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Indira Gandhi

National Open University MS-56


School of Management Studies Materials
Management

Block

6
ORGANISATION AND APPRAISAL OF
MATERIALS MANAGEMENT
UNIT 19
Materials Management and its Organisation 5
UNIT 20
Materials Information System 26
UNIT 21
Control of Material Management and Performance
Appraisal 36
Expert Committee (as on 26th November, 1999)
Prof. A.K. Pundir Prof. A. Prasad
NITIE Deptt. of Business Administration,
Mumbai BIT, Mesra, Ranchi

Prof A.K. Mittal Prof. N.V. Narasimham


Deptt. of IME, Director, SOMS,
IIT Kanpur IGNOU , New Delhi

Prof. Amarlal H. Kalro Prof Madhulika Kaushik


IIM Kozhikode School of Management Studies,
Calicut IGNOU, New Delhi

Prof. B.S.Sahay, Prof B.B. Khanna,


Management Development Institute School of Management Studies,
Gurgaon IGNOU, New Delhi

Prof Sadananda Sahu, Dr. Himanshu Kumar Shee,


Deptt. of Industrial Engineering and School of Management Studies,
Management, IIT, Kharagpur IGNOU, New Delhi

Prof. Ranjit Singh Prof. A.M. Agrawal (Course Co-ordinator)


Deptt. of Management, Malviya School of Management Studies,
Regional Engineering College, Jaipur IGNOU, New Delhi

Course Preparation Team


Prof. Ravi Shankar Mr. Sandeep Biswas
Deptt. of Management Studies NIS Sparta
Indian Institute of Technology New Delhi
New Delhi
Prof. Pradip Kumar Ray Mr. Anoop K. Kesharwani
Deptt. of Industrial Engineering and Huber+Suhner Electronics Pvt. Ltd.
Management, IIT, Kharagpur GURGAON
Prof. Bikash Badhury (Retd.) Mr. Akshay Kumar
Department of Industrial Engineering and School of Computer & Information Sciences,
Management, IIT Kharagpur IGNOU, New Delhi
Prof. A. Prasad Dr. M. Shanmugham
Deptt. of Business Administration, IGNOU Sub-Regional Center
BIT, Mesra, Ranchi Madurai
Lt. Gen. S.S.Apte (Retd.) Prof B.B. Khanna,
Consultant, Director, School of Management Studies,
New Delhi IGNOU, New Delhi
Dr. C.G. Naidu Dr. Anurag Saxena
Planning & Development Division, School of Management Studies,
IGNOU, New Delhi IGNOU, New Delhi

Course Editor & Coordinator(s)


Prof. Ravi Shankar Dr. Anurag Saxena Prof. A.M. Agrawal
(Course Editor) (Course Co-ordinator) (Course Co-ordinator)
Deptt. of Management Studies School of Management Studies, Formerly with School of
Indian Institute of Technology IGNOU, New Delhi Management Studies,
New Delhi IGNOU, New Delhi

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ã Indira Gandhi National Open University, 2005
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BLOCK 6 ORGANIZATION AND APPRAISAL OF
MATERIALS MANAGEMENT

Unit 19 Materials Management and its Organization talks about material


management activities, functions and organizational structure. It discusses the need of a
logistics organization. It also discusses different forms of organizations and organizational
positioning. It ends with a discussion on the alternatives to the organizational structure.

Unit 20 Materials Information System describes the information systems in materi-


als management and explains their importance in manufacturing process. You would be
familiar with the potential areas in materials management where the information system
development enables us for quick decision. The unit demonstrates the process of system
development through examples. It also highlights the features of Manufacturing Execu-
tion System (MES) in achieving Total Quality Management.

Unit 21 Control of Material Management and Performance Appraisal discusses


the control mechanism of materials management and answers how a performance
appraisal of materials function can be done.

3
4
UNIT 19 MATERIALS MANAGEMENT AND
ITS ORGANISATION
Objectives
After reading this unit, you would be able to:
· discuss material management activities, functions and organizational structure;
· discuss the need of a logistics organization, different forms of organization and
organizational positioning; and
· discuss the alternatives to the organizational structure.
Structure
19.1 Introduction
19.2 Materials Management Activities and Functions
19.3 Materials Management Organizational Structure
19.4 Logistics Organization
19.4.1 Need for Organization Structure
19.4.2 Importance of Organization to Logistics
19.4.3 Organizational Choice
19.4.4 Organizational Positioning
19.4.5 Inter-Organizational Management
19.5 Theory of the Super Organization
19.6 Team Approach as a Part of the Organizational Structure
19.7 Alliances and Third-Party Providers
19.8 Organizing for Global Sourcing
19.9 Summary
19.10 Self Assessment Questions
19.11 References and Suggested Further Readings

19.1 INTRODUCTION
Materials Management is an organizational concept whose primary objective is to
integrate and manage the sourcing, flow, and control of materials using a total systems
perspective across multiple function reports to a different executive, which can result
in each function or activity pursuing conflicting organizational goals and objectives. A
Materials Management structure traditionally separate materials functions to report to
an executive responsible for coordinating the entire inbound materials process, and
also requires joint relationships with suppliers across multiple tiers. The Materials
management executive can design and manage a system that meets a firm’s
performance objectives at the lowest total cost.

The greatest organizational growth of the supply chain management concept occurred
during the mid-1960s to late 1970s. However, that the materials concept began during
the period and the origins of materials management date back to the 1800’s

During the 1970s, most firms experienced shortage of vital materials as well as rising
materials price. Firms embraced the materials concept as a means to coordinate
diverse material functions and to control material-related costs, quality, and supply. A
concern to same purchasing professionals was that the creation of a material that
purchasing naturally assumes a lower position when management creates an
executive materials position. Furthermore, if a non-purchasing professional heads the
materials position, this reduces purchasing importance with in the organizational
structure even further. 5
Regardless of the background of the materials manager, most firms today recognize
the importance of Materials Management. Firms that develop a coordinated approach
to materials management show a greater interest in the control of material costs. This
can only increase the importance of purchasing with in the organizational hierarchy
because of purchasing influence on cost and quality.

The Material’s Manager must constantly balance tradeoffs between the functions
making up the materials organization. What does managing tradeoffs mean? Consider,
for example, material control (often part of purchasing) and inbound transportation.
Materials control tries to maintain raw material and work-in-process inventory levels
as low as possible while still meeting production schedules, which allows a firm to
minimize high inventory carrying costs

It is not difficult to see why companies support the Materials Management concept.
The materials management approach provides tangible benefits to an organization.
These benefits include
· Providing greater direct control over material costs
· Developing Personal awareness of the total system approach instead of a narrow
and restrictive functional approach.
· Opening channels of communication and stimulating the sharing of ideas among
the various material functions.
· Supporting the career paths of talented personnel by providing then the means to
develop well-rounded expertise. The material concept supports the movement of
personnel across functional boundaries.
· Developing greater operating efficiencies as material functions work together to
create material systems, coordinate procedures, and streamline the movement of
material and data among themselves.
· Encouraging an overall synergistic effect as functions cooperate towards
common goals.
The management of all inbound, production, and outbound activities is materials
logistics management or total systems management. In this exhibit, a materials
manager is responsible for all inbound and materials control functions to the point
where work-in-process becomes finished-goods inventory. The physical distribution
manager is responsible for moving, storing, controlling, and distributing finished goods
to field warehouses and the final customer. The actual point separating materials
management and physical distribution often becomes blurred. For example, a manager
responsible for the storage and movement of work-in-process inventory is probably
responsible for the initial movement and storage of finished goods, often the case
when finished goods and in-process inventory exist in the same facility. Materials
logistics management is the control of material throughout the entire pipeline. While
conceptually appealing, few firms have an executive position specifically responsible
for the entire material system for supplier to end customer.

19.2 MATERIALS MANAGEMENT ACTIVITIES


AND FUNCTIONS
One way to understand materials management within an organization is to list the
basic activities of a materials executive, which have been enlisted as follows:
· Anticipate a firm’s purchased materials requirements
· Source materials with the best qualified supplier
· Introduce new materials into the organization
6
· Monitor and control the status of materials as a current asset throughout the
process of it’s working in the organization
By considering the board activities of the materials manager, it becomes easier to
visualize the activities that occur naturally as part of materials management. These
areas are next discussed, and are given as follows:

Functions of a Marketing Manager


· Purchasing
· Inbound Transportation
· Inbound quality control
· Receiving and Storage
· Materials Control
· Production Planning and Scheduling

Purchasing
Most organizations include purchasing as a major function within the materials
structure. The difference for purchasing in a materials structure involves the reporting
hierarchy. Earlier research indicated that Purchasing Manager reported to the
Materials Manager in almost 70% of the firms organized under the materials
management concepts. In the remainder of the firms with Materials Managers,
Purchasing Manager reported to another executive.

Inbound Transportation
Most larger firms have a specialized traffic and transportation function, because of
transportation’s importance along with the large volumes in money terms, required for
the purchase of transportation services. For some firms, transportation is the single
largest category of purchasing-related costs, especially for highly diversified firms.
While a firm may have minimal common purchase requirements between its operating
units, opportunities usually exist to coordinate the purchase of transportation service.

Firms that organize under the materials management concept naturally place the
transportation function under the materials umbrella. These firms recognize the need
to control inbound materials shipments as tightly as they control outbound shipments to
customers. Allowing a supplier to arrange for inbound transportation does not provide
the cost control or coordination a purchaser requires to manage in its inbound
materials pipeline.

Inbound Quality Control


Quality control has taken on increased importance during the last 15 years. Almost all
firms recognize the importance of the supplier toward achieving quality goals and the
need to emphasize prevention rather than detection of quality problems. As a result,
the quality emphasis has shifted from detection during receipt of production to early
prevention, in the material sourcing process. This requires a strong awareness
concerning a supplier’s role in the quality process. Progressive firms work directly
with suppliers to develop proper quality control procedures and processes.

Receving and Storage


All inbound material must be physically received before production. In a non-just-in-
time environment, material must also be stored or staged, awaiting final use. Receiving
and storage is usually part of the materials management function because of the need
to control the physical processing and handling of inventory.
7
Receiving and storage includes a variety of task. For example, a firm must process
incoming receipts usually through a computer terminal, which updates the in-transit
file, purchasing files, the accounts payable system, as well as any other systems
requiring receipt information. Other tasks include the possible inspection of the
materials and its storage awaiting final production. Materials handling is also a critical
part of the receiving and storage process, including movement with in a facility along
with any movement between facilities during the production process. All materials
movement requires tight control.
Materials Control
The terms materials control and inventory control are often interchangeable. Within
some organization, however these terms have different meanings. The materials
control group is responsible for controlling materials releases to suppliers for inbound
shipments. This includes generating the materials release, contacting a supplier
directly concerning changes, and monitoring the status of inbound shipments.
Materials control activities are some times the responsibility of the purchasing
department, particularly in smaller organization.
In large organizations however, purchasing and materials control are often separate.
Purchasing evaluates and selects sources of supply will materials control determine
the actual order release quantities and shipment schedules to supports production. In
this case, tactical duties (Material control) strategic purchasing duties are separate.
The inventory control group is responsible for determining the inventory level of
finished goods needed to support customer requirements, emphasizing the outbound
physical distribution side of the organization. Within the prospective, inventory control
is part of the distribution process and is not technically part of materials management.
Production Planning and Scheduling
This activity involve determining the aggregate levels of production for a family of
items along with a time-phase, detailed schedule of production. While the production
plan is not a sales forecast it relies on forecasts for input. Because manufacturing is
responsible for carrying out of the production plan, production planning and
manufacturing stay in close contact with each other.
It is not unusual for the manufacturing executive to be responsible for production
planning and scheduling, particularly if a firm does not employ the materials
management concept. For firms with a materials manager position, however , 77%
reported that production planning reported directly to the materials manager. This is a
higher percentage than any other materials function, including purchasing.
Production planning and scheduling is a highly sophisticated process. The detailed
production planning process is not within the scope of a purchasing textbook.
Figure 19.1, explains the Total Materials Management System

Inbound Production Outbound

Material Management Functions: Physical Distribution Functions:


y Sourcing Activities y Outbound Transportation
y Inbound Transportation y Inbound Transportation
y Reciving and Warehousing Work-in- Finished y Field Warehousing
y Production Planning and Progress Goods y Customer Service and Materials
Scheduling Inventory Inventory Availability
y Materials Control y Finished Goods Delievery
y Intra & Inter-plant movement y Inventory Control
y Quality Control

Material Management Physical Distribution


Total System Management or Materials Logistics Management
8
Figure 19.1: Total Materials Management System
19.3 MATERIALS MANAGEMENT
ORGANIZATIONAL STRUCTURE
The actual functions under the materials umbrella can vary widely between firms.
Also, the reporting level of the materials management executive can be higher or
lower than shown here. Materials executives are generally higher in the organizational
hierarchy today than 15 years ago because of the increased importance of the
materials function, especially for firms with large material budgets. The materials
executive often reports directly to the executive vice president or president. In
figure 19.2, the vice president of materials management is responsible for production
planning and scheduling, traffic, purchasing and operations. In this example, materials
quality reports directly to purchasing, which is common given the relationship between
supply base management and materials quality. The director of operations is
responsible for receiving and storage, materials controls, and materials handling. This
illustration shows only one possible materials structure. Many organizations now have
purchasing vice president, whose responsibilities extend beyond those of the Materials
manager.

President
President
ororExecutive
Executive
Vice
VicePresident
President

Vice President of
Material
Management

Director of Director Director Director


Prodiction of of of
Planning & Traffic Purchasing Operations
Scheduling

Materials Receiving, Materials Materials


Quality Storage, and Control Handling
Inspection

Figure 19.2: A Typical Materials Management Organisation Structure

The Materials function is now equal in importance to manufacturing and marketing in


many organization. Historically, purchasing, usually reported to manufacturing, as it
still does in some manufacturing firms today, particularly those without a Materials
executive. However, most firms now recognize the need for an independent
purchasing and materials function free of outside influence. While purchasing must
support manufacturing, it should do so by placing personnel directly at manufacturing
facilities. These personnel locally report directly to purchasing personnel with only a
dotted-line reporting relationship to manufacturing management.

In recent years, organizations have evolved from the concept of Materials


management, which refers to an integrated set of functions within an organization
spanning inbound and outbound logistics, to the concept of supply chain management
(SCM). 9
Lower inventories throughout the chain, shorter cycle times, improved planning, and
lower costs. While Materials management is often discussed in theory, very few
organizations are able to achieve this level of integration and success. One reason for
this—the difficulty in developing the level of trust required to share information with
so many parties—will remains a challenge for purchasing and logistics managers in
the future.

19.4 LOGISTICS ORGANIZATION


The focus of this unit is specifically on the organizational structure required for the
management of the Materials Management function. The discussion is separated into
four parts.
· First is organizing the logistics efforts. Concern here is why a logistics
organization is needed.
· Second are the choices that are available with the management. These are the
formal to the informal organization forms as well as the placement of the
organization form with in the company’s organization structure as a whole.
· The third concerns the management of logistics across different organizations.
· Finally, we will look at the alternatives to the organizational structure that have the
purpose of operating a supply channel, namely, outsourcing some or all of the
logistics efforts through strategic logistics alliances, logistics partnerships, and
logistics third-party providers.

19.4.1 Need for Organization Structure


Logistics is a virtual activity that must carried out by virtually every type of firm or
institution. This means that some organizational arrangement, whether formal or
informal, will have been made to handle product and service movement. What then is
the need for any specific consideration of organization structure?

Conflict resolution
A traditional form of organization that many have adopted is to group their activities
around the three primary functions of finance, operations, and marketing. From a
logistics point of view, this arrangement has resulted in a fragmentation of the logistics
activities among these three functions whose primary purposes are somewhat
different from those of logistics. That is, responsibility for transportation might be
placed under operations, inventory divided among the three functions, and order
processing placed under either marketing or finance. Yet marketing’s primary
responsibility may be to maximize revenue, operations responsibility may be to
produce at the lowest per-unit cost, and finance’s responsibility may be to minimize
the capital costs so as to maximize return on investment for the firm. These
motivational cross-purposes led one executive some years ago to wisely observe.
If permitted to run free, a salesman and his manager would promise his customer
impossible delivery service from a plant or distribution center. On the other hand, the
production manager, if permitted, would request that all orders be accumulated for
long periods to reduce the cost of setups, and allow more time to plan economic
materials procurement quantities.
Such conflict of purpose can result in a logistics operating system that is sub optimal—
so much so that the efficiency of the firm as a whole may suffer. For example,
marketing may desire fast delivery to support sales, whereas manufacturing, if it has
the responsibility for traffic, may desire the lowest cost routing. Unless steps are
taken to achieve compromise across the functional lines, the most advantageous
logistics cost service balance is not likely to be realized. Some organizational structure
for the coordination of decision making of separate logistics activities is needed.
10
Management
Providing some organizational structure to logistics activities also defines the
necessary lines of authority and responsibility to ensure that goods are moved
accordingly to plan and that preplanning is carried out when needed. If the balance
between customer service and the costs to produce the service are critical to the
operation of a particular firm, someone should be placed in charge of overseeing
product movement. In effect, someone has to manage logistics. Whereas such areas
as order processing, traffic, and warehousing may be individually supervised for good
control, a manager is often required to coordinate their combined operations. Only a
manager has the scope to balance these operations to achieve the highest level of
efficiency.

19.4.2 Importance of Organization to Logistics


The attention that can be given to logistics organization and to the organizational
arrangement depends on the nature of logistics in the firm. Although every firm or
institution conducts logistics operations to some degree, logistics matters are not
equally important to all. A firm that spends a small fraction of its total operating costs
on logistics and/or believes logistics customer service levels are not of great
importance to customers is not likely to give logistics any special organization
attention. However, for many consumer-product firms, food firms, and chemical firms
in which logistics costs may average 25 percent or more of the sales revenue, the
opposite is true.

In addition, the need for a given type of organization depends on how logistics costs
are incurred and where service needs are the greatest. The organizational form may
center around materials management, physical distribution, or both (logistics).

Extractive industries are characterized by firms that produce basic raw materials,
mainly for use by other industries, characterize extractive industries. Examples of
such firms are those engaged in lumbering, mining, and agriculture. Logistics
operations involve the securing of a wide variety of goods needed in the extractive
operations. Capital equipment and supplies for operations are typical of such
purchases. Purchasing and transportation are the primary supply-side logistical
activities. Outbound products typically have a limited diversity, relatively low value,
and are shipped in bulk. Controlling shipping in terms of mode selection, routing, and
equipment utilization is a major concern. Therefore, the firms in these industries are
likely to have very visible materials management departments.

Service industries mainly concern themselves with supply-side logistics activities.


Firms in this industry convert tangible supplies into service offerings. Hospitals,
insurance companies, and transportation companies are good examples of service
firms. A variety of product items are purchased, many of which are critical, from
suppliers that are geographically dispersed. These items are entirely consumed in
producing the service. Purchasing and inventory management are primary logistics
activities to be managed, with slightly less concern about transportation since many of
the supplies are received under a delivery pricing arrangement. Logistics costs can be
significant to such firms, but the associated activities take place on the supply side of
the firm. Organization for logistics centers on materials management, with typically
little recognition given to any physical distribution activities.

Firms that purchase goods mainly for resale characterize marketing industries. Typical
members of this industry are distributors and retailers. Firms in this industry do little to
change the form of the product. Major concerns are with selling and logistics
activities. Typically such firms purchase many items from many suppliers that are
geographically dispersed. These items are resold in diverse combinations and in small
quantities, usually within a limited geographically area. Purchasing, inbound traffic,
11
inventory control, warehousing, order picking, and shipping characterize operations.
Organization for the management of logistics is significant and usually will involve both
materials management and physical distribution activities; however, greater emphasis
is likely to be given to a strong physical distribution organization since many of the
inbound supplies are priced by suppliers on a delivered basis.

Manufacturing industries are characterized by the firm that purchased a wide variety
of items from many suppliers for the purpose of transforming them into items of
relatively high value. There is substantial logistics activity, both on the supply side and
the distribution side of these firms. Organization design includes both materials
management and physical distribution.

19.4.3 Organizational Choice


When the need for some form of organizational structure has been established, there
are basic choices from witch a firm may select. These can be categorized as:
1) Informal,
2) Semiformal
3) Formal
None these types dominates among firms, nor is one type more popular than another
for firms of like characteristics. Organizational choice for any particular firm is
frequently a result of evolutionary forces operating within the firm. That is, the
logistics organizational firm is often sensitive to the particular personalities within the
firm, to the traditions regarding organization, and to the importance of logistics
activities.

The Informal Organizational Form


The major objective for logistics organization is to achieve coordination among
logistics activities for their planning and control. Given a supporting climate within a
firm, this coordination may be achieved in a number of informal ways. These typically
do not require any change in the exiting organizational structure but rely on coercion
or persuasion to accomplish coordination among activities and cooperation among
activities and cooperation among those who are responsible for them.

For firms that have designated separate areas of responsibility for such key activities
as transportation, inventory control, and order processing, an incentive system can
sometimes be created to coordinate them. Whereas the budget, witch is a major
control device for many firms, is often a disincentive to coordination, it can sometime
be turned into a mechanism for effective coordination. The budget may be a
disincentive because a manager of transportation, for example, would find it
unreasonable to incur higher-than-necessary transportation costs in order to achieve
lower inventory costs. Inventory costs do not fall within the transportation managers
budget responsibility. The transportation manager’s performance is measured by how
transportation costs compare with the budget.

One possible incentive system to encourage cross-activity cooperation is to establish a


number of cross charges or transfer costs among the various logistics. Consider how
a transportation selection decision might be made when it indirectly affects inventory
levels, but the transportation decision maker has no motivation other than to seek the
lowest possible transportation costs.

Another incentive is to establish some form of cost-savings sharing arrangement. All


managers of the separate logistics activities that show conflicting cost patterns could
poll their cost savings. A predetermined schedule could be established to divide the
savings for redistribution to salaries. There is incentive for cooperation because the
12
greatest potential savings comes about when cooperation leads to a balancing of
activities having conflicting cost patterns. There so-called profit-sharing plans have
had limited success among firms, but a new firms have used them effectively.

The use for coordinating committees is another informal approach to logistics


organization. These committees are made up of members form each of the important
logistics areas. By providing a means through which communication can take place,
then coordination may result. For companies in which there is a history of coordinating
committees, the committees’ form can be quit satisfactory. Dupont is one example of
a company famous for its effective management by committee. Although committees
seem to be a simple, straightforward solution to the coordination problem that do have
a shortcoming in that they generally have little power to implement there
recommendations.

Chief executive review of logistics decisions and operations is a particularly effective


way of encouraging coordination. Top management has the necessary position in the
organizational structure to easily observe sub optimal decision making with in the
organization. Because subordinate managers in the logistics activity areas are
responsible to top management, top management’s encouragement and support of
coordination and cooperation among these interventional activities goes a long way
toward achieving the organizational calls with out a formal organizational structure.

The Semiformal Organizational Form

The semiformal organization form recognizes that logistics planning and operation
usually cut across the various functions with in a firms organizational structure. The
logistician is then assigned to coordinate projects that involve logistics and that cover
several functional areas. This type of structure often called a matrix organization, and
it has been especially popular in the aerospace industry. The concept has been
adapted to logistics system management.

In a matrix organization, the logistics manager has responsibility for the entire logistics
systems but does not have direct authority over the component activities. The firms
traditional organizational structure remains intact, yet the logistics managers shares the
decision authority and accountability with the activity area manager. Expenses for the
activities must be justified by each functional department as well as by the logistic
program, which is the basic form of cooperation and coordination. (see figure 19.3).

President

Marketing Finance Production


Functional Authority

Traffic and Inventory Production


Wharehousing Management Scheduling

Quality
Customer Accounting and
Assurance
Service Information
Processing Purchasing and
Sales
Forecasting Materials
Management
Logistics
Project Authority

Figure 19.3: Logistics Matrix Organisation


13
Although the matrix organization can be a useful organizational form, we should
recognize that the lines of authority and responsibility became blurred. Conflicts may
arise that cannot be easily resolved. However, for some firms this choice is a good
compromise between a completely informal form and a highly structured one.
The Formal Organizational Form
The formal organization is one that establishes clear lines of authority and
responsibility for logistics. This typical involves (1) placing a manager in a superior
position relative to logistical activities, and (2) placing the managers authority on a
level in the organizations structure that allow effective compromise with the other
major functional area of the firm (finance, operations, and marketing). This elevates
and structures logistics personal in a form that promotes activity coordination. Firms
seek the formal organizational arrangements prove ineffective or when greater
attention is to be given to logistics activities.

Practitioners frequently remind us that there is no such thing as a typical organization


for logistics. Organizational structure is customized to individual circumstances within
a firm. However, we can develop a generalized formal organization that may good
sense in terms of the principals of logistics management and also appears, in at least
partial form, in enough firms to use it as a model.

This formal design accomplishes several important ends. First, logistics is elevated to a
position in the organization where it is managed with the same authority as the other
many functions. This helps to assure that logistic activities receive the same attention
as marketing, operations, and finance. It also sets the stage for the logistic manager to
have an equal voice in resolving economic conflicts. Having logistics on a par with the
other functional areas creates a balance of power that can be for the economic good
of the firm as a whole.

Second, a limited number of subareas are created under the chief logistics officer. The
categories are established with a separate manager for each and are managed as a
distinctive entity. Collectively, they represent the major activities for which managers
are typically responsible. Why exactly five areas? Only as many areas are created as
technical competencies require. It might seem desirable to combine, say,
transportation and inventory activities into a single area because their costs are
naturally in conflict and better coordination could be achieved. However, the technical
skills required in each area are substantially different, so finding management for the
combined areas having both type of skills are difficult . It is often more workable to
keep such activities under a separate manager and rely on the logistics manager to
establish coordination through the informal or semiformal organizational types
previously discussed. Similar arguments can be offered for the other activity areas.
Therefore, the formal organization structure is a balance between minimizing the
number of activity groups to encourage coordination while separating them to gain
effectiveness in the management of their technical aspects.

19.4.4 Organizational Positioning


Organizational choice and orientation are the first considerations in organizational
structure. Next comes the positioning of logistics activities for their most effective
management. Positioning basically concerns where to place these activities in the
organizational structure. This is determined by such issues as: (1) decentralization
versus centralization, (2) staff versus line, and (3) large company size versus small.
Decentralization Vs. Centralization
One of the continuing controversies in organization is whether activities should be
grouped close to top management or dispersed throughout the divisions of the larger
firms. For example, a major electric company had a number of products divisions,
14
such as industrial electrical equipment, nuclear power, small appliances, major
appliances, and lamps. A centralized organization groups logistics activities at the
corporate level for the purpose of serving all product groups, as shown in Figure 19.4.
On the other hand, the decentralized logistics organization puts the responsibility for
logistics at the product group or division level. A separate decentralized logistics
organization is established to serve each division.

General
Management

Staff and
Counsel

Finance Division A Logistics Division B

Sales and Order Entry Sales and


Analysis
Marketing and Processing Marketing

Inventory
Accounting Operations Operations
Management

Engineering Transportation Engineering

Procurement

Warehousing
and Materials

Figure 19.4: Centralised Logistics Organisaional Structure

There are some obvious advantages to each type, and a number of firms create
organizational forms that blend both types to seek their combined advantages. The
principal reason for the centralized form is to maintain close control over logistics
activities and to benefit from the efficiencies associated with the scale of activities
that can occur by concentrating all logistics activities for the entire corporation under a
single director. Consider the traffic activity as an example. Many firms own private
truck fleets. Utilization of the equipment is the key to efficiency. By having centralized
control of all traffic activities, a firm might that the forward haul of one division’s
products might be the back haul for another. These movements can then be balanced,
whereas under a decentralized organization they might be overlooked. Similar
efficiencies can be gained through shared warehousing, shared purchasing, and shared
data processing.

Decentralization of organization often allows quicker and more customized logistics


response to customer needs than the more removed, centralized organization.
Decentralization makes a great deal of sense when product lines are distinctly
different in their marketing, logistics, and manufacturing characteristics, and when few
economies of scale can be found. An generalized example of a Decentralized
Logistics organization is given in figure 19.5.

15
General
Management

Staff and
Counsel

Research and
Finance Division A Division B Purchasing
Engineering

Sales and
Analysis Logistics Operations
Marketing

Accounting Transportation

Order Entry and


Processing

Inventory
Management

Warehousing
and Materials
Management

Figure 19.5: Generalized Example of a Decentralised Logistics Organisational Structure

Rarely can we expect to find either a purely centralized or purely decentralized


design. For example, although there is managerial interest in divisional and even
regional autonomy among the operating units of the firms, technical advances such as
computerized data processing have made it more efficient to have centralized order
processing and inventory control. Such conflicting trends help to explain the diversity
of organizational forms in practice.
Activity 1
Discuss two or three most important benefits of Centralized organizations Vs
Decentralized organizations and Decentralized organizations Vs Centralized
organizations, using examples to support your choice.

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

Staff vs. Line

A number of firms do not create organizations that have direct or line responsibility
over goods movement and storage. They find it more satisfactory in their
circumstances to establish an advisory, or staff, organization for logistics. The
logistician in this case is placed in a consulting role to the other line functions such as
marketing and operations. An advisory organization is a good alternative when: (1) a
16 line organization would cause unnecessary conflicts among the existing personnel, (2)
logistics activities are less critical selling, producing, and other activities, (3) planning
is relatively more important than administration, and (4) logistics is treated as a shared
service among the product divisions.

The staff type of organization may be attached to any of the functional areas at a
centralized or decentralized level. Frequently, however, the logistics staff is located
near top management is geographical location and on the organization chart. Because
the logistics staff is in an role more indirect authority can be given to logistics by this
type of organizational positioning in fact, some corporate level logistics staff wield
more authority than many division-level line organizations.
Large vs. Small
Most of the attention given hears has been to the large, multidivisional firm. What
about the small firm? We should recognize that the small form has just as many
logistics problems as the large firm. In some ways, logistics activities are more
important because the small firm does not befit from volume purchases and volume
movements as does the larger firm. Organizationally, the small firm has some form of
a centralized organization because, for practical purposes , no product divisions exits.
Also, logistics activities are not as likely to be clearly defined and structured as in the
larger firm.

19.4.5 Inter-ogranizational Management


So far, we have noted the organizational problems associated with realigning the
activities of the firm to achieve more meaningful economic trade-offs and the
problems associated with managing activities at the interface between functional
areas. Both of these managerial problems are internal to the firm. Because the supply
and distribution policies of any one firm in the channel of distribution can effect the
performance of other firms in the channel, the question is raised as to whether there
might be some advantage to viewing the channel as a single entity, or “super
organization,” and managing it to the benefit of all members involved. This proposition
is probably not new, but the processes involved are little understood. As Stern and
Haslett have noted.

“The management of complex organizations has undergone considerable


scrutiny the students of administrative processes. But only a small body of
literature has been devoted to the management of inter-organization systems,
entities whose objectives transcend those of single organizations defined by
legal boundaries.”

If effective organizational processes can be developed to deal with logistics matters


external to the firm, the firm stands to gain in a way not otherwise possible.

19.5 THEORY OF THE SUPER ORGANIZATION


The super organization is a group of vertically related but legally separate firms that
share a common interest in the individual decisions made by each. For example, a
pricing decision of a carrier will influence the decision of a user on how much service
to purchase. This purchase decision, in turn, influences the pricing decision. Normally,
each firm would make its decision while pursuing individual goals. If profit
maximization is the goal, making the purchase and price decisions individually not only
leads to sob optimal profits for the firms, taken collectively, but also can result in sub
optimal profits for the individual firms. Management of the super organization will be a
relatively easy task if the cooperative efforts yield proportionately greater returns to
each member. The situation is self-motivation for the members, and the only need is to
become aware of the possibility and benefits of cooperation. However, if the benefits
of cooperation (pool) with one or a few of the channel members, equitably distributing 17
the benefits and dispersing among the member information about the effect of
cooperation will be needed.

Managing the conflict

The object of managing the super organization is to establish the conditions so that
each member of the coalition may benefit from his or her cooperation. Managing the
super organization is not the same as management within the firm. The reliance is
more on bargaining and tacit arrangements structural relationships. This type of
management is generally little understood and is a subject for much further research.
However, the direction for management seems clear. First, methods need to be
established for providing relevant information among the super organization members.
Second, there needs to be some method for distributing the gains achieved from
cooperation. Third, there needs to be the application of a strategy for conflict
resolution.
Relevant information
An adequate information base in the super organization is needed for at least two
reasons. First, in order for each firm to adjust its controllable variables so that
optimum channel profits are achieved, knowledge of the economic factor inputs to the
decision problems facing the other members, as well as accounting information on the
level of profits accruing to each member. Second, an adequate information system
also reduces the uncertainties among the autonomous members and contributes to
their continued voluntary cooperation. An inter member information system could be
established, but assuring adequate and accurate information among the membership is
difficult because of the weak lines of accountability. Also control within the super
organization depends much on how governmental antitrust agencies may view such
vertical integrative arrangements as on the willingness of members to relinquish a
degree of autonomy to the coalition.
Distribution of profits
Equitable redistribution of the profits achieved through cooperation by the coalition is
important. Under the revised pricing policy, channel profits are at their highest level
but the change in profits is not distributed equitably among the member. That is, both
buyer and carrier stand to gain more than when acting indecently. However, the seller
stands to lose. The seller would lack incentive to cooperate since he can profit more
by acting alone. He might drop the coalition, and the members would likely return to
their autonomous state. If a method for the redistribution of profits, possibly in
proportion to the profit levels that are likely to exist under the situation where all
members act along, were established, each could be satisfied, since he first recovers
the profit level he would have gained from acting along in addition to sharing in the
additional profits achieved through cooperation. All members are likely to remain in
the coalition since all derive benefit from this. However, establishing a profit
redistribution method that will keep all members acting in concert may be elusive, and
fair implementation tends to act against continued group cooperation.

Strategies for Conflict Resolution

Actually achieving a redistribution of profits may require more than appropriate


accounting procedures.

These chiefly are:

Bargaining: Negotiating among the members if one party is prepared to give up


something in order to achieve some of its objectives.

Diplomacy: Using ambassadors or envoys to affect compromise among members.


18
Membership: Exchanging personnel among member firms to lead to better
understanding and compromises.

Ideology: Using information, propaganda, and educational activities to get members to


think about managing inter organizational conflicts.

Third-party intervention: Using a neutral person to resolve conflict.

Frazier and Summers have suggested a somewhat different set :

Information exchange: Use discussions to try to alter the target firm’s behavior.

Recommendations: A suggested strategy whereby the source firm predicts that the
target firm will be more profitable by taking a specific action or set of actions.

Promises: The source firm pledges to provide the target firm with a specified reward
for compliance with the source’s stated desires.

Threats: The source firm communicates to the target firm that it will apply negative
sanctions should the target firm fail to perform the desired action(s).

Legalistic strategies: legal contracts and/or informal binding agreements between


the parties either require or suggest that the target firm perform a certain action.

Requests: The source firm merely informs the target firm of the action(s) it would
like the target firm to take without mentioning or directly implying any specific
consequences of the target firm’s subsequent compliance or noncompliance.

None of these methods can guarantee conflict resolution or force a particular channel
member to perform in a manner that will benefit the channel as a whole. However,
they should provide some guidelines for realizing the opportunities that lie dormant in
managing the logistics channel among firms.

19.6 TEAM APPROACH AS A PART OF THE


ORGANIZATIONAL STRUCTURE
Firms are showing an increased willingness to use cross-functional teams to arrive at
critical decisions or to implement major projects. Cross-functional teams consist of
personnel from various functions brought together to achieve a specific task. The
most common team tasks involving purchasing are evaluating and selecting suppliers,
developing cost-reduction ideas, and supporting new product development. When
implemented properly, the team approach results in improved performance and
organization decision-making because it encourages group interaction across different
functions. Problem solving is faster as the team assumes responsibility for problems
and works together as an integrated unit. This approach supports the development of
innovative methods to address traditional task and to “cut through the red tape” the
team approach can also result in the breakdown of restrictive communication barriers
between functions. Cross-functional teams represent a new form of an organizational
structure, as firms search of better ways to complete.

Currently, the major use of cross-functional teams in purchasing is to evaluate and


select suppliers for key items. A team will visit and rate potential suppliers against
various performance areas. The team evaluates a supplier’s quality, financial stability,
product and process technology, delivery, and management strength. A team
composed of functional experts should arrive at better decision then an individual
acting alone.

19
Another application supporting the use of teams is new product development. The
team approach for new product development represents a radical departure from the
traditional new product development process. With the cross-functional approach,
team members begin work simultaneously to reduce the total concept-to-customer
product development time. The time difference between the traditional approach and
the team approach can result in a competitive advantage to a firm. Firms now
recognize the importance of introducing new product before there competitors.

19.7 ALLIANCES AND THIRD-PARTY PROVIDERS


As an alternative to total ownership of the logistics capability and the need for an
extensive logistics organizational structure, some firms choose to share their logistics
capability with other firms or to contract for the logistics activities to be performed by
firms specializing in providing such services, called third-party providers. Many firms
are recognizing that there are strategic and operating advantages to be gained from
logistics partnering. Some of the general benefits are:
· Reduced cost and lower capital requirements
· Access to technology and management skills
· Improved customer service
· Competitive advantage such as through increased market penetration
· Increased access to information for planning
· Reduced risk and uncertainty
Of these, a potential reduction in operating expense ranks at the top of the benefits,
with possible improvement in customer service also being a primary concern. The
primary risk to the firm is the loss of control over logistics activities that may result in
the potential advantages never being realized.

To some extent, firms have been outsourcing a portion of their logistics activities for
many years. Every time a firm calls up UPS or a common carrier, or uses a public
warehouse to store its goods, it is partnering with an outside firm to handle part of the
supply chain activities. How extensive the relationship is between the firm and its
outside partners is a matter of degree. The relationship may be based on single events
to long-term contractual arrangements to shared systems of a strategic alliance.

Deciding whether to perform the logistics function in-house or to seek other


arrangements is a balance of two factors: how critical logistics is to the success to the
firm and how competent the firm is in managing the logistics function. The strategy to
follow depends on the position in which the company finds itself.

A company that has high customer service requirements, significant logistics costs as
a proportion of total costs, and an efficient logistics operation administered by
competent personnel, will likely find little benefit to partnering or outsourcing logistics
activities. Logistics activities are best performed in-house. Wal-mart is a company
that, because of its superior supply channel, has these characteristics. On the other
hand, for those for those companies where logistics is not center to strategy and a
high level of logistics competency is not supported within the firm, outsourcing the
logistics activities to third-party providers may well lead to significant cost reductions
and customer service improvements. Dell computer consider its core competencies to
be marketing and manufacturing of high-technology pc hardware rather than logistics.
This direct marketing firm contracts with several third-party logistics providers to
coordinate distribution firm in geographical areas.

Where logistics is critical strategy but logistics management competency is low,


20 finding a firm with witch to partner may provide significant benefits. A strong partner
may provide facilities located in existing and new markets, a transportation capability,
and administrative expertise not available within the company. Conversely, where
logistics is not especially critical to strategy but managed by capable personnel,
managers may want to be aggressive by taking the lead in seeking partners to share
the logistics system. Thus reducing the company’s cost through increased volume and
the economies of scale that result.

Alliances
It is quite natural for a firm that is heavily invested in transportation equipment,
warehouse, inventories, order-processing systems, logistics technology, and
administrative personnel to question whether this investment might be shared with
other firms to reduce its own costs. Conversely, being conscious of the high costs of
logistics, a firm may seek to partner with another firm that has excess logistics
capacity, strategic facility locations to markets, desirable technology, and outstanding
administrative capabilities that the firm seeks to shave. Of course the firm may have
certain skills and capabilities that are desirable to other firms. Forming a logistics
alliance, or partnership, may benefit both parties. The firm that does not desire to build
a high degree of management competency in logistics may also seek an alliance with
a stronger logistics partner to strengthen its own competitive position.

A logistics alliance is built on trust a sharing of information that aids logistics


performance, and specific goals to achieve a higher level of logistics performance
than can be achieved alone, operating ground rules for each partner, and exit
provisions for alliance termination. The benefits to be derived from a logistics alliance
have already been noted. If these benefits are so obvious why is it that there are so
few alliances that there are so few alliances that actually have been created? The
answer may lie in the concerns that a potential partner has about the alliance when
supply channels are to be merged. Chief among these concerns may be the following.
· Loss of control over the logistics channel.
· Fear of being “written out of the logistics picture.”
· Increased concern about logistics failures and no direct way to handle them for
their customers.
· Adequate checks and balances may not be able to be identified to the satisfaction
of the partner.
· Difficulty of identifying the economies to be achieved as compared with the
partner’s current logistics.
· A reporting system that does not match that of the partner, or one that is
inadequate to reduce uncertainty.
· Difficulty of identifying the benefits to be shared, especially when the partner has
some ownership in the logistics system.
· There may simply not be enough trust to try such an arrangement.
· Partners may not be viewed as equals where one partner’s requirements may
take precedence over another’s.
· Difficulty in seeing how trusts good faith, and cooperation can be achieved in
such an arrangement.
· Too few examples to show how such alliances work well in other companies.
Logistics alliances are fragile. They can be difficult to form and they may dissolve
easily. However, the potential benefits of them encourages management to continue
to explore ways of making them work.

21
Contract Logistics

For years, companies have been using the services of other companies to support their
worn logistics activities. Common carriers provide trucking and rail services, public
warehouses provide storage services, and specialty firms provide freight bill auditing
and accounting services. In recent years, mainly since the deregulation of
transportation, logistics companies have emerged that provide a full-service logistics
capability. That is, they can handle the entire logistics operation for a client company
for a contract price. They have variously been referred to as third party providers,
integrated logistics companies, and contract logistics specialists. Although there has
been significant growth for these logistics service providers, the companies using them
do so sparingly. Eighty five percent of the companies using outside services spend
less than 20 percent of their logistics budgets on them.

Compared with alliances, contract logistics companies sell services rather than form
partnerships that benefit from the synergism between the members of the alliance.
They hold themselves out to provide high level solutions to logistics problems.

A primary motivation for a company to outsource some or all of its logistics activities
is that third provider is more efficient because logistics is its primary business and
logistics is not the core competency of the buying firm.

19.8 ORGANIZING FOR GLOBAL SOURCING


Firms organize for purchasing internationally in a variety of ways. As a firm pursues
global sourcing, how it structures itself can greatly influence its success in worldwide
sourcing markets. An international structure is a function of several variables. These
variables are dynamic; a relatively unimportant variable today can become important
at a later date as competitive and economic conditions change.

Factors Affecting the Global Sourcing Structure

Organizations are often structured by product line or the characteristics of major


customer market segments. Consider, for example, a high-tech electronics
manufacturer. One business unit may be responsible for military production and sales,
another unit for the manufacture of electronic components to the computer industry,
while a third business unit manufacturer and markets consumer electronics. Each unit
has a different market focus and product line. Accordingly, each exists almost as its
own business with individual support functions. A decentralized organizational
structure is a fairly common approach for firms with highly differentiated product lines
or market segments with few common characteristics. (Refer Figure 19.6).

How does global sourcing fit within a centralized purchasing structure In the
centralized purchasing organization, commodity managers are responsible for
commonly purchasing items throughout the organization. The international purchasing
manager work along side the commodity managers, and report to the corporate
executive responsible for purchasing. These offices support the international buying
requirements of the commodity managers and division or plant buyers.

The centralized structure allows the domestic buyer and Commodity manager to
concentrate on the activities they perform best. Commodity managers develop
corporate contracts for commonly used company wide items. These contracts strive
for superior performance in quality, delivery and access to supplier technology through
out the organization. The division or plant purchasing managers concentrate on
identify capable domestic supplier for the items for which they are responsible. The
international purchasing offices search their region of the world to identify potential
foreign sources.
22
Headquarters

SUB A SUB B SUB C

Purchasing

International
Purchasing SBU Responsibilities
y Product Planning
y Manufacturing
y Purchasing (including International
Purchasing
y Worldwide Marketing/Sales/Distribution
y Accounting
SBU = Strategic Business Unit y Personnel
Figure 19.6: International Sourcing in Decentralised Firm

Resources and Capability Required


A number of other factors influence how a firm structures its global sourcing efforts.
If global sourcing requires large amount of time and resources, then this encourages a
firm to establish a certainly coordinated approach. Further more, global sourcing
requires specialized capabilities on the part of a buyer. To overcome these potential
constraints, a firm might create a centralized international sourcing office, to provide
international expertise at one location and contribute to cost efficient sourcing
throughout the organization. As just discussed, a firm might even establish centrally
managed foreign buying offices throughout the world.

Successful use of corporate international buying offices requires responsiveness to the


purchase needs of buyers at all levels of the organization. Buyers will avoid using the
international purchasing office if they perceive it is unresponsive to their needs. Also,
purchasing personnel at the business unit or plant level may not gain international
experience with a centralized international buying structure, and may never develop a
worldwide purchasing perspective. Despite the potential disadvantage, the volume of
international purchasing along with the capabilities required for foreign buying
influence how a firm organizes for international purchases.

19.9 SUMMARY
A businesses continues to be affected by dynamical customer requirement, they must
become more adept at responding to change. New markets, rapid advances in
communications, and new sources of bran wear and skilled laborer corporation
became the standard in the 1950s. Senior managers are struggling to a adept to the
21st century progress that is rapidly taking shape. Thriving in the fast-paced
environment of today requires a new kind of company and a new kind of CEO. This
requires.
· Open information channels, with email and financial reporting systems that bring
everyone into the loop.
· Diversified management, which brings young managers around the world for
three-month two-year stints.
23
As organizations continue to make these changes, purchasing managers must learn to
acquire new skills, become more flexible, and continually improve their capabilities.
The 21st century will undoubtedly be full of uncertainly and risk. Will the idea of
change may be frightening to many purchasing managers, it is also exhilarating to be
on the frontier of these changes. The next century is going to be a time when the
successful purchasing manager is a thinker and a risk taker, not a bureaucratising
managers must lead these changes, and be on the forefront in re-tooling their skill sets
and capabilities.

The basic issue in logistics organization is how to achieve coordination or cooperation


among activities, functions, and firms so that logistics plans can be implemented
effectively. Organization should facilitate optimum logistics performance and is, in
general, guided by total cost concept, except when customer service or information
strategies dominate. The organization should be considered on three levels. Grouping
relevant activities together and managing them collectively as a logistics function has
received the greatest attention. In certain cases, the payoffs have been great as a
result of this activity realignment. Much less considered have been the problems of
inter functional and inter organizational cooperation. The potential benefits may far
exceed those from direct activity management. However, achieving cooperation
among functions with in firm and among firms beyond their legal boundaries, when
cooperation is likely to be largely voluntary, is a highly complex organizational problem.
Undoubtedly in the future, logistics organization at all levels will choose cooperation as
a general theme for organizational effectiveness rather than simply selecting
formalized organizational structures that create as many coordination problems as they
resolve.

As an alternative to performing all logistics task in-house and, therefore, needing


extensive logistics organization, many firms have sought to out source logistics
activities or to form logistics partnership and share their logistics systems with other
firms. Advocates have argued that such a strategy can lead to reduce costs and
improved customer service, while allowing the firm to focus on its core competencies.
Those opposing the strategy cite loss of control of the logistics activities and a
resulting deterioration in customer service.

19.10 SELF ASSESSMENT QUESTIONS


1) What does it mean when we say a firm has organized according to the materials
management concept?

2) What advantages of organizing a purchasing department into specialized sub


units? What are the disadvantages? How can a firm overcome these
disadvantages?

3) Give an example of an organization that has benefited tremendously by Global


sourcing with the help of a Global organization.

4) Explain why a firm would want to develop an Organization Chart for Logistics

5) Explain the difference between a Line and a Staff organization structure for
Logistics.

6) Why are Customer Service, Packaging and Production scheduling considered to


be inter-functional management activity? How can they be managed effectively
within a functionally organized firm?

24
19.11 REFERENCES AND SUGGESTED FURTHER
READINGS

Jones, Jones and Deckro (1994), “Strategic Decision Processes in Matrix


Organization”, European Journal of Operational research

Peter F Drucker (1954), The Practice of Management, Harper and Row Inc, New
York
Tom Peter, Creating a Fleet Footed Organization,

25
UNIT 20 MATERIALS INFORMATION
SYSTEM
Objectives
After reading this unit, you would be able to :
· describe the information systems in materials management and explain their
importance in manufacturing process;
· be familiar with the potential areas in materials management where the
information system development enables us for quick decision;
· demonstrate the process of system development through examples; and
· highlight the features of Manufacturing Execution System(MES) in achieving
Total Quality Management.
Structure
20.1 Introduction
20.2 Advantages of Materials Information System
20.3 Functions of Materials Information System
20.4 System Approach to Materials Management: Classical model
20.5 Simulation Methods for Materials Information: A System Approach
20.6 Information System for Total Quality Management (TQM)
20.6.1 Manufacturing Execution System (MES)
20.7 Summary
20.8 Self Assessment Questions
20.9 References and Suggested Further Readings

20.1 INTRODUCTION
Information can provide powerful tool for change. Information management is an
important task to be handled carefully by the managers to keep themselves always
connected to the latest developments for online decisions. Whether it is Finance,
Marketing, Human Resource Management or Operations Management, all processes
require a proper information system. An information center is a place where
information is collected, transmitted, stored, analyzed, or compiled. The information
relates to the internal operation of the firm as well as to the environment. Quite
obviously, decision centers and information centers in the firm are inextricably bound
together. Decision centers generally transmit decisions to others in the organization,
and in a sense act as information centers. In simple terms, for an effective information
management, the decision maker need to strictly systematize the procedure stated
below:
a) gathering the facts in time,
b) Store them in an ordered way,
c) Process for the requirement and
d) Present them in a specified manner.
In manufacturing process, a group of people, machines & infrastructure work together
by coordinating for producing different types of products with an objective of making
optimum production and profitability. A set of transaction ties together the different
activities manufacturing process. They are:
26
1) Request from customer to bid on special product
2) Orders for special products
3) Orders for standard products
4) Production orders
5) Move orders
6) Purchase orders
The entire process is carried out in an organized way. The systematic approach to
execute the process involved in handling of materials for various purposes through
predefined steps is called Materials management system. This can be done through
programmed decisions so that the cost involvement in various processes of materials
management like ordering for raw materials, utilization level of the stock, overstocking
of the materials etc could be done judiciously.

In any manufacturing organization, it is required to deal with different forms, reports,


memos, labels and cards in use to assess the status of items movement and stock
available on hand. Many of these forms have the same usage with different layouts.
Each one of them has to be filed manually. It is a very time consuming and laborious
intensive process. Also, the transfer of these documents among related units of the
production causes delays in decision-making. The Materials Information Management
System streamlines and simplifies the entire filing procedure of the Bureau of
Materials, thus relevant information is integrated into an electronic data processing
and management system automatically. Materials Management uses bar code
technology to maintain stock levels and to re-order stock-using hand held scanners.

20.2 ADVANTAGES OF MATERIALS


INFORMATION SYSTEM
In addition to the above discussions, the materials Information management has
certain advantages as stated below:

Reduces time and costs by


· Establishing direct link between the data capture system and the suppliers
ordering system which reduces supply chain time and costs and reduces the
ordering errors
· Simplifying ordering – the data is inputted direct to the supplier via a hand held
barcode reader
The information retrieval through proper information system provides
· The data that can be used to forecast required stock
· Statistical analysis of historical data and generate reports to review product use
and to identify better efficiencies
It gives flexibility to manage products by
· Helping with product standardization programmes and effective stock control,
leading to more efficient use of limited storage and effective stock control
· Providing a modular storage system
· Streamlining receipting procedures, leading to improved payment systems
It saves money
· By saving on requisition costs, reducing obsolescence and waste and simplifying
stock valuation for the company
27
· By helping to give a clear understanding of a company’s spend and operating
costs
· By providing realistic stock levels linked to actual usage- matching service
delivery with company actual service need
Processing of a customer needs from its identification through conversion of raw
materials into finished goods and the distribution of these goods is carried out by a
sequence of fairly distinct activities. These activities are called the technical
development of the system. Out of all other system in functional management, the
sub-system used for materials manufacturing is considered to be significant in
operations management. They are inventory control system, demand management
system, remote electronic requisition system, warehouse management system, waste
management system etc. These sub-systems operate based on the product
specification, schedule, demand, availability of raw materials and assemblers.

A system to control movement and storage of materials within a warehouse is called


Warehouse Management System. The role of Warehouse Management System is
expanding to including light manufacturing, transportation management, order
management, and complete accounting systems.

The general function of materials information system integrates the various other
subsystems as shown below:

y Manual Requisitions
y Purchase Order Status Processing
y Sales Reports y Inventory Tools
y Waste Managenent Tools
Bar Coding y Warehouse Management
of Items & y Shipment Analysis
Inspection

y Quantity Received
y Procurement
y Shipment Data
y Product History
y Bill of Material
y Catalog Inventory
y Pending Order
acknowledgement
y Status Report

Figure 20.1: Materials Processing System


The design and the development of the materials information system require
considerable research efforts. The major study topics include:
1) Identify and synthesize the operational logic and business rules in the materials
testing processes to search for the best ways to organize and unify the forms,
reports, approvals and all relevant documents. Use of bar code technology for
locating the status of the products.
2) Identify and normalize the relational database to secure data integrity and manage
data flows within existing networks using bar codes assigned to the product
3) To convert and integrate the existing electronic data for concrete decisions
through proper statistical analysis

28
4) To protect and archive the data and outputs
5) To improve the system flexibility such that new materials and new information
can be inserted
6) To minimize the data entry errors through cross checking
7) To minimize the routine workload and improve the efficiency of the data
processing with customized client application programs and
8) To automate the filing processes and speed-up the closeout procedures by
scheduled replication tasks and alert message service of the database. In other
words, the entire closeout procedure will be monitored by the system and the
responsible person will be notified of the current project status.

20.3 FUNCTIONS OF MATERIALS INFORMATION


SYSTEM
The two main functions of Materials Information system are to generate an unordered
requirements listing for input to the purchasing system and to provide a materials
status and history report for use as follow up and status information. This would
facilitate to:
i) Identify and order long lead-time items in the early stages of requirements
determination
ii) Reduce existing clerical work load by paper work automation to the extent
practicable
iii) Provide a system of quick, accurate follow up and status reporting
iv) Provide whatever controls are needed to ensure that all required items are
ordered and not duplicated
v) Sketch the movement of items and report the status for further planning.
As can be seen, this system mainly deals with two different areas of operations
management namely Inventory Control, and Production & Manufacturing. Let us try
to understand the development of systems taking into all the aspects of requirement
and output for such system.
The inventory management system deals with:
· Maintaining an optimum level of raw materials and finished goods inventory
· Consolidation of purchase orders and inventory status
· Preparation of analysis reports like lead time, number of optimum runs etc
· Generation of MIS reports required for decision making
The various inputs and the processing of data to get output to this system are as
follows:

Table 20.1 : Inputs and Outputs for an inventory management system

System Inputs Processing Output Decisions


objectives receivable tools formats

Maintaining Data of suppliers Models used Number of units Minimize the


optimum level vendors, and in Operations to be ordered in a inventory cost
of raw materials buyers, storage cost research for EOQ specific interval
and other
finished goods

29
Consolidation Materials requisition Tools of Demand quantity Forecast for
of purchase slips, Delivery classification and and order quantity future trend
orders and challans, materials tabulation and
inventory status return status simple analysis,
OR techniques

Preparation of Goods received, Different Number in Optimum


various analysis quantity issued, parameters units specified quantity order
reports materials jejection like lead time,
percentage of
rejection, capacity
production

MIS report Using existing Operations and Decision reports Effective and
master data queuing tools online information timely decisions
based on all
receipts and issues

Process of production and manufacturing deals with the following objectives:


· Compute parts from production schedule which include the economic number of
outputs per unit
· Minimize the production schedule
· Reduce clerical costs
· Control backorders
The system requirement, tools utilized and the output expected to this system are as
follows:

Table 20.2 : Inputs and Outputs for a production and manufacturing system

System Inputs Processing Output Decisions


objectives receivable tools formats

Calculate the Bills of materials, Production Quantity of Materials


optimum production models output and requirement and
number of schedule, time expected time supply in time
units per requirement
production run

Optimize Market data Trend Number of Minimize


production and analysis, optimum production
schedule requirement scheduling production cost
movement tools runs required

Reduce clerical Quantum of Manpower Requirement Reduce


costs invoices and planning of manpower manpower
processing cost
bills handled

Control Demand Operations Exact Reduce


back-orders notes and research tools requirement shortage
lead time and expected costs
demand

The schematic representation of the materials process, in general for both the
operations, can be seen from the following figure.

30
INPUT PROCESS OUTPUT

Purchase order
Data of supplies MATERIALS Inventory status
Data of raw materials and INFORMATION Materials transfer report
Finished goods recieve note SYSTEM-PROCESS Purchase analysis
Materials requisition slip FOR REQUIRED Scheduling of tasks
Delivery challan OUTPUT Materials history
Materials rejection note Sales plan
End items requirement

Figure 20.2: Input, Process and Output of Materials Information System – A View

20.4 SYSTEM APPROACH TO MATERIALS


MANAGEMENT: CLASSICAL MODEL
In industrial situations decision-making is a continuous process. It is a conversion
mechanism for changing continuously varying flows of information into control signals
that determine rates of flows in the system. For example, various parameters used in
industrial decisions like economic order quantity, lead-time, expected waiting time are
not static. Decision point is continuously yielding to the pressures of environment. It is
taking advantage of new developments as they occur. It is always adjusting to the
state of affairs. It is treading a narrow path between too much action and too little. It
is always attempting to adjust towards the desired goals. The amount of action is
some function of the discrepancy between goals and observed system status.

Let us take an example of very frequently used illustration in materials production


pertaining to inventory models. The status of inventory is linked with the production,
distributors and retailers. A demand function has been specified in order to generate
the orders from the ultimate customers. At each level of factory, distributor and
retailer, an inventory of stock item is held and periodically replenished. Delays in
processing orders are assumed, as well as the delays in transmission of orders
between levels. Materials flow is delayed between the levels to represent time
required for shipment. Hence the database once created can be used as centralized
pool of information and can be retrieved in whatever the format required.

Consider another example of retailer’s distribution system as discussed by McMillon


and Gonzalez. Requisitions arrive from customers and go into an unfilled order file.
Shipments from the distributor arrive and enter inventory. From this inventory
deliveries are made to fill customer’s requisitions. Decisions concerning shipments to
customers and quantities to order to replenish the inventory are made at a decision
centre on the basis of knowledge of (or information form) unfilled orders, actual
inventory, and desired inventory.

Three kinds of flow can be traced in the system: materials flow, information flow, and
order flow.

31
Distributor
Order

Materials
Flow
Purchase Order Inventory
Shipments Received sent from Retail Information
Desired at Retail
at Retail (SRR) (PSR) Flow
(IDR)

Inventory Actual Decision Unfit Order at


at Retail (IAR) Point Retail (UOR)

Requisitions
Shipments Received at
Sent form Customer retail (RRR)
Retail (SSR)

Figure 20.3: Three Kinds of Flow

Inter-relationship among different states of retailer’s distribution system

The inter-relationship among the different state of the system can be expressed by the
following equation.
RRRn = f (n)
SSRn = RRR n-2
SSRn = PSR n-3
UORn = UOR n-1 + RRRn - SSRn
IARn = IARn-1+ SRRn - SSRn
IDR n = 20/9 [ RR n + RRRn-1 + RRRn-2]
PSR n = RRR n + ½ [ IDR n – IAR n ]
RRR n
SSRn
SRRn
UOR n
IAR n
IDR n
PSR n
32
In which RRR n is the exciter of the system is a function of time, n. The state vector is
the state of the system at any period in time ‘n’ is simply the value of the variables in
this vector in period ‘n’

It is clear from the above illustration that most of the parameters in materials
movements are inter-related and recursive in nature. Analytical decisions through
systematic calculation enable the decision maker to know or predict the required
decision points. Sometimes even the graphical analysis using the existing functional
equations help the analyst to present proper results through graphs. The information
system designed in this situation will be able to help for drawing proper
interpretation.

20.5 SIMULATION METHODS FOR MATERIALS


INFORMATION: A SYSTEM APPROACH
In developing simulation models one is continuously tempted to abandon specific cases
and to pursue the exclusive but intriguing universal model, the general systems
simulator or as are ultimate, the general problem solver.

From a theoretical point of view, the universal model is potentially a powerful


analytical construct by means of which we can immensely improve our understanding
of the decision making process. But in dealing with applied problems in business and
industry are must concern ourselves with the specific. Now let us understand the
importance of information management in an industrial situation to control the
production level to optimize the profit.

SYSCO manufacturing company assembles computers for domestic use. SYSCO


has these units custom-made by a variety of suppliers and it resells them under the
brand name SYSCOM.

Lead-time for delivery of new stock from their suppliers, SYSCO has found, Varies
in a random fashion, with the following distribution.
Lead time Probability
4 .10
5 .15
6 .50
7 .15
8 .10
While SYSCO is uncertain about demand from week to week (and uses a sales
forecasting strategy that will be described shortly), demand is in fact, normally
distributed about a mean of 50 SYSCOMS per week with a standard deviation of 15.

When customers request SYSCOMS and SYSCO is unable to deliver immediately


due to stock-outs, customer orders are back ordered, and customer back orders are
first satisfied out of new stock received. New stock is received over the weekend.

At the end of each week SYSCO management appraises its operating experience
during the week, updates records, and makes two decisions:
i) Whether to declare a price markdown if demand has been less than that demand
satisfactory and
ii) How many new machines to produce, if any.
33
Method of simulation based on probable demand from previous data is the best tool
to apply. Simulation either in the form of hand simulation or mechanical method is
quite obvious and required repetitive calculations. The problem is to develop an
information system by which SYSCO’s operating experience can be simulated so that
certain policy decision (notably the demand and forecasting strategy and the
inventory management policy ) can be tested to determine their influence on profits,
and so on. It would be profitable to design appropriate computer programs through
subroutines for generating demand and determining limits and making policy decision.

20.6 INFORMATION SYSTEM FOR TOTAL


QUALITY MANAGEMENT (TQM)
Total quality management as stated by Arora and Bhatia, is a philosophy aimed at
each and every aspect of business activity in alignment to the customer perspective.
The objective of TQM is achieving the concept of JIT (Just In Time) with initial
applications in the area of inventory management focusing on delivery schedules.
Purchase of materials and components arrive just in time in the factory site, often in
few hours when requisitioned. This requires placing small and frequent orders and
restructuring relationship with suppliers. The concept has further normalized to
produce as needed to meet customers order resulting in reducing lead times. The aim
is delineated to include elimination of inefficiency and improvement of product quality
in the manufacturing process. TQM has found relevance particularly in
manufacturing process which is by CIM (Computer Integrated Manufacturing)
including Computer Aided Design, product data management and manufacturing
execution system. Management of Information System plays a very vital role in
providing the required inputs at various stages to maintain the integrity of the system.

20.6.1 Manufacturing Execution System (MES)


The MES includes shop floor control, operator guidance and quality system. A cross-
functional team approach is encouraged for optimum employee participation. MES is
being considered as a key technology in drive to improve manufacturing performance
capability in the fiercely competitive global marketplace. MES is being increasingly
applied in a number of discrete batch and continuous process manufacturing industries
such as semiconductors, pharmaceuticals, petrochemicals, plastics and medical
equipments. Integrated MES implementation through computerized systems provide
useful integration of real time data with other information systems such as production
planning system and distribution control system. The corporate major objectives such
as profitability, market share and improved global competitiveness can be realized
through specific improvements such as short production runs, improved quality, lower
costs and customer responsiveness with the implementation of integrated
computerized MES. Schedule adherence, routing management, operator certification
control, work in progress management, process control, real time statistical process
control and statistical product monitoring are important ingredients of MES system
aimed at improved product quality and customer responsiveness.

20.7 SUMMARY
Development of Information system plays an information role in managerial decision-
making. Various manual formats are being needed to reference the information from
the master file, proper approach enables accurate information.

In this unit you have been exposed to the importance of Information System in
Materials Management with illustrative examples giving the steps for development of
a system. As the management of materials in a typical manufacturing environment
34
involves usage of various formats, registers, note sheets etc at different states(phases)
of manufacturing process, integration of these storages through a master data base
enable proper retrieval of information. The role of Manufacturing Executive System in
achieving Total Quality Management has also been enlightened.

20.8 SELF ASSESSMENT QUESTIONS


1) Discuss the importance of materials information system for a manufacturing unit.
2) Study the system followed (manual/computerized) for management of materials in
a manufacturing unit and suggests the steps for system development.
3) Visit some of the web sites who professionally develop the system for MIS and
identify the features.

20.9 REFERENCES AND SUGGESTED FURTHER


READINGS
Ashok Arora and Akshaya Bhatla, Information Systems for Managers, Excel
Books, New Delhi.
Bonini, C.P., Simulation of information and Decision Systems in the firm,
Englewood Cliffs, N.J.: Prentice-Hall Inc., 1963.
Buchan, Joseph, and Koenigsberg, ERNSET. Scientific Inventory Management.
Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1963.
Greenberger, Martin, Management and the Computer of the Future.
Cambridge, Mass., and New York: The M.I.T. Press and John Wiley & Sons, Inc.,
1962.
McMillan and Gonzalez, System Analysis – A Computer Approach to Decision
Models, Richard D. Irwin, Inc., Homewood, Illinois.

35
UNIT 21 CONTROL OF MATERIAL
MANAGEMENT AND
PERFORMANCE APPRAISAL
Objectives
After reading this unit, you would be able to:
· describe the importance of control and different types of controls in materials
management;
· elucidate the need and approaches for performance appraisal in materials
management; and
· explicate the balanced score card approach and SCOR framework for
performance appraisal.
Structure
21.1 Introduction
21.2 Why Control is Needed in Materials Management?
21.3 Different Types of Control Needed in Materials Management
21.4 Approaches to Materials Management
21.5 Need for Performance Appraisal in Materials Management
21.6 Approaches for Performance Appraisal in Materials Management
21.7 Matrices of Performance Appraisal system
21.7.1 Inventory Turnover Ratio
21.7.2 Safety Stock
21.8 Balanced Score Card Approach for Performance Appraisal
21.9 SCOR Framework for Performance Appraisal
21.10 Summary
21.11 Self Assessment Questions
21.12 References and Suggested Further Readings

21.1 INTRODUCTION
Materials are one of the major inputs to the production process. It is necessary to
properly manage the material for efficiency of the system and controlling the costs.
Organizations have to procure it in advance and hold it for some time. For example, a
super market stocks thousands of items in the shelf and wait for customers, similarly
in auto manufacturing company, thousands of parts are stored as inventory. Materials
management is the planning and control of the activities related to the material flow
from the suppliers up to the end of the conversion/production process. Ultimately, the
customers consume the finished items. In simple terms, materials management is the
management of materials, right from the time when a demand originates or is
expected to originate leading to a need for production, all through the various stages of
the processing and manufacturing etc, until it becomes a finished product and has
been dispatched to a satisfied customer. It includes the planning, organization and
control of all aspects of inventory management, procurement, warehousing, work-in-
progress, shipping, and distribution of finished goods.

Thus, activities in materials management include anticipating materials requirements,


sourcing and obtaining materials, introducing materials into the organization and
monitoring the status of materials as a current asset. This also involves management
of a huge amount of important information – for example, engineering, supplier, project
36 management, cost, and delivery are part of materials management.
Performance appraisal is periodically (usually annually) done, in which the work
performance of the system is examined and discussed, with a view to identifying
weaknesses and strengths as well as opportunities for improvement and system
upgradation. In other words, it is the process of assessing, summarizing and
developing the system’s performance. Performance appraisal of material manage-
ment system is necessary to ensure that there is an optimum use of materials and
prompt identification of unwanted materials. System’s inefficiencies like late delivery,
poor customer service, etc, can be identified through performance appraisal system in
material management.

21.2 WHY CONTROL IS NEEDED IN MATERIALS


MANAGEMENT?
The growth in marketing, market segmentation and increased competition has caused
a growth in a variety of products that firms produce and sell. This has complicated
the manufacturing and materials management functions of the firms. It assumes great
importance when practices like infrequent long production runs cause delays and
stock outs, while another situation could be of excessive inventory its management.
Situations of this kind are likely to create a conflict in marketing and planning systems.

Effective management of materials is crucial to the performance of an organization


as:
a) Materials costs are usually a firm’s largest expenditure.
b) Management of inventory in line with the demand and strategy to reduce it are
necessary to cost efficiency.
c) Operating with fewer inventories offers a firm a competitive advantage.
d) Timely execution, implementation and administration of contracts are important
business needs.
e) Supervising and/or monitoring the flow and storage of materials are important.
f) Development of proper relationships with suppliers and with other departments
within the organization is needed for long-term survival.
g) Increase productivity is a continuous affair.
h) Ensuring customer satisfaction i.e. timely supply along with quality supply is
important.
i) Reduction of wastage and obsolescence to a minimum is needed for cost cutting.

21.3 DIFFERENT TYPES OF CONTROL NEEDED


IN MATERIALS MANAGEMENT
To achieve the objectives of material management, different controls are needed,
depending upon the individual functions. These may broadly be categorised into following
aspects:
i) Forecasting,
ii) Purchasing and procurement,
iii) Stores and stock control,
iv) Inventory planning and control,
v) Production planning control.

37
Forecasting: Forecasting forms the basis for planning by establishing assessment
assumptions about the future needs. Good forecasting practice and timely availability
of information are crucial for good organization. Forecasting identifies the future
needs in terms of demand of product and services. Based on the forecasting of what
changes can be reasonably expected to occur in the business, materials managers can
determine what opportunities the organization is in a position to take advantage of.
Purchasing and procurement: This is one of the key controls needed in materials
management. The functions of a purchasing manager include:
i) Reviewing procurement requests,
ii) Soliciting and evaluating requests,
iii) Analyzing current and potential suppliers,
iv) Conducting negotiations with the suppliers,
v) Executing, implementing, and administering contracts,
vi) Developing forecasts and procurement strategies,
vii) Supervising and/or monitoring the flow and storage of materials, and
viii) Developing working relationships with suppliers and with other departments
within the organization.
All these functions require control at different levels of materials management.

Stores and stock control: The store has to take care of controlling and managing the
flow of materials. The important functions that need to be performed in this can be
categorized into the followings:
· Deciding on binning, raking, shelving using pallets, block staking or floor storage
etc, depending upon the type of material,
· Inspection for incoming as well as outgoing materials,
· Stock taking and deciding appropriate policies,
· Managing all warehouse functions.
Inventory planning and Control: Inventory management is the most crucial issue in
material management because of the apparent heavy capital directly involved with it.
Efficient materials management must ensure a high service level with an inventory
level at optimal cost. Planning and control are the key aspects in this. You must have
studied these in earlier units.

Production planning and control: MRP (Material Requirement Planning) is


commonly used in industries. It consists of tracing and priority control, expediting and
de-expediting, all the works of purchasing section and in addition making an estimate
of lead times, standard units, discounts, substitutes, vendors’ problems and price hikes.
Using product design information (like bill of material), inventory status, and master
production schedule (MPS), MRP generates purchase orders on a regular basis. DRP
(Distribution Requirement Planning), like MRP starts with demand for a product as
captured from the customer, it then works backwards using goods on hand, planned
receipts and planned order dates to establish a schedule for efficiently ensuring the
supply.

21.4 APPROACHES TO MATERIALS


MANAGEMENT
The Japanese View: Decision-making tends to come from bottom in Japanese firms
38 and rely highly upon consensus decisions. Procurement is made from small vendors
that are in proximity. Work-in-progress and production activities are often pulled
through the system according to sales and delivery requirements. The pull approach
is applied through a system of Kanban cards that travel with lots of goods. The
subsequent production activities are linked with the respective location of the cards.

The US and European View: The US view focuses on JIT (Just in Time) approach.
Similar to Japanese vendor supply methods, the system coordinates production plans
with vendor production and transportation delivery so that goods can be removed from
the carrying vehicles and placed immediately on production line.

In the European view, the emphasis has been tended more towards the optimal
utilization of plants capital, goods, labor and invested capital. There have been a few
practices that emerged in different regions, owning to different economic and social
scenarios. The current approaches are more likely to apply a mix of all the above
practices in addition to various other approaches that would be suited locally and
otherwise.

ABC Analysis: Monitoring and tracking all types of inventories incur a heavy cost to
firms and is a very challenging task. For example in automobile manufacturing where
thousands of parts are used, it is very difficult to monitor all the inventories. Certain
items may have a relatively low value and these items can often be monitored very
loosely. On the other hand, items with high value must be tracked carefully and
monitored.

To determine which inventory items should receive the highest level of control and
monitoring, a method has been proposed and called as ABC analysis. It is based upon
the Pareto principle that proposes that twenty percent of items account for eighty
percent of the value, while the remaining eighty percent of items accounts for only
twenty percent value. The ranking of items is done as follows:

Class A
The first twenty percent of items are assigned to class A. These items carry around
80% of total material cost. These items need closest control and monitoring. Accurate
inventory records are important, and there is a high potential for cutting cost through
careful buying and close scrutiny of safety stocks.

Class B
The next thirty percent of the items are classified as B items. These deserve less
attention than ‘A ‘ class items.

Class C
The last fifty percent of items are C items. These have the lowest value and can be
monitored loosely, with larger safety stocks maintained to avoid stockouts.
Example: Group the following stocks into an ABC classification scheme.
Table 21.1: Problem data set for ABC Classification

Material code# Volume Cost (Rs.)


109 200 600
222 26000 36
346 2000 55
432 20000 4
211 7000 10

39
Solution:
STEP 1: The total cost value of each item is calculated as follows:
Table 21.2: Calculation of Rs. Volume

Material code# Volume Cost (Rs.) Rs. Volume


109 200 600 120,000
222 26000 36 936,000
346 2000 55 110,000
432 20000 4 80.000
211 7000 10 70,000

STEP 2: Arrange the total cost (product of volume and unit cost) of each stock in a
descending order.

STEP 3: Pick up top stocks whose aggregated total cost (product of volume and unit
cost) is around 80%. These are A-class item. Next, pick up the least aggregated total
cost (product of volume and unit cost) from the bottom of the table so that these account
for around 5-7% of the cost or around 70-80% of volume. These are C-class items.
Remaining items may be placed under B-class items.
The ABC classification scheme of the problem is as follows.
Table 21.3: ABC Classification Scheme

Material Volume Cost (Rs.) Rs. Volume Percent Classification of


code# Material

222 26000 36 936,000 71.1 A


109 200 600 120,000 9.1 A
346 2000 55 110,000 8.4 B
432 20000 4 80.000 6.1 B
211 7000 10 70,000 5.3 C
TOTAL 1316,000 100

You have already studied Continuous Review (Q) systems (or Reorder Point (ROP)
systems) and Continuous Periodic Review (P) Systems in earlier units. For class
A and B items, Continuous Review (Q) systems (or Reorder Point (ROP) systems)
should be used for independent material control systems. This requires constant
monitoring of material levels. P Systems are more convenient to administer than Q
Systems.

For class C items, Continuous Periodic Review (P) Systems should be used for
independent material Control Systems. This requires monitoring of material at fixed
intervals. Q Systems are more expensive to administer than P Systems.

21.5 NEED FOR PERFORMANCE APPRAISAL IN


MATERIALS MANAGEMENT
Basic to any program is the need to systematically review and evaluate the status and
performance of the program. In planning and controlling the materials management
function, it should be recognized that the success of different activities depends on the
proper establishment and pursuance of a performance evaluation system. In material
40
management, traditionally static measures like average inventory, service levels, etc
are common. However, with emergence of supply chain concepts, more comprehen-
sive approach would be needed, which can also integrate the flow of material across
the supply chain partners. Different approaches such as “Balance score card,”
“SCOR Framework,” etc are fast emerging.

21.6 APPROACHES FOR PERFORMANCE


APPRAISAL IN MATERIALS MANAGEMENT
Appraisals of materials management activities should concentrate on the effectiveness
of programs and procedures for managing materials. Specific activities should include,
but not be limited to, the following evaluations:
i) Material quantities with respect to minimum inventory levels required to meet
program objectives.
ii) Programs, procedures, and practices for managing materials.
iii) Forecasts related such as accuracy, thoroughness, completeness, usefulness, and
compatibility with program plans and budgets.
iv) Use of materials in the quantities and for the system.
v) Procedures for identifying, reporting, and managing inactive materials and scrap.
vi) Adequacy of information provided by contractors responsible for developing
materials management plans.
vii) Adequacy of materials management procedures in contracts and subcontracts
issued by the contractor.

21.7 MATRICES OF PERFORMANCE APPRAISAL


SYSTEM
Different matrices are common in the effective management of materials. Some of
these are listed below.

21.7.1 Inventory Turnover Ratio


The inventory turnover ratio indicates how many times the inventory is ‘turned over’
in one year. In other words, it shows how quickly inventory can be sold. Inventory
turn over ratio shows how many times in a year the inventory is sold. This shows the
company with high turnover ratio is able to sell inventory more frequently. With this
ratio we can easily compare the companies on inventory utilization. Major
disadvantage of this ratio is that we cannot compare two firms from different
industries. There is huge variation in the inventory holdings of different industries and
organizations. For example in one industry inventory is held for longer time for
operation while in other it is requiring only short duration.

21.7.2 Safety Stock


Stock that is held in excess of expected demand due to variable demand rate and/or
lead time is known as safety stock. Safety stock reduces risk of stockout during the
lead time (Figure 21.1). As shown, the order is placed when stock depletes to reorder
point (ROP). During the lead-time (LT) if there are demand fluctuations, these are
covered by safety stock.

41
Maximum probable demand
during lead time
Quantity
Expected demand
during lead time

ROP

Safety stock

LT Time

Figure 21.1: Safety stock covers the risk of stockout during leadtime (LT)

21.8 BALANCED SCORE CARD APPROACH FOR


PERFORMANCE APPRAISAL
The balanced scorecard is a performance measurement system that allows managers
to look at the business from four divergent important perspectives: customer, internal
business, innovation and learning, and finance (Kaplan & Norton, 1992, 1996). It thus
links the financial and non-financial, tangible and intangible, internal and external
factors, thus providing a holistic framework for performance appraisal systems
(Figure 21.2).

Financial
Measures

Customer Internal
Strategy Process
Measures
Measures

Learning &
Growth

Figure 21.2: Four Perspectives of Balance Scorecard

A performance measurement system using Balanced Scorecard allows a firm to align


its strategic activities to the strategic plan. Under the balanced scorecard system,
financial measures are the outcome, but do not give a good indication of what is or will
be going on in the organization. Measures of customer satisfaction, growth and
retention are the current indicator of company performance, and internal operations
(efficiency, speed, reducing non-value added work, minimizing quality problems) and
human resource systems and development are leading indicators of company
performance.
42
Thus “Balance” includes
· Short and long term objectives
· Financial and non-financial measures
· External and internal measures, and
· Four different perspectives.
Purposes of the balanced scorecard include
· Clarify and translate vision and strategy
· Communicate and link strategic objectives and measures
· Plan, set targets and align strategic initiatives.

21.9 SCOR FRAMEWORK FOR PERFORMANCE


APPRAISAL
The SCOR Model (Supply Chain Operations Reference Model) was originally devel-
oped by PRTM Consulting. It is now managed and maintained by the Supply Chain
Council (supply-chain.org). It provides an excellent representation of the Fulfill Order
process. Other models such as the ABCD Check list (Oliver Wight Corp.) and OEE
(Overall Equipment Effectiveness) may also be used to represent the Fulfill Order
process. The performance indicators are well applicable in Material Management
also.
Table 21.4: Matrices of Performance

Type of Performance Performance Level 1


Performance Attribute Attribute Definition Metric
Supply Chain The performance of the supply chain in Delivery Performance
Delivery Reliability delivering: the correct product, to the Fill Rates
E
correct place, at the correct time, in the Perfect Order Fulfillment
X
correct condition and packaging, in the
T
correct quantity, with the correct
E
documentation, to the correct
R
customer.
N
A Supply Chain The velocity at which a supply chain Order Fulfillment Lead
L Responsiveness provides products to the customer. Times
Supply Chain The agility of a supply chain in Supply Chain Response
Flexibility responding to marketplace changes to Time
gain or maintain competitive Production Flexibility
advantage.
Supply Chain The costs associated with operating Cost of Goods Sold
Costs the supply chain.
Total Supply Chain
I Management Costs
N Value-Added Productivity
T Warranty / Returns Processing
E Costs
R
N Supply Chain Asset The effectiveness of an organization in Cash-to-Cash Cycle Time
A Management managing assets to support demand Inventory Days of Supply
L Efficiency satisfaction. This includes the Asset Turns
management of all assets: fixed and
working capital.

The SCOR model provides a set of performance metrics (Table 21.4) and supply
chain practices where the supply chain performance is contingent on the maturity of
supply chain practices. This model allows the firm to relate the weaknesses in their
material management function of the supply chain practices. 43
21.10 SUMMARY
This unit deals with the control issues and the performance appraisal in materials
management. Different types of control needed in materials management are also
discussed. Matrices of performance appraisal system in the context of materials
management are also presented.

21.11 SELF ASSESSMENT QUESTIONS

1) What is materials management and explain its importance?


2) Explain how a performance appraisal system can be used in the context of
materials management.
3) What are the matrices of performance appraisal in materials management?
4) Explain balanced scorecard approach for performance appraisal.
5) Explain SCOR framework for performance appraisal and how is it useful in
material management?.

21.12 REFERENCES AND SUGGESTED FURTHER


READINGS
Dutta A.K (1998), Materials Management: Procedures, Text and Cases, Prentice all
of India Pvt ltd, New Delhi.

Gopalakrishnan, P. and Sundaresan, M (1998), Materials Management: An Integrated


Approach, Prentice all of India Pvt ltd, New Delhi.

Kaplan R S and Norton D P (1992), “The Balanced Scorecard - Measures that Drive
Performance”, Harvard Business Review 70, 71-79.

Kaplan R S and Norton D P (1996), “The Balanced Scorecard - Translating Strategy


into Action”, Harvard Business School Press, Boston, MA, USA.

Lee, L. and Dobler, D.W. (1984) Purchasing and Materials Management, McGraw
Hill, New York.

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Indira Gandhi National Open University MS-56
School of Management Studies
MATERIALS
MANAGEMENT

Organisation and Appraisal of


Materials Management 6