasing is slightly expensive due to increased administration costs, it has the advantage of low price &
uniform quality buying on most favorable terms, economy in recording/accounting, availability of
specialized buying staff, reduction & elimination of surplus stocks. BILL-OF-MATERIALS is the most
important document in the MM department. It is an itemized list of all materials required for a
job/process/service. It gives the details of materials necessary the quantity of each item/substitute
materials that may be used when the original material(s) are not available. A complete exploded 3-
dimensional view of the various items also forms a part of the bill of materials.