building Materials administration can be defined as “the function responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as a pre-decided service can be offered at a minimum cost”.
By another definition, “materials administration can be said to be that process of administration which coordinates, supervises and executes the tasks associated with the flow of materials to, through, and out of an organization in an integrated fashion”.
Lee and Dobler define substances management as, “a confederacy of traditional substances activities bound by common idea – the idea of an integrated management approach to planning, acquisition, conversion, flow and distribution of production substances from the raw substance state to the finished product state.”
It has, directly or indirectly, impact on the activities of many related departments in the organization. Broadly, following can be identified as its main functions: From the above definitions, it is clear that the scope of materials administration is vast.
Based on the sales forecast and production plans, the materials planning and control is done. This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales.
This includes selection of sources of supply, finalization of terms of purchase, placement of purchase orders, follow-up maintenance of smooth relations with suppliers, approval of payments to suppliers, evaluating and rating suppliers.
This involves physical control of substances, preservation of stores, minimization of obsolescence and damage through timely disposal and effective handling, maintenance of stores records, proper location and stocking. Stores is also responsible for the physical verification of stocks and reconciling them with book figures.
The inventory control covers aspects such as setting inventory levels, ABC analysis, fixing economic ordering quantities, setting safety stock levels, lead time analysis and reporting.
Fig: building Materials administration
The fast developing Indian economy has placed before the materials manager a tremendous challenge and responsibility. In many organizations, materials form the largest single expenditure item.
An analysis of the financial statements of a large number of private and public sector organizations indicate that substances account for nearly 60% of the total expenditure.
The information on the average materials expenditure for different industry groups is shown in Table 1.
Table 1 : Average Material Cost as Percent of Total Cost
Thus, the importance of substances administration lies in the fact that any substantial contribution made by the substances manager in reducing substances cost will go a long way in improving the profitability and the rate of return on investment.
Such increase in profitability, no doubt, can be affected by increasing sales. But with the increased competition in the market, this alternative is not very easy to achieve.
Besides, some increase in the profitability can be achieved by concentrating on the substances cost which is typically a major rupee item for most organizations. In fact, as market pressure intensifies, organizations will be forced to cut down the costs and here, the substances administration steps in to play its role.
Since substances form major part of total cost, these offer a very good scope for reduction of total cost. A small percent in substances cost can result in large percent increase in profitability.
1000. Consider, for example, a small company has total sales of Rs. Total cost is Rs. 900. Thus, the profit is Rs. 100 which amount to 10% of the sales. Suppose, out of total cost of Rs. 900, substances cost is Rs. 600. Now if one percent saving in substances cost can be achieved, then the resultant saving is Rs. 6 (1 percent of 600) which directly adds to the profit, thus, profit becomes Rs. 106.
as a result, in this case, we can see that 1 % saving in materials cost results into 6% increase in profit.