Importance of Materials Management in an Organization
The importance of materials management cannot be overemphasized in this complex industrial world. It effects not only a particular industry but the entire economic activity of a whole nation. Reduction in materials cost by about 5 per cent is always possible through efficient materials management.
In 1958 Japan could achieve a cost reduction of 3.15 per cent in only 18 months through efficient materials management. Within a period of approximately seven years Japan National Rail ways alone were able to save 5,000,000,000 yen (47,301,661 USD approximately in today’s market), averaging a saving of roughly 4.8 per cent per annum. Materials in an enterprise usually represent 60-70 per cent of the total cost of the final product. Even a small change in materials cost can lead to substantial saving or a heavy loss.
Materials management is one of the most important function for any business organization. Its importance may vary from one industry to another, but it is most important for a manufacturing unit since there it is directly linked with profitability.
The main aim of any organization is to invest its capital in a manner that would ensure maximum return. There are two methods with the help of which it can achieve the goal :
1. By maximizing the units produced with the same capital investment, and
2. By maximizing the profit of each unit produced.
Efficient materials management can greatly help in achieving these two objectives. By effective inventory control and production schedule it can increase the production. By reducing the cost of materials (purchased, handled, stored and issued-at all the stages) it can maximize the profit of the enterprise.
It is said that one per cent saving on cost of material purchase equals the profit earned on 10 per cent increased turnover. It is difficult to increase the turnover by 10 per cent in this age of keen competition but it is easy and is very much within the reach of the materials management function to reduce the cost of materials purchase by one per cent since the materials constitute 60-64 per cent of its total sales revenue.
In India it has not yet been realized that materials management can result in appreciable cost reduction. Our management banks on reducing the personnel cost through saving in wages and welfare activities, advertisement and other allied activities but it has yet to recognize materials management as an area capable of offering a greater scope of cost reduction.