Importance of Materials management

The fast developing Indian economy has placed before the materials manager a tremendous challenge and responsibility. In many organisations, materials form the largest single expenditure item. An analysis of the financial statements of a large number of private and public sector organisations indicate that materials account for nearly 60% of the total expenditure. The information on the average materials expenditure for different industry groups is shown in Table. 

 Average Material Cost as Percent of Total Cost

Thus, the importance of materials management lies in the fact that any significant contribution made by the materials manager in reducing materials cost will go a long way in improving the profitability and the rate of return on investment. Such increase in profitability, no doubt, can be affected by increasing sales. But with the increased competition in the market, this alternative is not very easy to achieve. Besides, some increase in the profitability can be achieved by concentrating on the materials cost which is typically a major rupee item for most organisations. In fact, as market pressure intensifies, organisations will be forced to cut down the costs and here, the materials management steps in to play its role. 

Since materials form major part of total cost, these offer a very good scope for reduction of total cost. A small percent in materials cost can result in large percent increase in Profitability.

Consider, for example, a small company has total sales of Rs. 1000. Total cost is Rs. 900. Thus, the profit is Rs. 100 which amount to 10% of the sales. Suppose, out of total cost of Rs. 900, materials cost is Rs. 600. 

Now if one percent saving in materials cost can be achieved, then the resultant saving is Rs. 6 (1 percent of 600) which directly adds to the profit, thus, profit becomes Rs. 106. 

Therefore, in this case, we can see that 1 % saving in materials cost results into 6% increase in profit.