Materials Management – Best Practices for Small Manufacturers
Implementing proper materials management allows businesses to make sure raw materials with the best price and quality reach the shop floor in the right time and quantity. Follow these best practices to get more control over this essential segment of the supply chain.
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What is Materials Management?
Materials management is the part of a manufacturing company’s supply chain that is tasked with controlling all aspects related to the raw materials used in production. The process is aimed at managing the quality, sourcing, and price of materials, as well as their location and movement within the manufacturing pipeline. The job of the materials manager is close coordination between inventory, procurement, and production to set up procedures for communicating material requirements and distributing raw goods down the supply chain.
While some organizations may designate materials management a subsection of overall procurement management, other companies treat them as separate entities that serve different areas of a business. Others still may divide the functions of materials management between many business departments like procurements, supply chain, logistics, etc. This is often the case for larger manufacturing or construction enterprises.
As part of procurement management, materials management includes everything related to the sourcing and purchasing of materials. However, if treated as a separate subsection of supply chain management, it becomes a link between procurement and production, dealing mostly with material requirements planning, coordinating material deployment and replenishment, and conducting quality control and inventory analysis for direct materials.
It is worth mentioning that the materials used in manufacturing are usually divided into direct and indirect materials. Direct materials are the raw materials that the products a company produces consist of. Rubber in tires, sugar in soda, etc. Indirect materials are items and materials used in the manufacturing process that do not make up the product itself. These may include glues, staples, equipment, or spare parts. In most cases, materials management includes controlling the flow of both.
Materials Management Best Practices
Set standards for material specifications and quality
The materials manager is the ultimate decision-maker when it comes to quality control and approving raw materials for purchasing. However, the materials manager cannot be at the helm of every purchasing process and every quality check, so they need to set standard operating procedures to be followed by those participating in the process. That includes putting material specifications and quality requirements in place. This is the basis for maximizing product conformity and minimizing non-conformity.
Conduct regular quality checks to ensure conformity to standards
Effective quality control starts before the production process. Of course, no company is capable of assessing the quality of every unit of raw materials they receive, but quality control checks should be done on a regular basis, as often and as thoroughly as financially viable. In most cases, failures due to bad quality (especially internal failures, i.e. those detected by the customer, the ones necessitating returns, repairs, etc.) are more expensive than measures taken to ensure good quality.
Read more about balancing quality costs from this article about Cost of Quality.
Know the exact amount and location of your direct/raw materials
In order to provide the factory floor with the needed materials at the right time, you will have to know where and in which quantity the materials are. Correct markings and organization are imperative in every inventory. Physical counts should be conducted periodically to detect inconsistencies or misplacements, but technological solutions should be used to account for inventory in the day-to-day.
Keep track of your direct/raw materials inventory costs
A substantial portion of the average manufacturer’s expenses come from direct material costs. Therefore, it is absolutely essential to make sure that excess inventory is not tying up cash that could be put into good use elsewhere. Furthermore, holding inventory for too long could result in perished or damaged goods. This is especially true in the case of materials that have an expiry date. Manufacturers should consider different inventory valuation methods (e.g. FIFO, LIFO, Weighted Average) according to the nature of their business.
Read more about Inventory Valuation Methods.
Create a plan and follow it
Material Requirements Planning (MRP I) and Manufacturing Resource Planning (MRP II) are two closely related approaches to materials management.
While MRP I has its beginnings in the middle of the 20th century and deals with basic production planning and inventory control (what and in which quantity is needed), MRP II is an advancement of this method.
MRP II or Manufacturing Resource Planning looks into production planning through the added lens of demand forecasts (when materials need to be ordered) and capacity planning (when production can and should start) while also handling aspects like inventory control, purchasing, business planning, personnel requirements, etc.
Therefore, it allows for better optimization of machinery and resource use, better financial insights, and better control and coordination of production and stock.
Read more about MRP I vs. MRP II.
Use inventory control techniques
Using proven inventory control techniques might give you better insight into the performance of your SKUs and provide you with the knowledge that would help you minimize your inventory costs.
ABC (+XYZ) analysis
By applying the Pareto principle (or 80/20 rule) to inventory management, ABC analysis allows you to prioritize your SKUs according to their consumption value. Conducting an ABC analysis will divide your materials into three categories:
– A for about 20% of the total of SKUs that make up about 80% of the total consumption value. These items will receive the most attention: higher service levels, more review time, etc.
– B for about 30% of the SKUs making up around 15% of the total consumption value. These will receive less attention than A category items and more attention than C category items.
– C for about 50% of the SKUs that make up only 5% of the total consumption value. These will have the least amount of resources allocated to them.
In case only one parameter proves to be too basic in prioritizing your items, adding XYZ analysis into the mix also lets you account for fluctuations in the consumption patterns of the SKUs.
Read more from this article about ABC and XYZ Analysis.
Safety Stock and Reorder Point
Safety stock is the buffer of materials you hold to avoid stock-outs and continue production in case irregularities occur in the supply chain due to shifting supply or demand.
The reorder point is the set level of inventory at which an order for an SKU is triggered when it is time to replenish its stock.
Having only a reorder point set means that when delivery times exceed the expected time to a stock-out, your materials will be exhausted and production will stop until new materials arrive.
However, having a safety stock will prevent that from happening as well.
Both of these values need to be mathematically defined in order to ensure that they function as they should.
Just in Time
Just in Time is not just an inventory control method but also a general approach to manufacturing that aims to minimize the time a product spends in the supply chain – from the supplier of the materials to the end consumer.
This way, manufacturers can avoid overproduction, reduce bottlenecks and waiting time in production processes, and avoid holding excess inventory.
When talking about materials management, the general idea of JIT is to provide materials as they are needed, as closely according to demand as possible.
As a consequence, the movement of materials is streamlined while inventory levels along with holding space and costs are drastically reduced.
Read more about Just in Time Manufacturing.
Minimize search time by using material kitting
Material kitting means bundling the components of a BOM into a ready-to-consume set before arriving on the production floor.
This technique simplifies line-side inventory and improves picking speed, reporting, and quality control processes.
As a general rule, the practice of kitting would be most beneficial when dealing with large varieties of small components, customized products with different variables, or a lack of space on the shop floor that does not allow for much line-side inventory.
Read more about how to set up kitting processes.
Utilize technology to make processes more efficient
There are loads of technological solutions available that can aid manufacturers and materials managers in improving their business processes.
Barcoding, RFID and IoT devices, and warehouse management software aid in managing and closely tracking your inventory.
But what complements all areas of materials management along with all the other departments of a manufacturing company is a manufacturing ERP system.
Today, ‘MRP system’ and ‘manufacturing ERP’ are often used as interchangeable terms, although in theory, the latter has a wider range of functionalities (CRM and accounting, for example).
A good manufacturing ERP allows manufacturers to coordinate their whole business in one single program.
This includes material management processes like material requirements planning, material deployment and replenishment, quality control, inventory control and analysis, kitting, etc.
Material management is often considered part of procurement, but handling it separately and in a more focused manner could lead to better outcomes in terms of quality and efficiency.
In a nutshell, the best practices a materials manager should follow are related to the control of the quality and the flow of materials.
In order to achieve a seamless production with minimal bottlenecks and failures, it is recommended to use inventory control techniques like safety stock and reorder point, or Just in Time, along with technological solutions that aid in material tracking and assessment.
You may also like: 5 Tips for Making Material Planning More Effective