The Impact of Material Management and Purchasing in an Organization

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By: Site Engineer, Staff

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Materials management and purchasing over the years have been very strategic in industrial and manufacturing organizations because of their importance in production. It is an unshakeable fact that no manufacturing organization can survive without materials.

Materials are equally lifeblood of manufacturing concern just like money. Purchasing equally plays a very important role in any organization because those materials to be used in the organization are purchased by the purchasing department.

Entrepreneurs, however, are introduced to the knowledge of materials management because, in industrial and manufacturing businesses, the cost of materials is the main major cost that is truly variable. All the other major costs are more or less fixed (e.g., machinery and equipment, vehicles, houses, land, etc).

The profit of the company will, however, improve if the material’s costs are reduced since they are variable. Effective management of materials and purchasing is, therefore, demanded from the entrepreneur, if his organization should be profitably managed.

Materials Management

Materials are any commodities used directly or indirectly in producing a product or service. They include raw materials, parts, assemblies, and supplies. Managing materials in most companies are crucial to their success because the cost of buying, storing, moving and shipping materials, accounts for overall of a product’s cost.

Productivity means driving down the cost of doing business, and doing the job of materials management better is increasingly seen as the key to higher productivity in many firms today. Operations managers are working hard to develop better ways of managing materials, so that on-time deliveries, quality, and cost can be improved in such a way that their companies can survive in an increasingly competitive world.

A materials system is the network of materials flows within a production system, including materials at suppliers, in transit from suppliers, in receiving, in raw-materials warehouses, in in-process inventories, being processed in production departments, being moved between the production operations, being inspected in quality control, in finished goods warehouses, and in transit to customers.

Materials system of a manufacturing plant studying material flows, the acquisition, storage, movement, and processing of raw materials components assemblies, and suppliers is a good way to understand manufacturing. Also, services such as retailing, warehousing, and transportation companies can be viewed as systems of material flows. In these systems, all organizational functions are critically affected by the planning and control of the materials system.

Materials management is all the management functions related to the complete cycle of materials flows, from the purchase and internal control of materials to the planning and control of work in process to the warehousing, shipping, and distribution of the finished products.

This definition shows that a holistic approach to materials management starts from purchasing and procurement, stores and warehousing, traffic, production, planning and control, inventory management and control, to physical distribution of the finished products to customers.

This is illustrated below.

………………………………………………………………………………….

Input -> Conversion or Transformation Process -> Output

………………………………………………………………………………….

It is imperative to note here that each of the above segments of production represents a system on its own. One can now define materials management as the management of the flow of materials from its acquisition from suppliers to its conversion into the firm’s finished products.

Currently, some organizations are beginning to centralize their diverse materials management functions in one department headed by a materials manager. The executive position coordinates all the activities of the materials system and bears total responsibility for the continuous supply of materials of low cost and specified quality when and where the operating department and customers require them.

Materials management includes purchasing, logistics, warehousing and expediting. These activities form the framework for studying the nature and scope of materials management.

Purchasing

With the increase in the global competition for world markets, all manufacturers are working hard to reduce production costs. One of the most lucrative areas for this is in reducing materials costs. As the scope of the business has expanded to global proportions, the purchase of materials has moved to the world stage.

Increasingly, materials are bought worldwide, transported to domestic and offshore manufacturing sites, and they’re shipped to markets throughout the world. This stretched out supply chain has become necessary to offset increased competition for scarce materials. But the increased scope of supply has created an environment where materials are more subject to uncertain supply. This has also increased the importance of purchasing functions today.

Several factors are increasing the importance of purchasing today. The tremendous impact of materials costs on profits, the increasing prominence of automated manufacturing, and increasing global competition.

The purchasing department buys the raw materials, purchased parts, machinery, suppliers, and all other goods and services used in production systems from paper clips to steel to computers.

1. What Purchasing Managers Do

Many organizations have different organizational structures as regards whose level of authority the purchasing manager reports to. This should depend on the size of the organization but the most important aspect to look into here is the duties of a purchasing which include:

  • Maintains a DataBase: The purchasing manager maintains a database for information about the kinds of products that suppliers produce or capable of producing information about the quality of their products and information about their costs or prices. This database information helps the purchasing manager to conduct periodical supplier surveys to assess the supplier’s ability to meet on-time delivery quantity, quality and cost requirements.
  • Acts as the Interface Between the Company and Its Suppliers: The communication between suppliers and the organization is done through the purchasing manager. The communications from any department in the organization to the supplier as regards any supply is done through the purchasing manager.
  • Select Suppliers for His Supplies: The purchasing manager selects his suppliers for his supplies based on certain criteria: price, quality, quantity, and promptness of deliveries.

2. Mission of Purchasing

The company’s strategic objectives are always achieved collectively by all the company’s departments especially the purchasing department. The mission of purchasing is to sense the competitive priorities necessary for each major, product or service (low production costs, fast and on-time deliveries, high-quality products or services, and flexibility) and to develop purchasing plans for each major product or service that are consistent with operations strategies.

Another mission of purchasing includes profit-making potential. Research shows that firms spend at least 50-60% of the total production cost on materials. Bearing in mind this high percentage of the material cost to the total company cost, entrepreneurs should insist on proper management of the purchasing function as it could contribute tremendously to the profit potential of their businesses.

This is because a small amount saved in the procurement of materials can translate into a substantial amount of profit.

Objectives of Purchasing

The objectives of purchasing include:

  • To ensure a good relationship with suppliers.
  • Ensure a reduction in inventory losses such as losses due to deterioration, theft waste and obsolescence.
  • To ensure a constant flow of materials.
  • To reduce inventory cost to the barest minimum.
  • To maintain a constant supply of the qualitative standard of materials.
  • To ensure a reliable alternative source of materials supply

The purchasing manager should, also, ensure that he buys materials of the right quality, in the right quantity, at the right price, from the right source, and at the right time to ensure an optimal purchase.

Basic Purchasing Instruments

The basic purchasing instruments of the purchasing department include:

  • Request Form for Quotation: These instruments invite prospective suppliers to bid or quote on the goods or services. These forms usually include material specification, quality of purchase delivery date or schedule desired; where goods or services are to be delivered, and date that supplier selection will be completed. Requests for quotation usually request the following from each prospective supplier, the price per unit and total price, information on whether the suppliers pass the freight charges, cash discounts and other terms of payment, delivery date or schedule, and any special conditions of the suppliers. This document is prepared by the purchasing department and sent to suppliers that are believed to be capable of meeting the cost.
  • Purchasing Orders: A legal commitment by the buyer is present when a purchase order is issued in response to a quotation from a supplier. When a purchase order is issued absence of a request for a quotation, suppliers acknowledge acceptance of purchase order. Purchase order forms usually include: Purchase order number, the quantity of the goods or services, material specifications, date and location for delivery, shipping and billing instructions, the price per unit and total price, cash discount or other terms of payment and any special terms of the purchase. Purchase orders are the most important purchasing instruments. They are the basis of the suppliers, authority to produce the goods or services, and they represent the buyer’s obligation to pay for the items.
  • Material Specification: Material specification originates with the materials in operation. Material specifications are a fundamental means of communicating what materials production wants purchasing to buy and what purchasing authorizes supplies to supply.
  • Purchase Requisitions: The acquisition usually includes identification of what is to be purchased, requested delivery date or schedule, account to which the purchase cost charged, where purchased goods or services are to be delivered, and approval by the manager charged with the authority to approve the purchase. These purchase requisitions usually originate from the departments that will use the materials.

Just-In-Time (JIT) Purchasing

The JIT philosophy was popularized by Toyota Motor Company in Japan during the mid – 1970s and was transferred to the United States at Kawasaki’s Lincoln, Nebraska, plant around 1980.

The JIT approach to purchasing is part of the broader JIT philosophy of manufacturing. This philosophy organization should attempt to eliminate all sources of waste, including, any activities that do not add value, by focusing on having the right part at the right place at exactly the right time. Therefore, in applying this concept to purchasing means having materials arrive only as required, rather than holding backup, parts in inventory for some time. This approach enables an organization to minimize holding costs and to save space that is usually taken up by inventory waiting in the production area.

The key elements of JIT Purchasing are:

  1. The use of the JIT method should be introduced to the suppliers for proper synchronization of work.
  2. A long-term relationship between suppliers and the purchasing department should be redeveloped.
  3. Suppliers’ selection should be based on the price, delivery schedule, product quality mutual trust, and cooperation.
  4. Make sure goods are delivered at the doorstep of the production line.
  5. The relationship between customers and suppliers should be cooperative, not adversarial.
  6. For promptness, parts are delivered in small standard size containers with a minimum of paperwork, and exact qualities.
  7. Locate your suppliers around your surroundings or at a cluster area for easy and fast coordination and supply
  8. Materials should be delivered in perfect quality.

Inter-Department Relationship Between Purchasing Department and Other Departments

There is a horizontal inter-department relationship between the purchasing department and other departments to ensure coordinated integrated function for successful firms.

This horizontal communication relationship includes:

  • Purchasing And Production: The purchasing-production relationship begins when production gives its manufacturing schedule to the purchasing department while purchasing translates this into a procurement schedule. Again, the purchasing department should be communicated to the production department, when there is any production change to be carried out.
  • Purchasing And Sales: There should be proper management of purchasing so that things are purchased at a reasonable price that will allow the company to sell at a competitive price. Such purchasing situations should always be communicated to the sales to guide them in their sales.
  • Purchasing and Engineering: The relation here calls for understanding between the two departments. The materials specified by engineering must be economical to procure and also be sure that such types of materials are available in more than one source, and then it becomes the duty of the purchasing department to decide from which source to procure to have an advantage in material cost.
  • Purchasing and Finance: There should be an inter-exchange of purchasing and finance plans between the two departments to avoid poor financial planning and poor purchasing which will, in the long run, affect the organization’s performance. Purchasers should note that over buying cheaper commodities because of the cheap price and overstocking them will, in the long run, become expensive when they are not immediately used and in some cases get spoilt.
  • Purchasing and Stores: The purchasing purchases and semis to the stores to store and keep the inventory book for all the goods. The purchasing department sets the minimum stock and re-order points. The records and goods arc then kept by the store that knows the records and the rate of use of those materials. The communication relationship then exists at the time of receiving or re-ordering of items. The stores keep mute when a particular item goes below the re-order level and nothing is ordered by the purchasing then the organization will suffer the poor communication severally.

Anytime there is a change in the cost of any item, the purchasing should always try to communicate the production and sales departments for proper costing. Similarly, how to distribute finished goods to customers is a critical question. These issues are central to the important materials management activity of logistics.

Logistics

Logistics is the management of the movement of materials within the factory, the shipment of incoming materials from suppliers, and the shipments of outgoing products to customers.

Production Control: Movement of Materials Within Factories

Production control includes such functions as assigning delivery due dates to orders, faster production scheduling, shop floor planning and control, and detailed production scheduling. Production control also includes the movement of materials within factories, which consists of the following activities:

  • Moving finished products from the final assembly and storing them in the finished goods warehouse.
  • Retrieving finished goods from the finished goods warehouse delivering them to packaging and shipping
  • Moving packaged finished goods to the shipping dock.
  • Loading finished goods into outgoing vehicles at the shipping dock.
  • Removing materials from incoming vehicles and placing them on receiving dock.
  • Moving materials from the receiving dock to inspection.
  • Moving materials from the inspection to the warehouse and storing them until needed.
  • Retrieving materials from the warehouse and delivering them to production operations when needed.
  • Moving materials between production operations.

The management of the movement of materials within the factory may involve decisions about how to route batches of materials between departments. All of these movements of materials are coordinated by production control and are critical to effective operations management.

Warehousing Operations

Warehousing deals with materials that directly support operations. The first problems that must be addressed are when to place an order for each material and much to order. Orders are placed and shipments eventually appear in the receiving department, usually by either truck trailers or railroad cars.

Materials are routinely unloaded from delivering vehicles and held in temporary storage areas until quality control has tested them, confirmed their acceptability for use in operations, and released them.

Materials handling equipment such as forklift trucks, conveyors, straddle trucks, and pump forced pipelines arc use to place the materials into raw materials inventory. This inventory’s stored on pallets (a small base frame on which base and boxes of material are stacked), in high stacks, in storage tanks, or other means of holding raw materials.

In some firms, such as chemical processing plants, bulk materials are used as needed by operations departments without asking warehousing. In other facilities, however, a stock requisition is prepared by production control and forwarded to warehousing, requesting that materials be delivered to specific locations within production departments.

The record-keeping within warehousing requires a stock record for each item that is carried in inventories. The individual item is called a stock-keeping. Stock records are running accounts that show the on-hand balance, receipts, verified or corrected. It is customary today to use cycle accounting to maintain stock record accuracy in perpetual inventory accounting systems.

Cycle Counting

Cycle counting is an ongoing effort to count the number of units of each material in inventory compare this number to the balance shown on stock records, and reconcile the difference. The two-fold, and reconcile the purpose of cycle counting is to correct the stock records and, more importantly, to the inventory system and initially correct actions. In cycle counting, when a material is counted is determined by a counting schedule for that material. Material may be counted when it reaches its recorder point when a shipment of materials is received, or at a particular time interval.

High-value, fast-moving materials often tend to be counted more frequently. But how often we count an inventory item (monthly, quarterly, etc) should depend on two factors:

  • the history of the items inaccuracies, and
  • the difficulties caused if item counts are inaccurate.

An item that has a history of inaccurate counts and one that will cause big problems in production if counts are inaccurate should be counted more frequently. Fast-moving items that have inaccurate counts usually cause great difficulties in production schedules more often and when they do appear, the count can cause major changes in the master schedules, expediting split orders, panic shipment, procedures, extra transportation, and production costs, and ultimate goal of cycle counting is to reduce the inaccuracy of stock records to a very small percentage.

Expediting

This is the focusing of one or more persons’ attention on a particular order batch of materials to speed up the order through all or part of the entire materials system. De-expediting means slowing down an order.

Expediting or de-expediting is necessary usually because unforeseen events have caused an order for materials or products to be late or early.

Examples of some of these events are:

  • Parts being processed in heat-treat have encountered technical difficulties. The batch must be quickly transferred ahead of other materials if the annealing process is not to be delayed.
  • A customer increased the number of products ordered. The expanded order-quantity now exceeds finished goods inventory, and additional products must be quickly produced.
  • A supplier fails to ship an order for materials when promised. Emergency shipping procedures must be employed to get the pans in-house in time to avoid stock out or disruption of the production processes.

Expediting most often is necessary because of the uncertainties present in production systems customer demand, material delivery times, and in-house processing times are but a few of these uncertainties. Materials management must be flexible enough to accommodate these uncertainties by reacting quickly when the unexpected happens. All materials management employees periodically perform expediting, and this activity helps make materials systems flexible.

Performance Criteria Rank

  1. The level and value of in-house inventories.
  2. The percentage of orders that are delivered to customers on time.
  3. The number and severity of stock-outs in in-house inventories.
  4. The annual costs of materials purchased from suppliers.
  5. The annual costs of transportation for materials from suppliers and for products to customers.
  6. Annual costs of operating warehouses.
  7. The number of customer’s complaints about poor services.
  8. Other factors such as profitability and manufacturing costs.

These performance criteria ranks are in the order of their importance, that companies have traditionally used to evaluate materials managers.

Given the importance of materials management today, how do organizations measure how well materials managers are doing their jobs? This list is, however, exhaustive as other important criteria have been added because of global markets, time-based competition, and total quality management now in vogue.

Above all, materials management is very vital to the success of any organization and should be taken very seriously by the entrepreneurs.

 

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