Necessity of Materials Management

Firms invest a significant portion of their capital in materials. Even though the range of investments made in material varies from industry to industry, materials normally account for about 50 percent of the total capital invested. Therefore, materials need to be managed effectively and efficiently. For instance, if a hospital runs out of a single item like a syringe, a seemingly insignificant item in its inventory, it brings most operations to a standstill. Besides, such shortages delay service delivery and increase expenses for the firm.

Materials management does not mean stocking large amounts of materials to avoid the problem of a shortfall of material. Making more investments in materials than required is highly uneconomical for a firm because of the high costs involved in storage and maintenance. Therefore, firms should monitor carefully the entire material flow process so that there is no shortage of materials, and they are available at the right time, at the right place and in the right quantity.

Management of materials is very significant in a firm for the following reasons:

• The cost of material is increasing due to scarcity and increasing demand. So, the management should carefully assess the quantity required and minimize wastage during production.

• Reduction in expenditure on materials can improve the profits of a firm. Since overheads other than material costs like labor costs and administration expenses are relatively fixed and do not offer much scope for reduction, material is only the major area for cost reduction.                                  

For example, let us consider an organization that generated sales worth Rs. 1 lakh in a given year with a profit of Rs.10,000. Given that the cost of materials was Rs.50,000. The profits of the organization increase by 25 percent (i.e. Rs. 12,500) if the firm can save 5 percent (i.e. Rs. 2,500) of its current material costs (assuming that other costs remain the same). In this case, a five percent saving in material costs results in increase in profits by 25 percent. The return on investment (ROI) of a firm also depends on the effective utilization of materials, as they are an important part of the current assets of any firm. The Return on Investment (ROI) is calculated as:

ROI = EBIT / (Fixed assets + Current assets)

If a firm reduces its costs on materials (current assets), the return on investment of the firm also increases considerably.

• Materials management contributes to the quality of the end product or service. As materials management covers the execution of functions like purchasing, inventory control and material handling in a firm, the quality of the end product is dependent on it.

• Materials management aims at the preservation of important and scarce resources for future requirements. Further, material management executives are entrusted with the job of exploring new sources of supply and identifying the ways to ensure environmental safety.

Materials management helps accomplish the following objectives of a firm:

• Obtain the least possible prices for materials purchased.

• Maintain high inventory turnover so that less capital is tied up in inventory, i.e. help increase the effective utilization of the firm's capital.

• Ensure the availability of materials required to continue production, when there are disruptions in supply.

• Maintain cordial relations with suppliers and supplying firms.

• Maintain records along with well-planned administrative controls and periodic audits that discourage corruption.

• Keep searching for the new products and materials that can help the firm run efficiently.

Materials management, as we find, plays a significant role in a firm by integrating and coordinating the flow of materials within the firm thus helping in achieving its production and distribution objectives effectively.             

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