So you’re looking to grow your manufacturing business or the manufacturing arm of your existing enterprise. Chances are, especially in this strange new economy, life is going to get fairly complicated as you need to adjust the supply of materials to meet changing demand, as well as account for all the other little details that come along with purchasing and utilising materials.
This is where materials management comes in – and materials managers themselves. But what do materials managers do, and why are they important?
What is materials management?
Defining materials management
Materials management involves the sourcing, procurement, storage and utilisation of direct or indirect materials (see below) used in the manufacturing process. By strictly managing this area of activities, organisations are able to ensure that they always have their required supply of materials delivered to the right place, at the right time, in the right quantity, of the right quality, at a reasonable price.
Basically, if a manufacturer can’t secure its materials on-time, it can’t produce its products and therefore make money. So, that’s where materials managers come into play.
Materials management in organisational strategy
Materials managers can be critical strategic partners when it comes to increasing efficiencies. You see, materials aren’t just bought all at once and stored forever (that’s a fast way to increase shrinkage) – they have to flow with demand. That means someone has to analyse sales data and forecast demand in order to build a pipeline of suppliers able to meet said demand throughout its peaks and troughs. Getting this process right can save a considerable amount of money (reducing shrinkage, avoiding scrap, etc.).
Strategic decisions can also be made in the areas of cost-cutting or value-adding. For example, your materials manager might renegotiate contracts with suppliers, try to trim transport costs, look for higher-quality goods, build a wider network of partners to increase choice … and so on.
When we refer to direct materials, we mean tangible materials that are consumed during the production process and are reflected in the final product. For example, flour for bread, wood for furniture, hops for beer. These are the products that wind up on a bill of materials, which in turn can be helpful for calculating costs and finding suppliers.
We’ll talk again about bills of materials when we discuss materials requirement planning (MRP) software below.
Materials managers are also responsible for indirect materials. These are important supplies in their own right, but aren’t necessarily a part of the final product – cleaning supplies, for example, or oil, glue, safety equipment, and so on.
Indirect materials are not usually accounted for in the bill of materials, but would instead form a part of your organisation’s overheads to be accounted for in the cost of goods sold (COGS) when you report on your data later in the year.
The main responsibility of a materials manager is to source the right goods at a reasonable price.
The role of a materials manager
1. Sourcing and purchasing
While larger organisations may have their own purchasing departments, often it falls to the materials manager. After being briefed by production managers as to what direct and indirect materials are required, a materials manager will hunt through their network of suppliers or seek to expand said network in order to source right-fit goods at a reasonable price. As you’ll read below, ‘right materials’ and ‘right price’ are two of five very important materials management mantras.
Once purchased, goods must be moved as swiftly and efficiently as possible from their point of origin to an organisation’s storage facilities in order to be inspected and then utilised. This can be quite a significant cost area – in fact, logistics as a whole accounts for about 11% of a company’s revenue, and transport alone makes up just over half of all logistics costs. So, this part of the chain must be carefully managed and optimised to find those critical areas of improvement.
3. Receiving and inspection
When goods arrive, a materials manager will oversee the unloading process and ensure that each item purchased is inspected, uploaded to the company’s data system, and has arrived undamaged. From here, goods can be distributed or stored as appropriate.
4. Storage and inventory management
Inventory management is about a lot more than just keeping a tidy warehouse. Materials managers are also responsible for the maintenance of good storage records, as well as control of the facility itself. Goods must be stored in a manner that minimises the chance of spoilage, and the flow of goods must be monitored to ensure desirable inventory turnover.
5. Demand and risk management
Finally, there’s the more strategic components of demand and risk management. Forecasting to meet demand is a skill unto itself, requiring accurate data and strong industry knowledge. Meanwhile, each stage of the materials supply chain comes with it a degree of risk, especially when third parties are involved.
A materials manager who can accurately plan for demand and build control strategies associated with risks (i.e. risk of spoilage, risks at the supplier end, risks in transport), can create valuable room to breathe so the business is able to expand and contract quickly to meet the changing environment. Yet, this breathing room will not be so large as to potentially create a risk of its own – for instance, purchasing more resources than you need could create breathing room, but also increase carrying costs and the risk of scrap or spoilage.
There are five objectives for any good material manager
Common materials management objectives
Materials management KPIs tend to be built around the five Rs:
- Right materials
- Right time
- Right amount
- Right price
- Right sources
From these, we can usually derive a few common materials management objectives:
1. Ensure continuity of supply
First and foremost a materials manager’s job is to ensure smooth delivery of supplies on time, every time. This is especially important for any organisation with either a highly automated process, or which follows the JIT (just in time) inventory model, where there is little room for supply errors.
2. Cut materials costs
From sourcing to purchasing to transportation to storage, there are many nodes in the materials management network and each comes with a cost. By taking time to track the data from each of these sources, a materials manager may be able to see where inefficiencies are occurring (thus increasing costs), or where a less-expensive alternative may be possible (i.e. choosing a local supplier over one in another city).
3. Improve inventory turnover
Inventory turnover is a highly useful metric for determining how quickly your business turns over its entire stock in a set time period. A high inventory turnover (i.e. selling through your inventory multiple times in a given period) can improve revenue and reduce the chance of spoilage, whereas a low inventory turnover could lead to increased carrying costs.
4. Ensure continuity of quality
For many manufacturers, what comes out is equal to what goes in. Fluctuations in the quality of components could lead to fluctuations in the quality of products, which may harm customer satisfaction down the line. As such, materials managers must work to ensure continuity of materials quality to better guarantee a desirable end result.
5. Build and maintain good supplier relations
Finally, the importance of a strong supplier network cannot be overstated. Building strong relationships with key suppliers can lead to a variety of benefits, for example, VIP customer discounts, stronger negotiating positions, or even just making life a little easier by reducing friction.
Materials management vs. supply chain management: So … are they the same?
Given that both terms seem related to the flow of goods from the origin point to selling manufactured products, it would appear at first glance that materials management and supply chain management are redundant terms – more or less the same.
In a sense, they are. But not because they’re redundant, rather because one is a subset of the other.
Defining supply chain management
Supply chain management is the act of building, managing and optimising an organisation’s entire network, from suppliers to end users.
For a manufacturing business, the supply chain will extend all the way back to a product’s origin point (i.e. coffee bean farmers), then move through freight and distribution specialists until it gets to your business. Downstream, it extends through more logistics companies and distribution centres until it gets to the business that sells your products, then on to the end-users themselves.
To put it in short, materials management is a logistical function, which forms just one component in the supply chain.
Materials management vs. logistics management
To make matters a little more confusing, while materials management is a logistical function, ‘logistics management’ is also its own term.
Whereas materials managers are concerned specifically with the continuity of materials supply (whether direct or indirect), logistics managers have a wider scope. Their objectives also include activities associated downstream, for example order fulfilment, product delivery and quality assurance (related to transport).
What is materials requirement planning software (MRP)?
A common category of software used by materials managers is MRP. This is a very manufacturing-focused tool designed to help specialists in that area understand and quantify those five Rs we mentioned areas – essentially, what goods are needed, where are they coming from, when will they arrive and how much are they costing?
Your bill of materials is key to effective use of MRP software. That’s because MRP is meant to help a materials manager fulfil the requirements of the production materials – that is, supply the raw materials and other parts required for production. This goes onto the bill of materials, which goes into the MRP system and helps a manager source the right supplies.
MRP vs. ERP
First, what is ERP?
Enterprise resource planning (ERP) software is commonly used across sectors, manufacturing included, as it is a tool capable of creating a highly accurate cross-section of an organisation in order to monitor, essentially, its every component.
When an organisation uses ERP software, multiple departments will have a module in the system that they update with key information, such as financial data, stock levels, customer demand, and so on. This can help the organisation track its sales from entry point (supply) to exit point (selling the finished product), and all the costs that come in between.
Comparing ERP to MRP
ERP systems can do what MRP systems can do (albeit, often not to quite the same level) and then some. For example, ERP will not just factor supply and inventory but also CRM, supply chain management, sales data, scheduling and more.
So do you need ERP software or MRP?
Every business is different and so there’s not always a right answer to this question.
ERP is an integrated software that combines multiple arms of the business, whereas MRP tends to operate as a standalone service. While this may make it feel like ERP is better as it includes more, many organisations choose an MRP service instead because MRP providers are highly specialised and therefore offer a suite of manufacturing-specific tools.
That said, the flip side is that MRP operates alone and therefore its data may not readily plug into other parts of the business. It also may be quite heavy software for, say, a smaller business, or a business with a smaller manufacturing component. In either case, ERP may be preferable as it can still provide advanced inventory and materials management modules without being too complex, and it can plug this data into other areas – for example, sales and CRM to better forecast demand.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.