What Is Materials Management?

During times of economic uncertainty, especially inflationary periods, it can be tempting to stock up on materials before prices soar higher. But if businesses can’t quickly turn those materials into finished goods—and, more importantly, sell them to customers—this strategy can cost them more in the long run. On the other hand, waiting too long to order materials can cause other problems that also impact a company’s bottom line. However, with the right materials management policies, decision-makers can strike the appropriate balance between too much and too little, creating a leaner operation where costs are low and customer satisfaction is high.

This article explores the various aspects of materials management, including its objectives, core processes, benefits, challenges, and the role of the materials manager.

What Is Materials Management?

Materials management comprises all activities pertaining to the acquisition of raw materials, components, and finished goods from suppliers. Having the correct amount of necessary materials on hand, precisely when and where they’re needed, requires close coordination among multiple business functions, including inventory management, procurement, logistics, and warehouse management.

Materials management is particularly important for small and midsize businesses, which are typically more vulnerable to supply chain disruptions and increased costs for materials than their enterprise counterparts. But with proper materials management, businesses of all sizes open themselves up to a range of important benefits that, ultimately, drive operational efficiency, business agility, customer satisfaction, and profitability.

Key Takeaways

• Materials management involves planning, organizing, and controlling the flow of materials from procurement through production.
• By ensuring the right materials are in the right place at the right time, businesses can reduce costs and minimize waste while still meeting consumer demand.
• Modern businesses and materials managers can rely on software and other technology for real-time visibility into their operations.
• These tools also help leaders monitor emerging trends and changing market conditions and adjust their operations accordingly.

Materials Management Explained

Materials management refers to all of the interrelated processes involved in the flow of production materials into and throughout an organization—namely planning, sourcing, purchasing, storing, and distributing materials. The overall process typically begins with demand forecasting, where a business uses predictive analytics techniques to assess customer demand for a product. Results inform what and how much material is required to meet production needs to prevent either overstocking, which ties up capital in excess materials and increases carrying costs, or not ordering enough, which can manifest in lost sales and unhappy customers.

Improving materials management can lead to numerous benefits for a company beyond increased profitability—though, for many businesses, that is reason enough to assess their current operations. By prioritizing materials management, businesses and decision-makers can identify inefficiencies throughout their supply chains and implement steps to improve operations. For example, the identification and elimination of a bottleneck in the procurement process can help speed up order fulfillment without increasing costs.

The Importance of Materials Management

Successful materials management has everything to do with how quickly a business can produce its goods and meet customer demand, actions that directly improve its financial performance and market position. When a company consistently comes through for its customers, it can generate more sales and build customer loyalty that leads to higher revenue and a steady cash flow that can fund business growth. Effective materials management also helps reduce inventory carrying costs and minimizes waste, which frees up even more cash. By contrast, poor materials management can precipitate stockouts, production delays, and missed sales opportunities, any of which can dampen a company’s bottom line.

In addition to financial benefits, materials management also plays an important role in building a resilient supply chain, fostering strong supplier relationships, and reducing the company’s environmental impact to appeal to eco-conscious consumers (more on these benefits later).

Types of Materials Management

There are five primary functions involved in materials management, which work together to create a smooth and efficient flow of materials. By continually monitoring these areas, businesses can recognize what’s working and identify areas in need of improvement.

• Material requirements planning (MRP) is a supply planning method that calculates the materials needed to manufacture products based on sales forecasts, production schedules, bills of material, current inventory levels, and lead times. For example, a furniture manufacturer would employ MRP to determine how much lumber, fabric, and other raw materials it needs to fulfill incoming and anticipated orders without overstocking.

• Procurement/Purchasing management oversees the sourcing and acquisition of materials, including researching and vetting suppliers, negotiating favorable pricing and contract terms, and handling the myriad accounting tasks related to purchasing materials. At smaller companies, these functions are often handled by a single team; at larger organizations, they may fall to several distinct teams. Either way, staff can add value by working closely with suppliers to identify and implement new ideas, technologies, and processes to improve supply chain efficiency.

• Inventory management is the practice of controlling, tracking, and replenishing stock to make sure the right level of materials is currently available where you need it. Done right, it prevents overstocking and the associated carrying costs, as well as stockouts that send would-be customers straight to the competition. Inventory management also involves conducting inventory audits regularly and monitoring sales data to identify slow-moving or obsolete items.

• Warehouse management governs warehouse design and controls the storage and movement of materials within the building to maximize efficiency. Warehouse management includes sensible layout and floor planning of your facilities and efficient order picking and packing processes; the latter can be expedited by robotic picking systems, autonomous mobile robots (AMRs), and automated storage and retrieval systems.

• Transportation management coordinates the movement of materials from suppliers to production facilities to ensure timely delivery. Transportation management determines the most appropriate mode (or modes) of transportation (air, land, or sea), selects routes that improve delivery times, works to secure competitive carrier rates that reduce freight costs, and more.

Objectives of Materials Management

Materials management has emerged as a critical driver of supply chain excellence. By focusing on the five key objectives of materials management—collectively known as the “5 R’s”—companies can streamline their operations, minimize waste, and respond more quickly to changing market demands.

The 5 R’s

The five R’s of materials management provide a framework for businesses that guides the flow of materials through the supply chain as cost efficiently as possible. Let’s look at each “R” in more detail.

1. Right materials: The right materials are those of appropriate quality, specification, and functionality to meet production requirements and avoid waste. Acquiring the right materials is aided by close collaboration and clear communication with suppliers. This is especially important for medical device manufacturers, for example, that must use materials that meet strict biocompatibility and safety requirements or else risk patient harm and potential liability.

2. Right time: Availability of materials exactly when they’re needed is critical for production to run smoothly and without costly delays. Proper timing requires accurate forecasting and planning. It also involves coordination with suppliers, particularly when a business embraces the just-in-time (JIT) inventory methodology that requires careful timing (more on this approach in the next section).

3. Right amount: The right materials arriving at the right time is a strong start, but ordering too much or too little of them can have costly consequences, whether in the form of high carrying costs due to holding excess stock or stockouts that result in lost sales. Accurate demand forecasts go a long way toward determining the right amount of materials to order and stock.

4. Right price: Timing purchases strategically can help companies obtain the best prices and increase their profit margins, especially during periods of rising costs and inflation. Doing so requires market research, strategic sourcing, price negotiation with suppliers, and ongoing price monitoring. It’s especially important for materials that undergo significant price fluctuations, such as seasonal goods or commodities with long shelf lives. For example, a food processing company might monitor crop yields and market conditions to determine the best time to purchase large quantities of sugar and lock in favorable prices for future production runs.

5. Right sources: As global supply chains continue to expand, sourcing materials from reliable, high-quality suppliers is more important than ever. The ability to build the right pool of sources involves a detailed evaluation of potential suppliers based on factors such as their financial stability, quality-control processes, and delivery execution. Once suppliers are selected, companies will want to evaluate their performance on an ongoing basis.

Benefits of Effective Materials Management

From waste reduction to regulatory compliance, successful materials management can benefit a company in many ways. Below are eight key advantages and how they positively affect company operations.

• Reduction of material waste: Wasted materials translate to wasted money. Waste can signal a variety of issues, such as overordering, poor-quality materials that contribute to defects and rework, inefficient production processes, and improper storage and handling procedures that, for example, can cause spoilage. What’s more, materials waste contributes to pollution and the depletion of natural resources. Strategies like JIT inventory management, lean manufacturing, and periodic waste audits can help companies identify and remedy the root causes of waste.

• Increased inventory accuracy: Materials management tasks, such as regular cycle counting, automated inventory tracking, and real-time order updates, minimize discrepancies between recorded and actual stock levels that can lead to stockouts or excess inventory. Accurate inventory data empowers businesses to make informed decisions about when to place orders and how to schedule production, ensuring a smooth flow of materials through the supply chain. Automated inventory tracking systems that use barcodes, radio-frequency identification tags, or Internet of Things (IoT) sensors provide real-time visibility into stock levels.

• Optimization of material transport: Materials management doesn’t end once inventory is ordered. It also tracks incoming deliveries and follows the movement of materials within the organization. By improving their transportation and logistics processes, businesses can increase the efficiency of their operations. For example, consolidating shipments can lower transportation expenses by reducing the number of trips needed to move goods. Other optimization techniques include route planning, strategic carrier selection, and the use of transportation management systems for real-time visibility and control over shipments.

• Cost reduction: Small and large improvements to material management processes can help reduce costs and improve cash flow, profitability, and long-term financial health. It’s important to recognize that an improvement may sometimes cost more up front but will lead to long-term cost savings. For example, a manufacturer that decides to spend more on higher-quality materials could realize savings by producing fewer defective goods. It may also pay off in terms of reduced labor costs associated with rework and fewer customer returns or complaints.

  Some businesses further lower costs with JIT inventory management, a practice where materials and goods are delivered precisely when they’re needed. By aligning production schedules with demand, the JIT approach minimizes carrying costs and frees up capital that would otherwise be tied up in dust-riddled inventory. It also improves cash flow. Successful implementation of JIT inventory management relies heavily on real-time data so that supply accurately meets demand.

• Improved productivity: By ensuring that the right materials are available when and where they’re needed, materials management helps prevent production delays and downtime. It also minimizes time spent by employees trying to locate misplaced or missing items, which also enhances overall productivity. Automating inventory tracking and order picking through the use of scanners and picking robots frees employees even further to focus on higher-value activities, which can boost job satisfaction and morale.

• Enhanced decision-making: If businesses are to thrive, they must be able to respond immediately to evolving market conditions. Materials management software and advanced analytics provide decision-makers with real-time data about inventory so they can quickly decide what to do to achieve desired results. For example, if a retailer discovers that it has a surplus of winter coats as the season begins to change, it could decide to create targeted promotions to sell off the excess inventory at a discount before the items become outdated.

• Better compliance with regulatory requirements: Businesses must comply with ever-changing regulations or risk having to pay sizable fines and penalties, not to mention the costs for corrective actions and possible reputational damage. With robust material tracking, properly sourced documentation, and well-defined quality-control processes, companies can be confident that their materials and products meet the necessary standards. For example, a food-processing company that uses a materials traceability system could track all orders that came from a contaminated batch of ingredients, helping to reduce the spread of defective items and the subsequent need for large recalls.

The Materials Management Process

The materials management process consists of four sequential processes: procurement, receiving, storage, and transport. A slowdown in one can set off a chain reaction in the others, impeding the flow of materials throughout the supply chain. Let’s dive into each one, using a running example of a hypothetical furniture manufacturer called Sam’s Sofas.

1. Procurement:

   Procurement describes a range of activities involved in the acquisition of materials. They include researching reliable and high-quality suppliers, negotiating the most favorable prices and credit terms, submitting purchase requests, placing orders, and receiving and inspecting shipments. Procurement often includes purchasing activities as well, such as generating purchase orders, approving invoices, and arranging payments. After a lengthy vetting of suppliers, Sam’s Sofas decides to procure wood from a local lumberyard but fabrics and hardware from overseas suppliers.

2. Receiving:

   The receiving process involves managing loading bays for incoming deliveries, verifying the quantity and condition of shipped materials, documenting discrepancies, and updating inventory records. Matching purchase orders against shipments verifies that the correct items and quantities are received, while quality checks identify any damaged or defective materials. The receiving department at Sam’s Sofas keeps its bays clear on Tuesdays for incoming shipments from suppliers. Upon shipment arrival, a staff member compares the delivered goods to the corresponding purchase orders and conducts an initial inspection before signing off on the delivery receipt.

3. Storage:

   By following the proper storage protocols, businesses can minimize material damage, reduce obsolescence, and maintain up-to-date records as items move in and out of warehouses and storage units. This process requires close attention to maintaining quality standards, especially for goods with specific temperature or humidity requirements. Sam’s Sofas is careful to store its raw materials in a climate-controlled warehouse to prevent wood rot. It also organizes its materials by bin locations, using barcodes for fast retrieval. Supplies are tracked with an inventory management system that automatically reorders more goods when they dip below a predetermined level.

4. Transport:

   Transport covers the movement of materials from suppliers to facilities and through each production stage. Successful transport management requires the appropriate handling of equipment, efficient route planning and collaboration with logistics partners. During production, employees at Sam’s Sofas transport materials using forklifts, conveyor belts and AMRs, following carefully planned protocols based on the production stage, product size, and relevant safety standards.

Role of the Materials Manager

The materials manager plays a key role in the materials management process. To successfully fulfill the responsibilities, this person must collaborate closely with colleagues across various departments, as they oversee and track the performance of the following critical areas.

• Facility management: Materials managers control the handling, movement, and storage of materials within the company’s facilities, such as warehouses, storage areas, and stockrooms. They are responsible for designing efficient layouts that maximize space and increase the efficiency of materials handling processes. They must also make sure these areas are clean and well maintained to preserve the quality of materials and the safety of workers.

• Inventory management: Materials managers closely monitor inventory levels to ensure that adequate stock is available to meet production demands. They apply methods such as ABC analysis and economic order quantity (EOQ) to classify inventory items, calculate the most cost-effective order sizes, and determine appropriate reorder points. They also conduct regular audits to maintain accuracy and identify discrepancies.

• Operations management: Materials managers oversee the day-to-day operations related to materials, from procurement to production and distribution. They coordinate the efficient flow of materials, as well as develop and implement standard operating procedures for handling and storing materials. Materials managers work closely with external suppliers and carriers to ensure the timely delivery of materials and to resolve any issues that crop up along the way.

• Production planning: Materials managers support production planning, the process of determining the quantity of goods to be produced, the resources required, and the timeline for manufacturing. They collaborate closely with production teams to ensure that the necessary raw materials and components are available in the right quantities and at the right time to meet production schedules. This involves forecasting material requirements, coordinating with suppliers, and monitoring inventory levels.

• Cost management: Materials managers strive to tame materials-related costs through strategic sourcing, negotiating favorable contracts, and implementing cost-saving initiatives. For example, they may explore alternative suppliers or materials or longer-term contracts to reduce procurement costs without compromising quality. They also analyze inventory data to spot slow-moving or obsolete items that might be ripe for liquidation or clearance sales. Additionally, materials managers constantly monitor market prices for raw materials and components so they can be poised to take advantage of favorable price fluctuations.

• Implementation and control: Materials managers are responsible for developing, implementing, and maintaining material management policies and procedures that govern all of the above. For example, they help establish reorder points, define proper storage and handling techniques, set quality standards and inspection procedures, and outline supplier evaluation criteria.

Materials Management vs. Supply Chain Management

Materials management is an important component of the larger supply chain management function that focuses primarily on the procurement, storage, and movement of materials within an organization. Supply chain management (SCM) is broader, more strategic, and more complex, as it covers the entire life cycle of a product or service across the full network of suppliers, manufacturers, distributors, and customers. SCM activities include:

• Strategic sourcing and supplier relationship management
• Demand planning and forecasting
• Production planning and scheduling
• Inventory management across the supply chain
• Transportation and logistics management
• Warehousing and distribution management
• Order fulfillment and customer service
• Supply chain risk management and resilience planning
• Performance monitoring and continuous improvement

Ultimately, however, materials management and SCM both share the same goal: to maximize customer value and business efficiency while minimizing costs (read: increasing profitability) by controlling the flow of materials and goods.

Materials Management vs. Logistics Management

Logistics management, like materials management, is a subset of SCM. But unlike materials management, which focuses on the control of materials within an organization, logistics management focuses on the physical movement, storage, and flow of goods across the full supply chain and as they enter and exit the organization. Activities include:

• Transportation management, including the selection of air, sea, rail, or road carriers
• Warehousing and storage of finished goods and raw materials
• Inventory management of finished goods and raw materials in transit or storage
• Order fulfillment
• Reverse logistics for returns or repairs
• Freight forwarding for international logistics
• Logistics network design

Materials management and logistics management must work together so that materials and products keep moving through the supply chain. Companies that do not have their own internal logistics teams or the resources necessary to successfully maintain a fleet of delivery vehicles often turn to third-party freight forwarders and logistics service providers, aka 3PLs, to manage their logistics.

Challenges in Materials Management and Solutions

Modern businesses must navigate increasingly competitive marketplaces to quickly deliver goods to demanding customers, the majority of whom make their purchase decisions based on free shipping (82%) and delivery speed (68%), according to a Digital Commerce 360 survey of online shoppers. But demanding customers are just one challenge among many:

• Supply chain complexities: The global nature of today’s supply chain can mean longer lead times, increased risk of disruptions, and reduced visibility. To mitigate these issues, companies can diversify their vendors, develop contingency plans, and map out their supply chains to identify potential bottlenecks, among other supply chain best practices.

• Cost control: Rising costs for materials and transportation, coupled with hefty carrying costs, can take a big bite out of a company’s bottom line. Raising prices on customer purchases is one way companies can offset higher expenses, but businesses must be careful not to push prices too high or raise them too quickly, lest they drive away sales. Additional ways to help control costs include strategic sourcing, which relies on a rigorous framework for vetting suppliers, and investments in automation and sophisticated forecasting tools to foster a leaner production process.

• Quality control: Implementing and adhering to strict quality control measures, such as inspecting newly delivered materials and conducting supplier audits, can help identify—and prevent—quality issues in both raw materials and resulting final products. For example, by inspecting ingredients as they arrive, a restaurant can catch and replace spoiled ingredients before they’re needed for dishes or, worse, have been served to customers.

• Data management: Effective materials management relies on accurate, timely data. A centralized data management system, such as that provided by an enterprise resource planning (ERP) system, can integrate data from procurement, production, and inventory management, among other business-critical functions, fueling vital insights that inform proactive and real-time decision-making.

• Preservation of spares: Maintaining an adequate inventory of spare parts for equipment and machinery is a must if operations are to continue running smoothly during repairs and malfunctions. It should be noted that preserving spare parts requires proper storage conditions and protection against expiration or obsolescence to remain in good condition and be ready for use when needed.

• Surplus stock: Excess inventory ties up working capital that could otherwise be invested back into the business. It also can increase storage costs, lead to dead stock, or force the company to write off inventory, all of which negatively impacts the company’s profitability and cash flow. To address this challenge, businesses can implement a pull or JIT approach to inventory management.

• Environmental sustainability: As more customers seek environmental sustainability from the businesses they buy from, businesses would be wise to adopt eco-friendly materials management practices when sourcing materials. These practices might include sourcing materials from recycled sources or optimizing transportation to reduce carbon emissions. Green strategies also help businesses satisfy increasingly stringent environmental regulations in order to avoid costly fines and reputational damage.

• Regulatory compliance: Local, state, national, and industry regulations often seem like a moving target. Businesses must stay up to date with any regulatory changes and conduct regular compliance audits if they are to avoid potential fines, legal consequences, and/or revenue losses. Maintaining accurate and up-to-date documentation of materials sourcing, handling, and disposal also demonstrates compliance, especially in industries with more stringent guidelines for materials, such as healthcare or food service.

• Technology integration: Advanced technologies and business platforms, such as IoT devices integrated into an ERP system, can break down information silos and create a unified, holistic view of the organization. This technology gives decision-makers the real-time insights they need to improve the flow of materials into and throughout the business. To choose the right ERP system, businesses should first conduct a thorough assessment of goals and needs to determine the features and functions it requires.

• Risk management: Materials management is susceptible to external economic pressures, including price fluctuations, supply shortages, and supply chain disruptions. By developing a robust risk-management framework, business leaders can identify industry- or region-specific challenges and develop mitigation strategies to proactively manage them. A clothing manufacturer, for example, might simultaneously source fabrics from coastal and inland vendors to minimize the risk of shortages of critical supplies arising during an upcoming hurricane season.

Future Trends in Materials Management

Materials management as a discipline is constantly evolving, driven by advancements in technology, such as artificial intelligence for deep data analyses and better connectivity among systems and devices so they can communicate with each other in real time. Here are four additional trends that are shaping the future of materials management.

• Increased digitalization: With cloud-based technologies, businesses can centralize their operational data and provide staff with a real-time view of their materials management processes that’s always accessible from any connected device. This facilitates better decision-making, improved collaboration, and heightened efficiency. Two specific technologies modern materials managers are implementing are blockchain and predictive analytics.

  • Blockchain: This decentralized ledger technology gives businesses a secure, transparent, and tamper-proof way to record transactions and track materials as they move through a supply chain. For example, the diamond industry uses blockchain technology to trace the authenticity and ethical sourcing of diamonds from their original mine to the consumer.

  • Predictive analytics: Predictive analytics tools leverage machine learning algorithms to analyze historical data, identify data patterns, and make predictions about future outcomes, such as the demand for certain products or how suppliers might perform. For instance, a global business might use predictive analytics to align its procurement strategy with weather trends to reduce the risk of supply shortages.

• Sustainability: As previously mentioned, businesses are increasingly focusing on more environmentally friendly materials management practices. This is a crucial piece of the widespread effort at many companies to build more sustainable supply chains that reduce the human and environmental impact of making and moving goods around the globe. Sustainability in materials management includes the adoption of circular economy principles, which emphasize designing products around materials that can be reused and recycled. For example, our hypothetical Sam’s Sofas may partner with local dealers to implement a take-back program for old furniture, whereby materials are recycled for new products, thus minimizing the environmental footprint for every business involved.

• Collaboration: The need for strong, collaborative relationships with internal and external supply chain stakeholders alike is key to successful materials management. Effective communication and real-time data-sharing among partners can help identify potential issues, optimize processes, and drive improvements. A consumer electronics company, for example, could collaborate with its suppliers to develop new components that are more cost-effective and built with more easily attainable materials, reducing costs for both partners.

• Outsourcing: By contracting with specialized service providers to handle specific materials management functions, such as sourcing materials or inspecting materials for quality, companies not only benefit from specialized expertise but are also better able to focus on their core competencies and potential for scaling the business. For example, a growing automotive manufacturer might outsource procurement to a 3PL with extensive experience in sourcing high-quality components, thereby freeing up internal resources to focus on vehicle design and assembly.

Enhance Your Materials Management With NetSuite Inventory Management

Businesses need full visibility into their inventory—what they have on hand, when new shipments will arrive, and where and how these materials will be used—if they are to effectively manage their materials. With NetSuite’s Inventory Management software, businesses can integrate inventory data from warehouses, retail stores, dropshippers, 3PLs, and more into one comprehensive, cloud-based platform. This centralized information source provides real-time visibility into stock levels, order status, and demand forecasts, enabling leaders to quickly adapt operations as market conditions change. With NetSuite’s advanced features, such as automatic reorder points and lot traceability, materials managers can better maintain optimal stock levels, reduce waste, and ensure quality control.

For an even broader perspective of the entire supply chain, NetSuite ERP integrates inventory management with procurement, production, logistics, and warehouse management modules. By automating manual processes and providing actionable insights, NetSuite helps businesses find areas where they can reduce costs, improve efficiency, and enhance the customer experience.

As costs rise and markets shift, materials management is an increasingly important piece of business efficiency, profitability, and competitiveness. By implementing comprehensive strategies and leveraging technology, businesses can steadily improve how they track, allocate, and store materials. They can also embrace new best practices and stay informed about emerging trends and evolving customer demand. With the right materials management approach, businesses can minimize supply chain challenges, better serve their customers, and build a strong foundation for future growth.

Materials Management FAQs

What is meant by material management?

Material management refers to the process of planning, organizing, and controlling the flow of materials used in production processes. It encompasses sourcing, purchasing, inventory control, and distribution to ensure that materials get to where they need to be in order to fulfill orders and satisfy customer demand.

What are the 5 R’s of materials management?

The 5 R’s, or “rights,” of materials management are the right materials, right time, right amount, right price, and right sources. By following these principles, decision-makers can improve supply chain operations, efficiency, and customer satisfaction.

What is an example of materials management?

An example of a materials management process is a just-in-time (JIT) inventory system. By following JIT principles, businesses procure raw materials and components exactly when they need them to produce goods. JIT materials management processes minimize inventory carrying costs and reduce the risk of losses from dead stock.

What are the five different types of material management?

The five main types of materials management are material requirements planning, purchasing management, inventory management, warehouse management, and transportation management. Together, they aim to ensure that the right materials are available at the right time, in the right quantity, and at the right place to support production and meet customer demand.