INSTITUTE OF SUPPLY AND MATERIALS MANAGEMENT

(Incorporated by Act of Parliament No. 3 of 1981)

HO No. 01/01

COURSE: Graduate Diploma in Purchasing & Supply Chain Management

MODULE: No. 01 – Principles in Purchasing and Materials Management

SUBJECT: The Purchasing & Materials Management Functions

1. IMPORTANCE OF MATERIALS

a. Introduction

An organization, in the public sector or in the private sector , cannot function without
supplies, materials and equipment.

For an organization to operate effectively and efficiently there must be a proper mix of what
management authority call the six Ms namely Men, Money, Materials, Machinery, Markets,
and Management .

The relative importance of the materials component in this mix has changed considerably over
the years.

Before the 20th century , materials were readily available and cheap. Spectacular
technological advances made after the turn of the century and the rapid growth of mass
production, Materials Management assumed importance.
So much so that in most industries today, the materials component amounts to more than
50% of the total cost of production.

In this regard Lee and Dobler state :

“ The introduction of better machines, coupled with scientific management to develop and
utilize more sophisticated man-made systems, made possible the factory system turbine, the
electric motor, automatic controls, changed the entire complex of manufacturing. Gradually
materials became more complex, labour become more specialized, and mechanization
increased . These changes inevitably led to specialization in manufacturing and to longer
production runs.

As the volume of production increased, unit labour costs decreased. The reduction of, unit
labour costs increased the relative cost and importance of materials in the production
process . Percentage - wise labour costs went down and materials cost went up. This
change in the value of materials relative to total production costs continues today”

1
 The critical importance of materials increased still further after the energy crisis of 1973.

In this millennium , the function of purchasing and material's management has assumed
greater importance than ever before .The function is crucial as it involves managing
resources in a more systematic manner. Market research and forecasting for supply markets
and purchasing departments being more involved in product planning for raw materials
and components, to manage more consciously the materials flow.

b. Materials in the Public Sector

All governments buy and use a very vast and varied range of supplies , materials and
equipment. The proportion of their budget spent on materials has been steadily increasing
year after year, both , in developed and developing countries.

In developing countries, with colossal sums spent on welfare in varied fields viz. medical
and social services , agriculture, transport , education, irrigation, etc. the proportion is
around 20 to 25 percent of the annual budget expenditure , for its various operations . The
Government of Sri Lanka spends over 35 percent of its annual expenditure budget for the
procurement of recurrent and special requirements of materials and equipment .

State manufacturing Corporations spend about 50 percent of their respective master budgets
for the purchase of raw materials, fuels, spare parts and components etc.
required for production works.

c. Materials in the Private Sector

In private industry, generally over 50 percent of its sales revenue is spent on materials,
supplies etc. In industry in Britain for example , on an average 53 percent of every sterling
pound worth of goods sold is accounted for by goods and services purchased. In Sri Lanka
the large corporate industrial undertakings too allocate 50 percent of their master budget to
their materials budget.

2. PURCHASING AND MATERIALS MANAGEMENT

a. Definition

Purchasing and Materials Management can be defined as an integrated management

approach operation involved in planning and forecasting of material requirements,
purchasing, issuing and distribution , from the initial stage when the need arises up to
the stage when the need is satisfied. In other words , it is concerned with the total material
flow in an organization . In the certain manufacturing organizations in the west, production
control is also included in the materials management function.

All the activities connected with the materials flow have to be effectively coordinated and
integrated so as to afford the optimum service at the minimum cost.

2
 b. Purchasing and Material Management a dynamic function

Purchasing and Materials Management is both a practical and dynamic science. The
knowledge and techniques embodied in this discipline is the product of the policies and
practices developed by practical and progressive supply men who have successfully
operated in the materials field.

It is a dynamic function because there is constant development of new techniques of

purchasing and materials management based on technological advances. The increasing
use of network analysis , operational research , information technology , value
analysis/value engineering techniques , etc. in material operation point to the dynamism of
the profession.

3. THE SCOPE OF PURCHASING AND MATERIALS MANAGEMENT

a. Related functions

The scope of purchasing and materials management fall broadly into main areas of
Purchasing, Storage, and Inventory (Stock) control. In addition to these basic activities of a
purchasing and material management organization , there are related functions which
have to be carried out by materials managers to achieve optimum results and there by
contribute effectively towards the attainment of the corporate goal of the enterprise.

These functions include short term , medium term and long term planning of materials,
supplier selection and evaluation, resource development , value analysis and learning curve
techniques, make or buy concepts , sub-contract strategy, production control (in some
organization), purchasing research and market intelligence, operations research, traffic and
distribution. These will be dealt with in the lectures to follow.

b. Purchasing

The purchasing function concerned with the process of buying materials efficiently and
economically .There are seven (rights) responsibilities in purchasing which can be briefly
stated as follows.

To buy the RIGHT ITEMS of the RIGHT QUALITY, in the RIGHT QUANTITY, from the
RIGHT SOURCE , at the RIGHT TIME , delivered at the RIGHT PLACE , and the RIGHT
PRICE. The Right Price is stated last , not because it is least important. Indeed, it is of
much importance. It is influenced by the first six rights mentioned. Explanations of these
RIGHTS will be dealt with at a later stage.

What is important to remember now is the that achievement of these RIGHTS in practice
is no easy task. It may be necessary to give weightage to a particular “Right” to obtain the
optimum benefit in the purchase of the items required.

3
 The attainment of the objectives in practice calls for a high level of proficiency and
professionalism on the part of the supplies manager.

Purchasing is no longer regarded as just a Cost Centre; more importantly it is considered as

a Profit Centre.

The profit-making potential of efficient purchasing is brought out clearly in the following
example:
Saving 10% on labour

Saving 5% on materials

Labour 10,000,000 9,000,000 10,000,000

Materials 50,000,000 50,000,000 47,500,000
O/Heads 30,000,000 30,000,000 30,000,000
Profit 10,000,000 11,000,000 12,500,000
Total Rs. 100,000,000 100,000,000 100,000,000

It will be seen from the above figures that 5% saving on the materials component has
produced an additional profit of Rs.2,500,000 while 10% saving on the labour component
(double the percentage saving on materials) has produced only Rs.1,000,000 profit , The
profit making potential of efficient purchasing is very clear. On the other hand if buying is
inefficient, losses will arise.

In this connection David Farmer states: “ What should be stressed is the potential inroad that
can be made in a company’s profit if supplies work is carried out inefficiently. Quite apart
from making either a direct saving or a direct loss, the supplies function can have a major
effect on a company’ s profit performance by its job efficiency”.

In recent years the purchasing and materials function has undergone complete
re-evaluation by business management . Materials Management is something described as
‘the last gold mine’ by business managers. It is among the few of the specialized business
functions to be centralized and given the responsibility and the authority for making major
contributions to management.

c. Inventory (Stock) Control

Inventory (Stock) Control is considered the nerve center of the activity.

For effective inventory control of stocks, the materials or supplies manager should
determine:

(i) What items to Stock.

(ii) How much to purchase for stock.
(iii) When to purchase.
The aforesaid are basic considerations . There are so many dimensions, in the inventory
control exercise. Several systems of inventory control have been tried and applied in

4
 progressive organizations in recent decades. The type of inventory control system/s to be
adopted in an organization depends on several factors and situations, which will be
discussed when this function is dealt with.

In recent years, many governments have taken serious notice of the colossal inventories
held in private enterprises and in the government / public sector. The problem of inventories
assumed great importance in India in 1974 consequent on the finding of the Tender
Committee which revealed that inventories were stock piled for speculative purposes.

According to the Census and Statistics Department of the Sri Lanka Government the
aggregate national inventory in 1994 amounted to Rs.1.9 billion. In the government sector
excessive inventories have been built up over the years particularly on the Stores Advance
Accounts operated by large departments.

d. Storage

The ideal situation would be not to carry stocks at all, but to ensure that supply is available
without interruption direct from the supplier to the user, in practice this cannot be achieved
to a large extent. The Just-in-time (JIT) and other techniques such as the Materials
Requirement Planning System (MRP) Which minimize stock holding of raw material
components, work-in-progress etc. to a considerable extent are used in developed countries
like Japan, USA and Europe.

However, generally no organization can function without stocks. They stand between input
(receipt) and outputs (issues) de-coupling the two processes, and absorbing the fluctuations
in demand and supply, maintaining in the process a smooth flow of supplies and materials
for uninterrupted operations.

Stocks tie up a good portion working capital which could otherwise have been used to
obtain profits or dividends (opportunity cost). Company Directors and government
authorities nowadays are very much concerned with the size of stock holdings which tie
up considerable proportion of working capital, reducing thereby liquidity and the cash flow.
Storage involves such functions as protection and preservation of stock, stores layout, stock
location systems, classifications, stock accounts and records , materials handing etc.

It has been estimated that the cost of stock holding can be as high as 35 percent of the
annual value of stock held in countries like USA, Japan and in Europe. In Sri Lanka and
India stockholding costs are about 25% of the annual value of stock held.

4. PURCHASING AND STRATEGIC PLANNING

a. A Strategic function

Despite the growing awareness on the part of top management of the crucial importance of
purchasing and materials management , in corporate operations and profitability, the

5
 traditional view that purchasing is an administrative and not a strategic function still persists
particularly in the public sector.

The reason for this is the reluctance of purchasing managers to get themselves involved,
unlike production and marketing managers, in strategic planning which is considered
nowadays so vital for the survival and profitability of an enterprise.

Igor Ansoff, Peter Ducker and other management theorists regarded Purchasing as an
administrative function up to recent times. The reason generally advanced to support this
view are several . The chief of them being Purchasing failure to present management with
planning data; its failure to collect analysis and interpret important data on supply
markets; its lack of professionalism, skill and knowledge required for the collection of data ,
their analysis and projection. Igor Ansoff, in his classic book ‘Corporate Planning’ is quite:
emphatic when he stated that purchasing was administrative rather than` strategic .
However, when he was challenged on this statement at a later date , Ansoff had stated he
had since changed his views. He had remarked that “this typified what happens in
management ; we tend to focus on what we believe to be important , and it took the crisis of
1973 to emphasize the potential impact of supply”

b. Purchasing and materials management interfaces

The inter – relationship between materials management, production, marketing and finance is
shown in the diagram below: -

Marketing Production M M Dept. Finance

Dept. Dept. Dept.

Sales Production Materials Finance

Forecast Schedule Budget Budget

Output Transforma Input Finance

Distribution Purchasing
-tion

As will be observed in figure above, Purchasing and Materials Management have to interface
closely with the other main functions of Production ,Marketing and Finance.

The success of a corporate enterprise depends on effective coordination and liaison that
subsist between all these functions. Planning strategy, which is a part of the other three
functions , cannot exclude purchasing strategy.

**********