Page 10 - DMGT525_MATERIALS_MANAGEMENT

Unit 1: Materials Management: An Introduction

Notes

Task Assume yourself as a material manager, what are the functions you would perform
and how?

Materials form the largest single expenditure item in most of the manufacturing organizations.
They usually represent 50 to 60 per cent of the total cost of the final product. An analysis of the
financial statement of a large number of manufacturing organizations reveals the fact that on an
average about 60 per cent of the total expenditure is locked up in materials.

Materials management determines three cost categories within the company which, in most
cases, have a substantial effect on company profits. In team, these are:
Materials Costs: These are those costs which arise for the procurement of raw materials, indirect
materials, fuels, semi-finished and finished products (goods), including delivery costs. In the
manufacturing industry they constitute the largest percentage of the costs of Management of
Materials.
Capital Costs: These cover primarily interest which accrues for the capital tied up in the stocks
of materials, semi-finished and finished products (good), including depreciation for value
adjustments which have to make.
Overhead Expenses: They cover the overhead expenses and/or cost centre expenses of all the
separate areas within materials management, including the sometimes considerable costs of
transport and packaging, electronic data processing and disposal.
Integrated materials management which is conceived as a comprehensive supply system can
substantially contribute to a company’s profits, via its systematic influence upon these cost
categories.

!
Caution The impact of the materials management department on company profits depends
on the importance of materials costs, the degree of which materials management can
control inventories of semi-finished products and work in process as well as finished
goods, and the amount of personnel assigned to materials management.
Materials management must nowadays make an active contribution to improving profit by
taking advantage of all opportunities for:

 Reducing costs (materials costs, capital costs, overheads), and
 Setting free the capital tied up in inventories and indeed in the whole pipeline from the
suppliers to the consumers in the market.

This inevitably calls for an integrated approach to materials management in the interest of the
company’s profitability:

 Purchasing must make its contribution to optimise the costs of materials:
 Directly by making full use of its opportunities in the procurement markets, i.e., systematic
procurement marketing, and

 Indirectly by early introducing its market knowledge into design and development
processes, i.e., even at the stage of determining the materials and parts to be used.
 The cost of tied up capital and overheads must be reduced by an integrated approach to
planning, controlling and handling of the flow of materials and goods in the entire supply
system from the suppliers to the customers, namely:

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