Why materials management?


Historically, the five M’s of an industrial organizations namely Men, Machines, Money, Materials, and Methods have shifted their positions from time to time in their relative importance In early days, the focus was on men as they were the main source of productive power. In the course of time, the emphasis shifted towards machines, which became the main source of industrial power. As years went by the methods of production became more complex and in order to manage the complicated manufacturing system, efficient management became necessary. Naturally, the attention was shifted to scientific management.

The oil crisis of the 1970s changed the priorities of industrialists all over the world. The unprecedented hike in the oil prices and consequent heavy budget allocations on oil made the captains of industrial establishments take note of one of the M’s, namely money. Materials as an input in production systems started receiving attention of the industrialists from 1900 onwards. Earlier to this, materials were taken for granted as they presented no major problem with regard to either supply or cost. Since the beginning of 20th century, materials have been occupying a place of the importance among the M’s and this will continue to be so in the years to come.

Materials Matter More

Materials occupy a significant place among the M’s of an industrial enterprise because of several reasons. First, the amount spent on materials is increasing in relation to the expenditure on other inputs. The trend is clear enough in manufacturing industries. The proportion of total revenue spent on the acquisition of materials has been gradually increasing until it has become 4 or 5 times as great as that required for the remuneration of direct labor.

The trend is not peculiar to manufacturing industries alone. Similar developments seem to be occurring in retailing and other tertiary industries. The reduction in personal service and labor — intensive aspects, speed-up in distribution and the automation of parts of the information collection and processing systems have urged distributive industries along the same path as manufacturing industries towards greater emphasis on the planning and control of the merchandise flow.

Any manufacturer would be at considerable competitive disadvantage, if these opportunities to improve the product or reduce the production cost, were rejected in favor of making under its own roof, all the components required. Some intermediate goods can be bought at lower prices with higher standards than they could be made internally; others can be bought at higher prices which lead nevertheless to lower product costs because internal machining or assembly processes are reduced or eliminated, and others lead to higher product costs and better product performance, so that customers get value for money even though they pay more for the product than they would for an inferior product. But in all the three cases, material costs increase relative to total product costs.

In most business operations today, the cost of material is the last remaining cost that is truly variable – all other major costs are either fixed or tend to be semi-fixed. Hence, a reduction in the cost of materials per se clearly offers an unusual opportunity for profit improvement. When one considers that, materials cost in a typical manufacturing firm represents approximately 50% of total cost, the opportunity for profit improvement in the material area, is virtually impossible to match in any other area of business operation.

It is for the simple reason that, materials offer maximum scope for cost reduction and profit improvement. Materials management is, therefore, described as the ‘last gold mine’ for business managers.

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