AICTE-SPONSORED QIP SHORT-TERM COURSE

ON

SUPPLY CHAIN MANAGEMENT

(03.10.07 – 07.10.07)

LECTURE NOTES

Prepared By

Prof. S. P. Sarmah Prof. M. Jenamani

Principal Coordinator Co-coordiantor

Department of Industrial Engineering and Management

Indian Institute of Technology, Kharagpur
West Bengal- 721 302
 Contents

Part A: Introductory Topics

I Introduction to Supply Chain Management 1

II Materials Management 11

III Sourcing Decisions 17

IV Bullwhip Effect and Supply Chain Management 27

V Distribution Management Overview 39

Part B: Advanced Topics

VI Supply Chain Management and Multi-echelon Inventories 55

VII Supply Chain Contract and Coordination 65

VIII A Method for Supply Base Rationalization Considering Supply Risk 79

IX E-procurement 103

X Economic Theory of Auctions 113

XI Technologies for Supply Chain Integration 127

XII Security and Payment Issues in Integrated Supply Chain 141

XIII Automatic Data Capture using RFID and its Implications 155

XIV Dynamic Vehicle Routing with GPS and GIS 175

XV Optimization of Supply Chain Network: Simulation, Taguchi, and Psychoclonal 189

Algorithm Embedded Approach
 PART A

INTRODUCTORY TOPICS
 CHAPTER I
Introduction to Supply Chain Management
-An Overview

1.1 Introduction
A Supply Chain encompasses all activities in fulfilling customer demands and requests. These
activities are associated with the flow and transformation of goods from the raw materials stage,
through to the end user, as well as the associated information and funds flows. There are four stages in
a supply chain: the supply network, the internal supply chain (which are manufacturing plants),
distribution systems, and the end users. Moving up and down the stages are the four flows: material
flow, service flow, information flow and funds flow.
Different entities of the suply chain may be owned by one individual/organization or by several
individuals/organizations. Most supply chains of today belong to the later category. In such supply
chains, the owner of each entity attempts to maximize its benefit. Focus on individual links of the
supply chain invariably leads to inefficient and high cost product/service delivery system. In the
process, such a supply chain looses to supply chain that is customer focussed where the individual
links orient their business processes and decisions to ensure least cost delivery of products/services to
the ultimate customer.

1.2 Increasing role of supply chain management

In the last two decades, both academicians as well as practitioners have shown keen interest on the
subject supply chain management (SCM). Globalization of market, increased competition, reducing
gap between products in terms of quality and performance are compelling the academicians and
industry to rethink about how to manage business operations more efficiently and effectively. Since,
scope for improvement within the organization is decreasing, the academicians and captains of
industry are looking for newer alternatives of integrating the business activities beyond the
organization’s boundary. More specifically, they are trying to align and coordinate the business
processes and activities of the channel members to improve the overall performance and effectiveness
of supply chain. As a result, producer, vendor and buyer have started aligning their operations to make
the business more focussed. The alignment and integration lead to deliver more value and satisfaction
to the customer for the same price. This makes the supply chain more competitive. In the process, the
channel partners increase their market share and profit.
In principle, all the steps from procurement of raw materials to final delivery of products can be
included into a supply chain, connecting raw materials suppliers, manufacturers, distributors and
finally customers. Thus, a supply chain can be viewed as a group of entities interacting to transform
raw material into finished product and then final delivery of the product to the customer. Each
member of the chain provides some activity necessary for the transformation (value addition) and
interactions among the members can take place in the form of information, material and money flow.
Narasimhan and Carter (1998) in their work have mentioned that a well-integrated supply chain
involves coordinating the flows of materials and information between suppliers, manufacturers, and
customers. Effective supply chain management requires planning and coordination among the various
channel members including manufacturers, retailers and intermediaries if any (see Thomas and
Griffin, 1996). Due to severe competition in the market, to-day companies are more focusing on their
core competencies and therefore, increased cooperation between the members of the channel and
coordination of decisions are important. For coordination between various parties to be effective, faith
and effective communication between the members are essential.
Bowersox and Closs (1996) put forward argument that to be fully effective in today’s competitive
business environment, firms must expand their integrated behavior to incorporate customer and
supplier and refer this extension of integrated behaviors through external integration as supply chain
management. Further, no organization has enough resources so that it can single handedly manage the
entire supply chain. Therefore, to compete in the market in the present day, the obvious choice is to
work in coordination with the other members of the channel.

1.3 Evolution and growth of SCM

Supply chain management passed through various stages of evolution in last two decades to reach the
present position. The present supply chain management thought could be traced back to early sixties
when Mallen (1963) in his theory developed within the framework of marketing, advocated for
extension of the organization to include all other members of the distribution channel. Croomi et al.
(2000) in their review paper have mentioned that initial development of SCM is along the lines of
managing physical distribution and transport systems. It used techniques such as industrial dynamics
and minimum total cost approach to distribution and logistics. However, when the focus on
opportunities for competitive advantage started shifting from inside the manufacturing plant to
develop relationship with supplier and then finally with customers, work on SCM research started
picking up and since 1980’s, the subject is receiving attentions of both academicians and practitioners.
Maloni et al. (1997) have mentioned that evolution of intra-firm functional integration has occurred
for most firms over the last few decades. SCM extends the concept of intra-firm functional integration
to inter-firm integration of all the firms in the supply chain. Stevens (1989) has shown that the
process of integration of supply chain undergoes following four phases.
(i) Initially, every department of business organization functions independently. In such an
environment, there is no coordination to achieve an overall customer service objective.
(ii) In the second phase, focus shifts to cost reduction without any consideration of
performance achievement. The business organization goes for functional integration
within the organization through materials management, manufacturing management and
distribution for smooth flow of goods.
(iii) Recognizing the importance of customer’s in the business, the third phase aims to
integrate those aspects which are directly under the control of company including the
outward goods management and thereby integrating supply and demand along the
company’s own chain.
(iv) Phase four is the extension of the integration to external activities and in the process;
company becomes customer oriented by linking customer’s purchasing activities with
company’s own procurement, manufacturing and subsequently marketing activities.
From the above discussion, it is clear that supply chain management has evolved around a customer
focused business vision. This focus has led firms to change their internal and external linkages and
capture synergy of inter-functional and inter-organizational integration and coordination.
When we talk about supply chain of two or more parties linked by flows of goods, information and
funds then some interpret that SCM research is essentially the same as that of multi-echelon inventory
research addressed way back in sixties by Clark and Scarf (1960). But, multi-echelon inventory theory
is mainly concerned with controlling the timing and quantity of material flows whereas SCM research
encompasses a much broader set of issues. As for example, the issue of transportation delay in multi
echelon inventory theory is studied via lead-time whereas SCM studies the alternative modes of
logistics (Tsay et al., 1999).

1.4 Definition of Supply Chain

In supply chain management literature, there are numerous definitions available indicating the
fact that still there is not one universally acceptable definition for supply chain. This is probably
because of the fact that authors in this area use the term supply chain rather loosely to cover a wide

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range of subject areas. This has however, helped supply chain management research to grow at much
faster rate.
The definition of supply chain is given in the eighth edition of APICS dictionary (1995) as “The
processes from initial raw materials to the ultimate consumption of finished product linking across
supplier-user companies.”
Houlihan (1985) is credited with coining the term Supply Chain and he mentioned some
characteristics unique to SCM. Jones and Riley (1985) defined supply chain as an integrative
approach to dealing with the planning and control of the materials flow from supplier to end-users.
Oliver and Webber (1992) state that a supply chain should be viewed as a single entity that is guided
by strategic decision-making. Stevens (1989) defines it as a connected series of activities from
supplier to customer. Villa (2001) has commented that in principle, all the activities from raw material
supplies to the final delivery of product to the customers can be included within the purview of the
supply chain.
From the large number of definitions available in the literature of supply chain, it is observed that
though they are apparently different from each other, yet, they are carrying more or less the same
meaning representing a system of supplier, manufacture, distributor, retailer and customer, where
materials flow downstream from supplier to customer whereas information and financial flows are bi-
directional.
Further, another important observation is that each definition has recognized that supply chain works
beyond the boundary of one organization and as a result a clear cut demarcation of boundary in a
supply chain is difficult since, where the boundary of one organization finishes, the boundary of the
other member of the supply chain starts.
Though above definitions of supply chain are mostly related with manufacturing organizations, yet,
there exists supply chain related with service organizations also. Some authors (e.g. Anderson et al.,
2000a, 2000b) have focused their study relating to supply chain of service organization.

Supply chain management

Supply chain management presupposes that there exists a supply chain, which needs to be managed
efficiently. As mentioned above, each entity of the supply chain performs a specific activity and
therefore, in a supply chain, there will be number of activities. Thus management of the supply chain
means coordination of activities among the entities as one system. Thomas and Griffin (1996) have
mentioned that supply chain management strategy is to coordinate the various organizations’
objectives in order to increase the efficiency of the entire supply chain.
Therefore, one major challenge of supply chain management is the development of effective
coordination mechanisms between the various entities of supply chain that ultimately lead to
reduction of lead time, cost and uncertainty. Time, cost and uncertainty are important (though in
varying degrees) to all supply chains. For improving the profit of the firm, SCM must focus in
effective and efficient management of materials, information and financial flows in the supply chain.
Ellram and Cooper (1990) have mentioned that since SCM extends the concepts of functional
integration beyond a firm to all firms in the supply chain, therefore, each member of supply chain
should help each other to improve the competitiveness of the chain. According to Christopher (1992),
the real competition is not between a company and another company, but rather between a supply
chain and another supply chain. A supply chain as a whole may have its own identity and function
like an independent firm.
The council of logistics management defines supply chain management as
“The systematic strategic coordination of the traditional business functions and the tactics across these
business functions within a particular company and across businesses within the supply chain for the

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purposes of improving the long term performance of the individual companies and the supply chain as
whole”
Lee and Billington (1992) mentioned that supply chain management focuses in the coordination of the
manufacturing, logistics, and materials management functions within an organization. They have
defined supply chain management
“The integration activities taking place among a network of facilities that procure raw materials,
transform them into immediate goods and then final products, and deliver products to customers
through distribution system.”
Mentzer (2001) has mentioned SCM as the systematic, strategic coordination of the traditional
business functions within a particular company and across business within the supply chain for the
purpose of improving the long-term performance of the individual companies and the supply chain as
a whole.
New and Pyne (1995) have described supply chain management as the chain linking each element of
the manufacturing and supply process from raw materials through to the end user, encompassing
several organizational boundaries.
Further, La Londe (1997) elaborating the activities of SCM states that it is the process of managing
relationships, information, and materials flow across enterprise borders to deliver enhanced customer
service and economic value through synchronized management of the flow of physical goods, money
and associated information from sourcing to consumption.
Table 1.1 shows the important components of a supply chain management function. These
components can be grouped into two main business processes. They are: Materials Management and
Physical Distribution Management.
As a whole, supply chain management is a set of approaches used to integrate various activities of
suppliers, manufacturers, warehouses efficiently, so that merchandise is produced and distributed at
the right locations and the right time to minimize system-wide costs while satisfying customers’
service level requirements. Successful integration of various processes depends on the accurate and
timely sharing of information by all members of the supply chain. Due to various activities involved
in a supply chain, there may be multiple stakeholders (e.g. suppliers, manufacturers, distributors,
retailers and customers) in a supply chain.
From the above-mentioned views of various authors, it is clear that the scope of SCM is not only
confined to functional activities but also organizational. The functional scope includes a broad range
of traditional business functions, whereas the organizational scope is concerned with relationship
issues important to the participating firms. There is a need to develop a partnership relation between
the participating firms to reap the full benefit of SCM. Therefore, firms must take steps to break down
both intra and inter firm barriers to smoothen uncertainty and to improve control over distribution
channels. From intra-firm functional integration to external integration is the demand of the situation
and supply chain partnership can bridge the gap between the buyer and the supplier.

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Table 1.1 Components of Total Supply Chain Management (Source: Monackza et al., 2002;
Min and Zhou, 2002)

Inbound Production Outbound

Materials management Work in Finished Physical distribution

function process goods function
inventory inventory
• Sourcing activities • Order receipt and
processing
• Inbound transportation
• Pricing
• Receiving and
warehousing • Promotional support
• Production planning • Outbound transportation
and scheduling
• Return product handling
• Materials control
• Field warehousing
• Intra and inter plant
• Customer service and
movement
material availability
• Quality control
• Finished goods delivery
• Inventory control

Materials Management Physical distribution

Supply chain Management

1.5 Characteristics of supply chain

There are some characteristics unique to supply chain management that differentiates it from earlier
researches on integrated logistics. Houlihan (1985) has mentioned that inclusion of strategic decision-
making aspect is one of the key characteristics that differentiate it from earlier research of integrated
logistics. Ganeshan et al. (1999) while referring to characteristics of SCM have mentioned that supply
chain management reaches out beyond the boundaries of cost containment and links operating
decisions to strategic considerations within and beyond the company and in channel wide supply
chain. Thus, SCM as a management philosophy has the following characteristics
• It is a system approach that considers the channel as a whole to manage the flow of goods
from the supplier to the ultimate customer.
• A strategic orientation towards cooperative efforts to synchronize and converge intra-firm
and inter-firm operational and strategic capabilities into a united whole.
• A customer focus to create unique and individualized sources of customer value, leading
to customer satisfaction.

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In adopting a supply chain management philosophy, firms must establish management practices that
permit them to act or behave consistently with the philosophy. Some of the activities necessary for
implementing SCM philosophy can be mentioned as follows
• Integration of processes
• Mutually aggreable goal with same focus of customer service
• Mutual sharing of information
• Mutual sharing of channel risks and benefits
• Development of partnership to maintain long term relationship and cooperation.

1.6 Centralized vs. decentralized supply chain

Generally, one encounters supply chains with two different structures. In one structure of supply
chain, all upstream and down stream members of the chain have same owner. In this type of supply
chain, there will be perfect information regarding cost structure and demand pattern of the members.
In such chains, a central planner has the power to impose a globally optimal solution that is
implemented by all memebers.
On the other hand, in the other type of supply chain structure, different entities involved in the supply
chain have different ownership. In such a structure, there are many independent decision makers. This
supply chain is fundamentally different from the first supply chain in two aspects: First, there is
information asymmetry as a party in the chain may not be willing to share information regarding
his/her cost structure and demand. Secondly, the objective of a member of the chain may be different
from another member.
The second kind of supply chain as mentioned above is mostly prevalent in to-days business
environment. This class of supply chains is receiving attention of researcher and practitioner. Planning
and coordination issues of such supply chains have attracted attention of researchers as well as
practitioners (Ertogral et al., 2001). Such supply chains may be termed as decentralized chains.
Differences in focus of individual channel members make such supply chain more costly and less
effective. Decentralized supply chains are less efficient compared to centralized (single owner) supply
chains. Much of the current researches focus on how this gap of inefficiency can be reduced by
implementing novel coordination mechanisms (e.g. contracts). Tsay, Nahmias and Agarwal (1999)
refer to this as system wide performance improvement objective. The most commonly used term in
the literature for system wide performance improvement is the channel coordination.

1.7 Important elements of supply chain management

Supply chain management can broadly be divided into the following four elements
(i) Purchasing elements: Purchasing is an extremely important element in supply chain management
since incoming material quality, delivery time and purchase price are dependent on buyer supplier
relationship and capabilities of the supplier. Problems with suppliers will ultimately affect the end
customers. One of the crucial issues in purchasing is supplier management. This involves assessing
supplier’s current capabilities and how can it be improved. One of the key activities in supplier
management is supplier evaluation. This occurs both when potential suppliers are being evaluated for
a future purchase and when existing suppliers are periodically evaluated for performance purpose.
Over time, careful and effective supplier management efforts allow firms to selectively screen out
poor performing suppliers and build successful, trusting relationships with the remaining top
performing supplier. These suppliers can provide immense benefits to the buying firm and the entire
supply chain.

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(ii) Operations Elements
Once materials, components and other purchased products are delivered to the buying organization, a
number of internal operations elements become important in assembling and or processing the items
into finished products, ensuring that the right amount of product is produced and that finished product
meets specific quality, cost and customer service requirements. When actual demand does not
materialize with forecasted demand then the firm is left with either too much inventory or not enough.
In both the situations, firm is incurring cost. To minimize these costs, firms rely on demand
management strategies. The objective of the system is to match demand with the available capacity,
either by improving production scheduling, curtailing demand, using a back order system, or
increasing capacity. Further controlling or managing inventory is one of the most important aspects of
operations and certainly valuable to the firm. Firms can and typically do have some sort of material
requirement planning software system for managing their inventory. These systems can be linked
through out the organization and its supply chain partner using enterprise resource planning systems
providing real time sales data, inventory, and production information to supply chain partners.
(iii) Distribution elements
The finished good are delivered to customer a number of different nodes of transportation. Delivering
products to customers at right time, right quality, and right time and in right volume require a high
level of planning and cooperation between the firm, its customers, and the various distribution
elements. Transportation management decisions involve a tradeoff between cost and delivery timing
and customer service. In order to provide the desired level of customer service, firms must identify
customer requirements and then provide the right combination of transportation, storage, packaging,
and information services to successfully satisfy those requirements. Further, designing and building a
distribution network is one method of ensuring successful product delivery. Again there is a trade off
between the cost of the distribution system’s design and customer service.
(iv) Integration Elements
Activities in supply chain are said to be coordinated when members of the supply chain work together
while making delivery, inventory, production, and purchasing decisions that impact the profit of the
supply chain. Successful supply chain integration occurs when the participants realize that supply
chain management must become part of all of the firms’ strategic planning processes, in which
objectives and policies are jointly determined on the basis of final customers’ needs and what the
supply chain as a whole does well. Finally, firms act together to maximize total supply chain profits
by determining optimal purchase quantities, product availabilities, service levels, lead times and
production quantities.

1.8 Partnership formation and vendor managed inventory

Focus on external integration as means to minimize rise of cost naturally led to the development of
partnership relation amongst the player of a supply chain. This trend did not escape the attention of
the supply chain management researchers. Parlar and Weng (1997) have mentioned that long-term
relationship makes both parties of the supply chain better off. However, Boddy et al. (1998) have
mentioned that a change from traditional unfavorable relationship between the customer and the
supplier to one of closer partnering requires careful consideration and attention of management.
Kotler (1997) observed that as firm globalize, they realize that no matter how large they are, they lack
the total resources for success of a complete supply chain that produces value. They recognize the
necessity of partnering with other organizations in the supply chain. In a comprehensive review paper
on supply chain partnership, Maloni and Benton (1997) have mentioned that a supply chain
partnership is a relationship formed between two independent entities in the supply channel to achieve
specific objectives and benefits. From this definition, one can assume that partnership relationship
between the members increases level of information sharing. This ultimately helps in improving the
overall performance of the supply chain through reduction in inventories and reduction in total cost of
managing the supply chain. Besides, one looks ahead to form partnership with the supplier to have

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better customer service, better capacity utilization, technological innovation, and to new products. A
number of authors (e.g. Ellram, 1991) are quite optimistic about the success of supply chain
partnership. Ellram (1991) has mentioned that the central theme of these partnership relationships is
the establishment of, and commitment to, an interactive exchange where both parties benefit from
sharing of risks and resources.
Further, supply chain management to be effective, it requires mutually sharing of channel risks and
rewards among partners (Ellram and Cooper, 1990). This assures competitive advantage in the long
run. In a complex relationship in which performance is difficult to measure, profit or income sharing
based on incentive scheme is an important cooperation mechanism. Again, how to share the extra
benefit due to cooperation is an important issue. Probably a win-win approach to sharing of benefit
between parties is essential for cooperation. For sharing of benefits, many a times, a negotiation
process may be needed where both the parties are free to exchange views.
According to Rubin and Carter (1990), negotiation is the process of reviewing, planning and
analyzing used by two parties to reach acceptable agreement or compromise. It is a process where
both parties adjust their expectations during the resolution of conflict, as one party does not have
absolute power over the other party. In partnership relationship, it is important to note that each party
must be rational. Negotiation building is integral to successful long-term business relationship
(Sharland, 2001).
In the negotiation process, it is also important what to say and how to say since; it may have
significant impact on the outcome of the process. When one party inappropriately presents the things
to the other party, then the later party may perceive that long-term relationship may not be feasible
with the former party. Kelle et al. (2003) have recently studied buyer supplier partnership in JIT
environment and developed models that can be used as quantitative tools for contract negotiation
between the two parties. This could be done through either price correction or through price premium.
Another important facet of cooperation is information sharing, an essential enabler to minimize
inventory in the supply chain. Information systems must be able to track and communicate production
and customer requirements at different levels in the supply chain (Cooper, Lambert and Pagh, 1997).
Despite the perceived benefits of cooperation, it is seen that there is hardly perfect cooperation as
dominant player tend to be opportunistic. Munson et al. (1999) have nicely elaborated about misuse of
power by channel leader. Sometimes, it is noticed that a powerful manufacturer in the channel
controls dependent suppliers, subcontractors and retailers.
Another new dimension to the supplier-buyer partnership is the vendor managed inventory concept. In
vendor managed inventory (VMI) strategy, supplier manages inventory at customer’s premises and
assumes responsibility to replenish the inventory to meet the needs of the buyer who withdraws items
as per his/her requirements. In this strategy, supplier takes decision on inventory replenishment
without waiting for the customer to order the product. Recently, few articles as mentioned below have
cited the benefits of vendor-managed inventory or supplier owned inventory (SOI). VMI helps in
supply chain coordination leading to improvement in the performance of a supply chain.
Dong and Xu (2002) in their work have stated that VMI is an effective strategy of realizing most of a
fully coordinated supply chain. Piplani et al. (2003) have used the term supplier owned inventory
(SOI) instead of VMI. In their study on the effect of SOI strategy on the cost of a supply chain
concluded that total cost in SOI is never be more than the non-coordinated supply chain. Some other
authors such as Cetinkaya and Lee (2000), Waller et al. (1999), Hung et al. (1995) have also studied
the VMI strategy and its benefits. From the study of VMI literature, it is seen that by implementation
of VMI strategy, a buyer reduces total inventory related cost. However, whether VMI reduces the
supplier cost is still an open question.

1.9 Future trend in supply chain management

The practice of supply chain management is recent phenomenon, as many organizations are just now
beginning to realize the benefits and problems that accompany an integrated supply chain. Supply

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chain management is an incredibly complex undertaking involving cultural change among most or all
of the participants, investment and training in software and communication system, and realignment
of the competitive strategies employed among the participating firm. In the competitive business
environment products, technology and customers change and subsequently the priorities for the
supply chain must also change, requiring supply chains to be ever more flexible to respond quickly to
these changes. The future issues for the supply chains that need to be addressed include increasing
supply chain responsiveness, creating an environment friendly supply chain, and reducing total supply
chain cost.
(i) Supply chain expansion
The supply chain dynamic to day is changing and companies are now working with firms located all
over the globe to coordinate purchasing, manufacturing, shipping and distribution activities. While
this global expansion of the supply chain is occurring, firms are also trying to expand their control of
the supply chain to include second and third-tier suppliers and customers. Thus supply chain
expansion is occurring in two fronts : increasing breadth of the supply chain to include foreign
manufacturing, office and retail sites, along with foreign suppliers and customers; and increasing the
depth of the supply chain to include second and third tier suppliers and customers. As the firm
becomes more comfortable and experienced with their supply chain relationships with immediate
suppliers and customers, there is a tendency to expand the depth of the supply chain by creating
relationships with second and third tier suppliers and customers. This span expansion phenomenon is
just now taking place in most industries and will continue to increase as the practice of supply chain
management matures.
(ii) Increasing supply chain responsiveness
Agile manufacturing, JIT, mass customization, efficient consumer response and quick response are all
terms referring to concepts that are intended to make the make the firm more flexible and
responsiveness to customer requirements and changes. In to-days intense competitive market
environment firms and their supply chains are looking today at ways to become more responsive to
their customers. To achieve greater levels of customer responsiveness, supply chains must identify the
end customers’ needs and position the supply chain’s products and services to successfully compete,
and then consider the impact of these requirements on the supply chain participants and the
intermediate products and services they provide. Once these issues have been adequately addressed
among the firms in the supply chain, additional improvement in responsiveness comes from designing
more effective and faster product and service delivery systems as the products are passed through the
supply chain and by continuously monitoring changes occurring the market place and using this
information to reposition the supply chain to stay competitive.
To improve customer responsiveness, firms require to reevaluate their supply chain relationships, to
utilize business process reengineering, to reposition warehouses, design new products and services,
reduce new product design cycles, standardize processes and products, empower and train workers on
multiple skills, build customer feedback into daily operations, and, finally, link together all of the
supply chain participants’ information and communication systems. To day web based systems are
proving to be ideal for connecting supply chain members efficiently. One such tool is Formation
systems’ Optiva 4.0. a web based product life cycle management platform that provides business
intelligence and collaboration from product concept through introduction to improvement. It can be
integrated within a supply chain to help product gets to market faster.
(iii) Greening of supply chains
Producing, packaging, moving, storing, repackaging, and delivering products to their final
destinations can pose a significant threat to the environment in terms of discarded packaging
materials, carbon monoxide emission, noise, traffic congestion, and other forms of industrial
pollution. As the practice of supply chain management becomes more widespread, firms and their
supply chain partners will be working harder to reduce these environmental problem.
***********

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References
[1] Bowersox, D.J. and Closs, D.J., 1996, Logistical management: The integrated supply chain
process, New York, NY: Mc Graw-Hill
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 CHAPTER II
Materials Management

2.1 Introduction
Putting in the simplest terms materials management is about moving the materials within an
organization. What do “materials” mean? Materials can basically be defined as those objects or things
that are to be moved in order to produce goods. Material is one of the 5M’s that a manager has at his
command, the other being Men, Machine, Methods and Money. Materials could be in the form of raw
materials, paperwork, messages or information etc. So materials can be both tangible and intangible.
You see the newspaper boy delivering the newspaper to your doorstep everyday or the mi1kman
delivering the milk packets to you. These are tangible materials. There is also some material moved
when you watch a movie on your television or when you receive a phone call. These are the intangible
materials that are moved. So materials management is an important function of every business. The
better is the materials management in a company the better is the health of that company.

2.2 Materials management and its functions

Materials can be put in three categories. First category is purchased materials like the raw materials,
components, spare parts and items that are used and do not appear in the end product. The second
category is of in-process materials or the materials in the semi-finished stages and lastly the finished
goods that are ready for customers. One has to manage these materials. The aim of this management is
to obtain the materials at the minimum possible price while maintaining quality also and to maintain
the inventories in such a way that minimum cost is incurred while maintaining adequate materials for
the production process.
Let us see what materials management actually means. It is defined as a function that integrates
purchasing, storage, inventory control, materials handling and standardization etc in an organization
to achieve its objective of reducing the costs. Every organization wishes to maximize its profit by
maximizing its production and minimizing the cost of production. The average material cost in a
manufacturing setup is around 50-70% of the total expenditure, which further goes up if one takes into
account the inventory costs, storage, waste and other factors etc. It is therefore imperative for an
organization to have a sound materials management with an objective to reduce material costs, control
inventories, ensure uniform flow of materials and maintain good relations with suppliers. Materials
Management has to do activities related to planning, accusation and utilization of materials.
Materials Management as a subject started picking up from early sixties and has gained importance
thereafter. Since the amount of money incurred on materials is higher than the cumulative amount for
machines, men and methods, one has to give high importance to the materials. It is the most feasible
area that can offer opportunities for reduction of costs and improvement of profits. Materials add
value to the product, as the product quality is directly dependent on the materials used. Materials
Management thus can be seen as a system that assures the availability of products to the customers at
minimum cost. In a nutshell, we can say that materials management is about making available the
right materials in right quantity at a right price on the right time.
The functions of the materials management are materials planning and control, purchasing, inventory
control, store keeping, material handling, warehousing, standardization & simplification and
organization & appraisal of materials. Let us discuss them briefly.
1) Materials planning and control: Material requirement lies at the core of successful material
management. This function is at the core of all the material requirements in any manufacturing
process.
2) Purchasing: This function identifies the sources of supply, does market research, call tenders
and select suppliers, negotiate with them and thus make available the raw materials.
3) Inventory control: This function is responsible for the location and storage of materials so that
they remain available at the minimum cost and quickest time.
4) Store keeping: This function is responsible for the receipt and issue of the materials. The
materials are stored in such a way that minimum handling is required and wastage is minimal.
5) Material handling: This function aims at minimizing handling and provision of equipments for
handling materials. This function is crucial for minimizing space requirements, effective
distribution and for providing better working space.
6) Warehousing: This function is responsible for the storage facilities for the materials, weighing
facilities, materials handling equipments, material distribution facilities, fire fighting
instruments etc.
7) Standardization and simplification: This function selects items of great demand and sets the
standards for quality, raw material, sizes and performance of any product.
8) Organization & appraisal of materials: This function helps in effective functioning by
proving smooth flow. It provides coordination and avoid delays and wastages
Management of materials embodies various costs. Since the ultimate aim of materials management is
to reduce the costs of materials and hence the final product, it is worth seeing what these costs are. Let
us take a glimpse of what these costs are:

Table 1.1: Costs involved in the Management of Materials

Sl.
Costs Description
No.
1 Cost of materials The basic cost of materials that has to be paid to suppliers
The cost incurred in purchases e.g. cost on staff, tendering,
2 Purchasing cost
stationary, postage, processing supplies, receiving, inspection
The cost incurred on storage including buildings, costs on staff,
3 Inventory carrying costs
interest on capital locked/ borrowed, obsolescence
Costs incurred on paper, plastic, metal foils, metal and wood
4 Packaging cost
containers etc.
Costs incurred on moving the goods to different desired
5 Transportation cost
locations from time to time
Costs incurred on handling equipments like cranes and
6 Material handling cost
conveyors
Wastage during Costs incurred on holding scrap, obsolete stock and their
7
production disposal

Source: Shah N.M. (1996), An Integrated Concept of Materials Management

An integrated materials management system helps in taking judicious decisions that in turn leads to
lower cost for materials. Similarly if an organization has low inventory carrying costs, less stock outs
etc., it is bound to do well.

2.3 Management of flow of materials

In any organization, the responsibility for ma