Introduction

In the earlier years, Materials Management was treated as a Cost Centre, since Purchasing Department was spending money on materials while Stores was holding huge inventory of materials, blocking money and space. However, with the process of liberalization and opening up of global economy, there has been a drastic change in the business environment, resulting in manufacturing organizations exposed to intense competition in the market place. Indian manufacturers have been working out various strategies to face the above challenges and to cut down manufacturing costs to remain competitive. Progressive Management have since recognized that Materials Management can provide opportunities to reduce manufacturing costs and can be treated as a Profit Centre.

On an average, half the Sales income is spent on Materials. Suppose a firm is spending 50% of its volume on materials and the profits are 10% of sales volume. A 2% reduction in materials cost will boost the profits to 11% of sales or the profits will be increased by 10%. To achieve the same increase in profit through sales efforts, a 10% increase in sales volume will be necessary. In other words, compared to sales volume, material cost has five times the average on profits. Organizations earn or loose large sums depending on how effective are their Materials Management.

The cost savings which are possible in Purchasing are as follows:

a) By obtaining materials at lower prices through:
• Development of new sources
• Price negotiations with vendors
• Using modern techniques like cost-price analysis to determine the right or reasonable price for the materials
b) By managing taxes payable
c) By reducing the cost of packaging
d) By optimizing the transportation costs
e) By ensuring the right quality of materials
f) By value analysis
g) By import substitution

Profitability

Till the