what is raw materials in business plan

Raw Materials Supply Business Plan [Sample Template]

By: Author Tony Martins Ajaero

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Are you about starting a raw materials supply company? If YES, here is a complete sample raw materials supply business plan template & feasibility report you can use for FREE .

Okay, so we have considered all the requirements for starting a raw materials supply business. We also took it further by analyzing and drafting a sample raw materials supply marketing plan template backed up by actionable guerrilla marketing ideas for raw materials supply companies. So let’s proceed to the business planning section .

The fact that players in the manufacturing industry would require raw materials for them to be able to produce their products means that there is a good business opportunity for suppliers of raw materials. So, if you are thinking of starting a business where you are assured of huge returns on investment, then one of your best bets is to venture into the raw materials supply business.

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Just like all other investment vehicles, there are potential down sides that you need to look out for if you want to start a raw material supply business.

Part of what you need to do to make headway in this line of business is to ensure that you have good business relationship with manufacturers of the raw materials you intend supplying and also business network with end users (manufacturing companies) that make use of the raw materials you intend supplying.

If you are truly convinced that starting a raw material supply business is for you, then you need to write your own business plan. Below is a sample raw materials supply business plan template that will help you successfully write yours with little or no stress.

A Sample Raw Material Supply Business Plan Template

1. industry overview.

Those involved in the raw material supply business engage in the movement and storage of raw materials and unfinished goods from the point where they are generated to the point where they are used to produce a product or transformed into finished goods.

Raw materials could be lumber, sawdust, raw latex, crude oil, cotton, coal, raw biomass, leaves/herbs, roots, iron ore, logs, or even water.

Over the past five years, the industry has struggled to rebuild itself, even as the overall economy strengthened. Rising consumer confidence and household income have helped ignite remodeling activity that was stalled during the recession, providing additional demand for raw materials.

The Raw Material Stores industry is indeed a large industry and pretty much active in most countries of the world. Statistics has it that in the united states of America alone, there are about 45,069 registered and licensed building materials supply stores and other related raw material suppliers scattered all across the United States responsible for employing about 301,881 people and the industry rakes in a whopping sum of $107 billion annually.

The industry is projected to grow at 4.4 percent annual growth within 2012 and 2017. It is important to state that Builders FirstSource has the lion market share in this industry.

The Raw Material Supply industry is highly regulated in the United States of America and anyone who aspires to start a raw materials supply business must apply and obtain a license before they can legally operate in the industry. This is to guard against substandard raw materials which ultimately will lead to the production of substandard finished goods.

The raw materials supply industry is a profitable industry and it is open for any aspiring entrepreneur to come in and establish his or her business; you can choose to start on a small scale supplying raw materials to cottage industries or you can choose to start on a large scale supplying raw materials to players in major industries in key cities through the United States of America and Canada.

2. Executive Summary

Free Flow™ Raw Materials Supplier, Inc. is a registered raw material supply business that will engage in the supply of raw materials to the textile industry. Our office will be located in Little Rock – Arkansas.

We have been able to lease a facility that is big enough (a 15 thousand square foot facility) to fit into the design of the kind of standard raw material supply store that we intend launching and the facility is located in a corner piece building in the biggest textile raw material market in Little Rock – Arkansas.

Free Flow™ Raw Materials Supplier, Inc. will supply a wide range of raw materials like cotton, fleece, fiber, wool and fur et al to players in the textile industry. We are set to service a wide range of clientele in and around Little Rock – Arkansas.

We are aware that there are several large and small raw materials supply store outlets all around Arkansas that supply raw materials to the textile industry, which is why we spent time and resources to conduct a thorough feasibility studies and market survey so as to be well positioned to favorably compete with all our competitors.

Free Flow™ Raw Materials Supplier, Inc. will ensure that all our customers are given first class treatment whenever they order textile related raw materials from us.

We have a CRM software that will enable us manage a one on one relationship with our customers no matter how many they are. We will ensure that we get our customers involved in the selection of the types of raw materials that we will be dealing in.

Free Flow™ Raw Materials Supplier, Inc. will at all times demonstrate her commitment to sustainability, both individually and as a firm, by actively participating in our communities and integrating sustainable business practices wherever possible.

We will ensure that we hold ourselves accountable to the highest standards by meeting our customers’ needs precisely and completely whenever they patronize our products.

Free Flow™ Raw Materials Supplier, Inc. is a family business that is owned by Loew Adolphus and his immediate family members. Loew Adolphus has a B.Sc. in Business Administration, with over 5 years’ experience in the raw materials supply stores industry working for some of the leading brands in the United States.

3. Our Products and Services

Free Flow™ Raw Materials Supplier, Inc. is in the raw materials supply industry to service a wide range of clients and of course to make profits, which is why we will ensure we go all the way to make available a wide range of textile related raw materials from top farmers in the United States and other countries of the world.

We will do all that is permitted by the law of the United States to achieve our aim and ambition of starting the business. Our product offerings are listed below;

• Treated cotton

4. Our Mission and Vision Statement

• Our vision is to become the leading brand in the raw materials supply industry in Arkansas.
• Our mission is to establish a world – class raw materials supply store business that will make available a wide range of textile related raw materials from top farmers at affordable prices to textile companies in Little Rock – Arkansas and other key cities in the United States of America and Canada where we intend opening our supply chain network.

Our Business Structure

Free Flow™ Raw Materials Supplier, Inc. does not intend to start a raw material supply store business on a small scale; our intention of starting a raw material supply store business is to build a standard textile related material supply store in Little Rock – Arkansas.

Although our raw material supply store business might not be as big as Builders FirstSource and co, but will ensure that we put the right structure in place that will support the kind of growth that we have in mind while setting up the business.

We will ensure that we hire people that are qualified, honest, customer centric and are ready to work to help us build a prosperous business that will benefit all our stakeholders. As a matter of fact, profit-sharing arrangement will be made available to all our senior management staff and it will be based on their performance for a period of ten years or more.

In view of that, we have decided to hire qualified and competent hands to occupy the following positions;

• Chief Executive Officer (Owner)
• Store/Warehouse Manager
• Human Resources and Admin Manager
• Merchandise Manager

Sales and Marketing Manager

Information Technologist

• Accountants/Cashiers
• Customer Services Executive

Truck and Van Drivers

5. Job Roles and Responsibilities

Chief Executive Officer – CEO:

• Increases management’s effectiveness by recruiting, selecting, orienting, training, coaching, counseling, and disciplining managers; communicating values, strategies, and objectives; assigning accountabilities; planning, monitoring, and appraising job results; developing incentives; developing a climate for offering information and opinions; providing educational opportunities.
• Creates, communicates, and implements the organization’s vision, mission, and overall direction – i.e. leading the development and implementation of the overall organization’s strategy.
• Responsible for fixing prices and signing business deals
• Responsible for providing direction for the business
• Responsible for signing checks and documents on behalf of the company
• Evaluates the success of the organization

Admin and HR Manager

• Responsible for overseeing the smooth running of HR and administrative tasks for the organization
• Maintains office supplies by checking stocks; placing and expediting orders; evaluating new products
• Ensures operation of equipment by completing preventive maintenance requirements; calling for repairs
• Enhances department and organization reputation by accomplishing new and different requests; exploring opportunities to add value to job accomplishments
• Defines job positions for recruitment, and managing interviewing process
• Carries out induction for new team members
• Responsible for training, evaluation and assessment of employees
• Responsible for arranging travel, meetings and appointments
• Oversees the smooth running of the daily office activities.

Store Manager:

• Responsible for managing the daily activities in the store/warehouse
• Ensures that proper records of textile related raw materials are kept and warehouse does not run out of products
• Ensures that the store facility is in tip top shape and goods are properly arranged and easy to locate
• Interfaces with farmers who sell wool, furs and fibers and also cotton farmers
• Controls textile related raw material distribution and supply inventory
• Supervises the workforce in the textile material sales floor

Merchandize Manager

• Helps to ensure consistent quality of textile raw material are purchased and retailed / supplied in good price that will ensure we make good profit
• Responsible for the purchase of textile raw materials for the organizations
• Responsible for planning sales, monitoring inventory, selecting the merchandise, and writing and pricing orders to vendors
• Manages external research and coordinate all the internal sources of information to retain the organizations’ best customers and attract new ones
• Models demographic information and analyze the volumes of transactional data generated by customer purchases
• Identifies, prioritizes, and reaches out to new partners, and business opportunities et al
• Identifies development opportunities; follows up on development leads and contacts; participates in the structuring and financing of projects; assures the completion of development projects.
• Responsible for supervising implementation, advocate for the customer’s needs, and communicate with clients
• Develops, executes and evaluates new plans for expanding sales
• Documents all customer contact and information
• Represents the company in strategic meetings
• Helps increase sales and growth for the company
• Manages the organization website
• Handles ecommerce aspect of the business
• Responsible for installing and maintenance of computer software and hardware for the organization
• Manages logistics and supply chain software, Web servers, e-commerce software and POS (point of sale) systems
• Manages the organization’s CCTV
• Handles any other technological and IT related duties

Accountant/Cashier:

• Responsible for preparing financial reports, budgets, and financial statements for the organization
• Provides managements with financial analyses, development budgets, and accounting reports; analyzes financial feasibility for the most complex proposed projects; conducts market research to forecast trends and business conditions.
• Responsible for financial forecasting and risks analysis.
• Performs cash management, general ledger accounting, and financial reporting
• Responsible for developing and managing financial systems and policies
• Responsible for administering payrolls
• Ensures compliance with taxation legislation
• Handles all financial transactions for the organization
• Serves as internal auditor for the organization
• Assists in loading and unloading textile raw materials
• Maintains a logbook of their driving activities to ensure compliance with federal regulations governing the rest and work periods for operators.
• Keeps a record of vehicle inspections and make sure the truck is equipped with safety equipment, such as hazardous material placards.
• Assists the transport and logistics manager in planning their route according to a pick – up and delivery schedule.
• Inspects vehicles for mechanical items and safety issues and perform preventative maintenance
• Complies with truck driving rules and regulations (size, weight, route designations, parking, break periods etc.) as well as with company policies and procedures
• Collects and verify delivery instructions
• Reports defects, accidents or violations

Client Service Executive

• Ensures that all contacts with clients (e-mail, walk-In center, SMS or phone) provides the client with a personalized customer service experience of the highest level
• Through interaction with customers on the phone, uses every opportunity to build client’s interest in the company’s products and services
• Manages administrative duties assigned by the human resources and admin manager in an effective and timely manner
• Consistently stays abreast of any new information on the organizations’ products, promotional campaigns etc. to ensure accurate and helpful information is supplied to customers when they make enquiries

6. SWOT Analysis

Our intention of starting our textile raw material supply business in Little Rock – Arkansas is to test run the business for a period of 3 to 5 years to know if we will invest more money, expand the business and then open our supply outlets all over key cities in the United State.

We are aware that there are several textile raw material supply stores all over Little Rock – Arkansas and even in the same location where we intend locating ours, which is why we are following the due process of establishing a business.

We know that if a proper SWOT analysis is conducted for our business, we will be able to position our business to maximize our strength, leverage on the opportunities that will be available to us, mitigate our risks and be welled equipped to confront our threats.

Free Flow™ Raw Materials Supplier, Inc. employed the services of an expert HR and Business Analyst with bias in supply chain business to help us conduct a thorough SWOT analysis and to help us create a Business model that will help us achieve our business goals and objectives. This is the summary of the SWOT analysis that was conducted for Free Flow™ Raw Materials Supplier, Inc.;

Our business is located in a city with loads of textile manufacturing companies and also, we can boast of having good business relationship with top producers in and around Arkansas.

A major weakness that may count against us is the fact that we don’t have our own farm for now, we are a new raw material supply store outlet and we don’t have the financial capacity to compete with multi – million dollars raw materials supply stores when it comes to supplying textile raw materials at a rock bottom prices.

• Opportunities:

The fact that we are going to be operating our textile raw material supply company in one of the busiest raw materials market in Little Rock – Arkansas provides us with unlimited opportunities to supply our goods to a large number of cottage companies and textile manufacturing companies.

We have been able to conduct thorough feasibility studies and market survey and we know what our potential clients will be looking for when they order textile raw materials from us; we are well positioned to take on the opportunities that will come our way.

Just like any other business, one of the major threats that we are likely going to face is economic downturn. It is a fact that economic downturn affects purchasing/spending power especially for a business like textile raw material supply.

Another threat that may likely confront us is the arrival of a new textile raw material supply store outlet in same location where ours is located. So also, unfavorable government policies may also pose a threat for businesses such as ours.

7. MARKET ANALYSIS

• Market Trends

If you are conversant with the Textile Raw Material Supply Stores Industry, you will quite agree that the changes in disposable income, consumer sentiment, ever changing trends and of course the rate of startups textile companies springing up is a major growth driver for this industry.

A massive rise in consumer confidence has also contributed in helping the industry experience remarkable growth, but uneven performance in these drivers has led to slightly constrained revenue growth.

So also, the rising demand for winter clothes, as a result of increasing disposable income and consumer sentiment, will result in revenue growth, but profit margins will stagnate as textile raw material supply stores keep prices low to attract more sales amid growing competition.

A close watch on the industry activities reveals that the retail market for textile raw materials was hit hard by the recent economic downturn and experienced a decline in revenue in recent time. As part of marketing strategies, textile material supply stores partner with key players in the textile industry. They are in the best position to offer you textile raw material supply contract.

8. Our Target Market

We have positioned our textile raw material supply store to service the textile manufacturing companies in and around of Little Rock – Arkansas and every other location where franchise cum outlets of our textile raw material supply stores will be located all over key cities in the United States of America and Canada.

We have conducted our market research and feasibility studies and we have ideas of what our target market would be expecting from us.

Our Competitive Advantage

A close study of the textile raw material stores industry reveals that the market has become much more intensely competitive over the last decade. As a matter of fact, you have to be highly creative, customer centric and proactive if you must survive in this industry.

We are aware of the stiff competition and we are well prepared to compete favorably with other leading textile raw material supply stores in Little Rock – Arkansas and throughout the United States and Canada.

Free Flow™ Raw Materials Supplier, Inc. is launching a standard textile raw material supply store that will indeed become the preferred choice for key players in the textile manufacturing industry in Little Rock – Arkansas and every other location where our outlets will be opened.

Our textile raw material supply store is located in a corner piece property in the largest textile raw material market in Little Rock – Arkansas.

One thing is certain, we will ensure that we have a wide range of textile raw materials available in our store at all times. It will be difficult for customers to visit our store and not see the type of raw material that they are looking for. One of our business goal is to make Free Flow™ Raw Materials Supplier, Inc. a one stop textile raw material shop.

Our excellent customer service culture, online store, various payment options and highly secured facility will serve as a competitive advantage for us.

Lastly, our employees will be well taken care of, and their welfare package will be among the best within our category in the industry meaning that they will be more than willing to build the business with us and help deliver our set goals and achieve all our aims and objectives.

We will also give good working conditions and commissions to freelance sales agents that we will recruit from time to time.

9. SALES AND MARKETING STRATEGY

• Sources of Income

Free Flow™ Raw Materials Supplier, Inc. is in business to retail a wide range of textile raw materials to textile manufacturers of in and around Little Rock – Arkansas. We are in the business to maximize profit and we are going to go all the way out to ensure that we achieve or business goals and objectives. Free Flow™ Raw Materials Supplier, Inc. will generate income by;

10. Sales Forecast

One thing is certain when it comes to textile raw materials supply, if your store is well stocked with various types of textile raw materials and is centrally positioned, you will always attract customers cum sales and that will sure translate to increase in revenue generation for the business.

We are well positioned to take on the available market in Little Rock – Arkansas and we are quite optimistic that we will meet our set target of generating enough income/profits from our first six months of operation and grow the business and our clientele base.

We have been able to critically examine the textile raw material stores industry, we have analyzed our chances in the industry and we have been able to come up with the following sales forecast. The sales projection is based on information gathered on the field and some assumptions that are peculiar to startups in Little Rock – Arkansas.

• First Fiscal Year: $450,000
• Second Fiscal Year: $950,000
• Third Fiscal Year: $1. 9 million

N.B : This projection was done based on what is obtainable in the industry and with the assumption that there won’t be any major economic meltdown and there won’t be any major competitor retailing same raw materials as we do within same location. Please note that the above projection might be lower and at the same time it might be higher.

• Marketing Strategy and Sales Strategy

Before choosing a location for Free Flow™ Raw Materials Supplier, Inc. we conducted thorough market survey and feasibility studies in order for us to penetrate the available market and become the preferred choice for key players in the textile manufacturing industry in and around Little Rock – Arkansas.

We have detailed information and data that we were able to utilize to structure our business to attract the number of customers we want to attract per time.

We hired experts who have good understanding of the textile raw material supply industry to help us develop marketing strategies that will help us achieve our business goal of winning a larger percentage of the available market in Little Rock – Arkansas.

In summary, Free Flow™ Raw Materials Supplier, Inc. will adopt the following sales and marketing approach to win customers over;

• Open our textile raw material supply store in a grand style with a party for all
• Introduce our textile raw material supply store by sending introductory letters alongside our brochure to textile manufacturing companies and other key stakeholders in and around Little Rock – Arkansas
• Ensure that we have a wide range of textile raw materials from different manufacturing brand at all times
• Make use of attractive hand bills to create awareness and also to give direction to our textile raw material supply store
• Position our signage / flexi banners at strategic places around Little Rock – Arkansas
• Position our greeters to welcome and direct potential customers
• Create a loyalty plan that will enable us reward our regular customers
• Engage on roadshows within our neighborhood to create awareness for our textile raw material supply store
• List our business and products on yellow pages ads (local directories)
• Leverage on the internet to promote our business
• Engage in direct marketing and sales
• Encourage the use of Word of mouth marketing (referrals)

11. Publicity and Advertising Strategy

Despite the fact that our textile raw material supply store is well located, we will still go ahead to intensify publicity for the business. We are going to explore all available means to promote our textile raw material supply store.

Free Flow™ Raw Materials Supplier, Inc. has a long – term plan of opening outlets in various locations all around key cities in the United States which is why we will deliberately build our brand to be well accepted in Little Rock – Arkansas before venturing out.

As a matter of fact, our publicity and advertising strategy is not solely for winning customers over but to effectively communicate our brand. Here are the platforms we intend leveraging on to promote and advertise Free Flow™ Raw Materials Supplier, Inc.;

• Place adverts on community based newspapers, radio and TV stations
• Encourage the use of word of mouth publicity from our loyal customers
• Leverage on the internet and social media platforms and other platforms to promote our business.
• Ensure that our we position our banners and billboards in strategic positions all around Little Rock – Arkansas
• Distribute our fliers and handbills in target areas in and around our neighborhood
• Advertise our textile raw material supply store business in our official website and employ strategies that will help us pull traffic to the site
• Brand all our official cars and trucks and ensure that all our staff members and management staff wear our branded shirt or cap at regular intervals

12. Our Pricing Strategy

Our pricing system is going to be based on what is obtainable in the textile raw material supply line of business, we don’t intend to charge more and we don’t intend to charge less than our competitors are offering in and around Little Rock – Arkansas.

Be that as it may, we have put plans in place to offer discount once in a while and also to reward our loyal customers especially when they refer clients to us. The prices of our textile raw materials will be same as what is obtainable in the open market in The United States of America.

• Payment Options

The payment policy adopted by Free Flow™ Raw Materials Supplier, Inc. is all inclusive because we are aware that different customers prefer different payment options as it suits them but at the same time, we will ensure that we abide by the financial rules and regulation of the United States of America. Here are the payment options that Free Flow™ Raw Materials Supplier, Inc. will make available to her clients;

• Payment via bank transfer
• Payment with cash
• Payment via credit cards
• Payment via online bank transfer
• Payment via check
• Payment via mobile money transfer

In view of the above, we have chosen banking platforms that will enable our client make payment for supply of our textile raw materials without any stress on their part. Our bank account numbers will be made available on our website and promotional materials.

13. Startup Expenditure (Budget)

When it comes to starting any business, the amount or cost will depend on the approach and scale you want to undertake.

If you intend to go big by renting / leasing a big facility, then you would need a good amount of capital as you would need to ensure that your employees are well taken care of, and that your facility is conducive enough for workers to be productive.

The materials and equipment that will be used are nearly the same cost everywhere, and any difference in prices would be minimal and can be overlooked. As for the detailed cost analysis for starting a textile raw material supply store business; it might differ in other countries due to the value of their money. These are the key areas where we will spend our startup capital;

• The total fee for registering the Business in the United States of America – $750
• Legal expenses for obtaining licenses and permits as well as the accounting services (software, P.O.S machines and other software) – $3,300
• Marketing promotion expenses for the grand opening of Free Flow™ Raw Materials Supplier, Inc. in the amount of $3,500 and as well as flyer printing (2,000 flyers at $0.04 per copy) for the total amount of $3,580
• The cost for hiring Business Consultant – $2,500
• Insurance (general liability, workers’ compensation and property casualty) coverage at a total premium – $2,400
• The cost for payment of rent for 12 months at $1.76 per square feet in the total amount of $105,600
• The cost for shop remodeling (construction of racks and shelves) – $20,000
• Other start-up expenses including stationery ( $500 ) and phone and utility deposits ( $2,500 ).
• Operational cost for the first 3 months (salaries of employees, payments of bills et al) – $60,000
• The cost for Start-up inventory (stocking with a wide range of textile raw materials) – $250,000
• The cost for counter area equipment – $9,500
• The cost for store equipment (cash register, security, ventilation, signage) – $13,750
• The cost of purchase and installation of CCTVs – $10,000
• The cost for the purchase of office furniture and gadgets (Computers, Printers, Telephone, TVs, Sound System, tables and chairs et al) – $4,000.
• The cost of launching a Website – $600
• The cost for our opening party – $7,000
• Miscellaneous – $10,000

We would need an estimate of $550,000 to successfully set up our textile raw material supply store in Little Rock – Arkansas.

Generating Startup Capital for Free Flow™ Raw Materials Supplier, Inc.

Free Flow™ Raw Materials Supplier, Inc. is a private business that is solely owned and financed by Loew Adolphus and his immediate family members. They do not intend to welcome any external business partners, which is why he has decided to restrict the sourcing of the startup capital to 3 major sources. These are the areas we intend generating our startup capital;

• Generate part of the startup capital from personal savings
• Source for soft loans from family members and friends
• Apply for loan from my Bank

N.B: We have been able to generate about $250,000 ( Personal savings $200,000 and soft loan from family members $50,000 ) and we are at the final stages of obtaining a loan facility of $300,000 from our bank. All the papers and documents have been signed and submitted, the loan has been approved and any moment from now our account will be credited with the amount.

14. Sustainability and Expansion Strategy

The future of a business lies in the number of loyal customers that they have, the capacity and competence of their employees, their investment strategy and the business structure. If all of these factors are missing from a business, then it won’t be too long before the business close shop.

One of our major goals of starting Free Flow™ Raw Materials Supplier, Inc. is to build a business that will survive off its own cash flow without the need for injecting finance from external sources once the business is officially running.

We know that one of the ways of gaining approval and winning customers over is to retail our wide range of quality textile raw materials a little bit cheaper than what is obtainable in the market and we are well prepared to survive on lower profit margin for a while.

Free Flow™ Raw Materials Supplier, Inc. will make sure that the right foundation, structures and processes are put in place to ensure that our staff welfare are well taken of. Our company’s corporate culture is designed to drive our business to greater heights and training and retraining of our workforce is at the top burner.

As a matter of fact, profit-sharing arrangement will be made available to all our management staff and it will be based on their performance for a period of six years or more. We know that if that is put in place, we will be able to successfully hire and retain the best hands we can get in the industry; they will be more committed to help us build the business of our dreams.

Check List/Milestone

• Business Name Availability Check: Completed
• Business Registration: Completed
• Opening of Corporate Bank Accounts: Completed
• Securing Point of Sales Machines: Completed
• Opening Mobile Money Accounts: Completed
• Opening Online Payment Platforms: Completed
• Application and Obtaining Tax Payer’s ID: In Progress
• Application for business license and permit: Completed
• Purchase of Insurance for the Business: Completed
• Leasing of facility and remodeling the shop: In Progress
• Conducting Feasibility Studies: Completed
• Generating capital from family members: Completed
• Applications for Loan from the bank: In Progress
• Writing of Business Plan: Completed
• Drafting of Employee’s Handbook: Completed
• Drafting of Contract Documents and other relevant Legal Documents: In Progress
• Design of The Company’s Logo: Completed
• Graphic Designs and Printing of Promotional Materials: In Progress
• Recruitment of employees: In Progress
• Purchase of the needed furniture, racks, shelves, computers, electronic appliances, office appliances and CCTV: In progress
• Creating Official Website for the Company: In Progress
• Creating Awareness for the business both online and around the community: In Progress
• Health and Safety and Fire Safety Arrangement (License): Secured
• Opening party planning: In Progress
• Compilation of our list of products that will be available in our store: Completed
• Establishing business relationship with vendors – farmers: In Progress

Raw Materials: Definition, Types, and Accounting

Raw materials also known as primary commodity, unprocessed material, or feedstock are a fundamental substance utilized in the manufacturing of goods , final products, or intermediate materials that serve as the raw materials for future finished products. When referred to as feedstock, it is implied that these materials are crucial assets to the production of other items. Usually, they are related to natural resources, as they are unprocessed commodities such as oil, cotton, iron ore, plastic, and water.

A 2022 report showed that improving the sourcing of primary commodities has become one of the key objectives of companies reconfiguring their supply chains.

Types of Raw Materials

Unprocessed materials can be categorized into several types such as plant-based, mined, and animal-based:

• Plant-based Raw Materials: They come from plants and trees such as flowers, vegetables, fruits, cotton, wood, latex, and nuts.
• Mined: These raw materials are extracted from the earth they can be from stones, metals, and minerals to soil, sand,, or coal.
• Animal-based: They are produced or extracted by the animals such as milk, meat, furs, or wool.

However, there are two extra categories that are related to the accounting processes of a business: Direct and Indirect

Direct Raw Materials

Raw materials that are included in this category are used directly in the manufacturing processes of a finished product such as metals for a car. As for accounting, they are placed on the current assets of a company and are expensed on the income statement within the cost of goods sold. Furthermore, they can deteriorate or become unusable during storage leading the company to classify them as obsolete. In this case, the company records the inventory as a debit and reduces its assets by crediting obsolete inventory

Since 2002 the EU has had an ongoing trade deficit in raw materials including goods such as oilseeds, cork, wood, pulp, textile fibers, ores and other minerals as well as animal and vegetable oils According to Eurostat

Indirect Primary Commodities

In this case, they aren’t part of the final good but instead are used in its production process. Indirect raw materials are recorded as long-term assets and they can fall under several categories such as selling, general or property, plant and equipment.

Examples of Raw Materials

Calculation Formula

As it is important to maintain raw materials inventory in the proper quantity and at the right place to avoid obsolete inventory and overstocking errors, proper inventory management should be put into place!

Here’s the raw materials calculation formula for your businesses’ manufacturing processes:

Raw materials used = opening raw material + raw material purchases – closing raw material

For the sake of this example let’s suppose that:

• The cost of raw materials purchased is equal to $5000
• the opening raw materials cost $15000
• the closing raw materials are $10000

Thus: Raw materials used = $15000 + $5000 – $10000 = $10000

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• How to Fund Your Business With Venture Capital
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• How to Use Your Business Plan to Track Performance
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• Is This Idea Going to Work? How to Assess the Potential of Your Business.
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• Write Your Business Plan | Part 3 Overview Video
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• Write Your Business Plan | Part 4 Overview Video
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• Write Your Business Plan | Part 5 Overview Video
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

How to List Personnel and Materials in Your Business Plan Manufacturers must show the labor and resources needed to run their business. Here's what you need to know.

By Eric Butow Oct 27, 2023

Opinions expressed by Entrepreneur contributors are their own.

This is part 11 / 12 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

Manufacturers combine labor and materials to produce products. Any problems with these critical inputs spell trouble for your business and its backers. Business plan readers look for solid systems to ensure that personnel and materials are appropriately abundant.

For this reason, your plan should show that you have adequate, reliable sources of supply for the materials you need to build your products. If you are working with suppliers in other parts of the world, show that they are reliable and that you have established a system to make such international production run smoothly. A global marketplace means more opportunities to find the materials or products you need and new markets for sales. This can be impressive to your readers.

Related: The Main Objectives of a Business Plan

However, you need to define and provide the details of how your business will benefit from being a part of the global marketplace. Even if you are not planning to actively pursue global partnerships, buy from vendors around the globe, or market to customers in other countries, you must address the possibility of international sales if you are selling via your website.

Estimate your needs for materials and describe the agreements with suppliers, including the length and terms you have arranged to fulfill those needs. You may also give the backgrounds of your major suppliers and show that you have backup sources available should problems develop.

Related: What Equipment and Facilities to Include in Your Business Plan

You'll first need to estimate the number and type of people you will require to run your plan. Startups can do this by looking at competitors' plants or by relying on the founders' prior experience at other companies. Existing firms can extrapolate what they'll need to expand from current operations.

Next, show that you can reasonably expect to be able to hire what you need. Look at local labor pools, unemployment rates, and wage levels using information from chambers of commerce or similar entities. If you plan to import sizable numbers of workers, check out housing availability and build an expense for moving costs into your budget.

Related: How to Craft a Business Plan That Will Turn Investors' Heads

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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Understanding Raw Materials: Definitions, Formulas, Types, and Importance

Defining Raw Materials

Raw materials are the fundamental building blocks in production processes, representing the unprocessed materials that are transformed into finished goods. These materials are integral to supply chain management (SCM) as they influence every stage, from procurement to production. In warehouse and inventory management, it is important to handle raw materials well. This helps keep production running smoothly without delays. Accurate tracking of raw material levels in real-time is crucial to maintaining supply chain agility and responsiveness.

The Formulas Involved in Raw Material Management

Calculating the cost of raw materials.

To accurately determine the cost of raw materials, ecommerce businesses need to consider several factors. A common formula used for this purpose is:

Cost of Raw Materials = (Opening Inventory + Purchases) – Closing Inventory

By applying this formula, businesses can calculate the precise cost of the raw materials used in the manufacturing process. This information is invaluable for understanding and managing expenses associated with production.

The cost of raw materials is a big part of what a business spends; this is important to remember. By accurately calculating this cost, companies can make informed decisions regarding pricing strategies, production volumes, and budget allocations.

Formulas for COGS

Knowing your Cost of Goods Sold (COGS) is crucial because it directly affects your gross profit margin and overall profitability. By understanding COGS, you can:

• Set Pricing Strategies: Accurate COGS helps determine the right pricing to ensure profitability.
• Manage Inventory Costs: Identifies how much you’re spending on inventory, helping to control costs and optimize stock levels.
• Evaluate Financial Performance: Provides insight into the efficiency of production and the effectiveness of cost control measures.

COGS = Beginning Inventory + Purchases − Ending Inventory

Here’s a breakdown of the components:

• Beginning Inventory: The value of inventory at the start of the period.
• Purchases: The cost of additional inventory bought during the period.
• Ending Inventory: The value of inventory remaining at the end of the period.

COGS should be updated regularly to reflect changes in inventory and purchases. For most businesses, updating COGS monthly aligns with financial reporting cycles. Companies that change their inventory quickly or need real-time data may need more frequent updates. These updates could be weekly or daily. This helps them make better decisions.

Formulas for Inventory Turnover and Efficiency

Inventory turnover and efficiency are key performance metrics in the ecommerce industry. They indicate how effectively we utilize and replenish raw materials. Here are two essential formulas to assess inventory turnover:

Inventory Turnover = Cost of Goods Sold / Average Inventory

Inventory Efficiency = (Cost of Goods Sold / Total Inventory Holding Cost) x 365

These formulas help businesses gauge their efficiency in managing raw materials inventory, enabling them to make informed decisions and optimize their operations accordingly.

Understanding inventory turnover and efficiency is crucial for maintaining a healthy cash flow and ensuring that working capital is effectively utilized. By monitoring these metrics and making adjustments as needed, businesses can streamline their operations and improve their bottom line over time.

Supply Chain Visibility and Traceability

Real-time tracking of raw materials is vital for supply chain visibility and traceability. With advanced inventory management systems, businesses can monitor the movement of raw materials from manufacturing to supplier facilities, ensuring that each batch arrives on time and meets quality standards.

This visibility helps identify potential bottlenecks and enables businesses to act swiftly in case of disruptions, reducing the risk of production delays.

Lean Manufacturing Principles Applied to Raw Materials

Lean manufacturing principles are closely tied to JIT strategies, with the goal of maximizing value while minimizing waste. This approach focuses on streamlining processes and eliminating non-value-added activities. By applying lean principles, businesses can reduce excess raw material inventory, minimize handling and storage costs, and improve overall efficiency. Lean manufacturing also emphasizes continuous improvement, encouraging organizations to regularly assess their processes and identify areas for optimization.

Raw Materials and Just-in-Time (JIT) Inventory

Just-in-Time (JIT) inventory management is a lean approach that aligns raw material procurement with production schedules, reducing holding costs and minimizing waste. By receiving materials only when they are needed for production, companies can avoid overstocking and lower the risk of material obsolescence. JIT requires precise demand forecasting and strong relationships with suppliers to ensure timely deliveries, helping to keep inventory levels lean without compromising production schedules.

Material Requirements Planning (MRP) in Manufacturing

Material Requirements Planning (MRP) systems are designed to optimize raw material usage by aligning procurement with production schedules. MRP systems calculate the exact quantities of raw materials needed to meet production demands, helping businesses avoid both shortages and overstocking.

With MRP, businesses can make plans for production. This helps match the materials they have with their manufacturing schedules. It ensures that people use resources well and that production stays on schedule.

Example of Material Requirements Planning (MRP)

Let’s say you are a furniture manufacturer. You need to produce 100 tables for the month. To ensure everything ran smoothly, you used the Material Requirements Planning (MRP) system to determine the required materials. The system calculated that 400 pieces of wood, 200 screws, and 100 pieces of glass were needed.

Checking the inventory, the system found you have 150 pieces of wood, 180 screws, and 50 pieces of glass currently in stock. The MRP system highlighted the shortfalls: 250 pieces of wood, 20 screws, and 50 pieces of glass are still needed to make the 100 tables.

Advanced Analytics and Predictive Forecasting

Advanced analytics and predictive forecasting have revolutionized raw material management by enabling businesses to anticipate future demand and adjust procurement strategies accordingly. By analyzing historical data and market trends, companies can predict when to replenish raw materials, reducing the likelihood of stockouts or excess inventory. Predictive analytics also help identify potential supply chain disruptions, allowing businesses to proactively mitigate risks and ensure a steady flow of materials.

Advanced analytics and a predictive forecasting software can provide several key metrics to help manage raw materials effectively including but not limited to:

• Demand Forecast Accuracy: Measures how closely predicted demand aligns with actual usage, helping to refine forecasting models.
• Inventory Turnover Ratio: Indicates how often inventory is sold and replaced over a period, guiding optimal stock levels.
• Stockout Rate: Tracks the frequency of running out of stock, helping to identify areas where inventory levels may be insufficient.
• Lead Time: Measures the time taken from placing an order to receiving raw materials, aiding in better planning and reducing delays.
• Safety Stock Levels: Determines the buffer stock needed to prevent stockouts during unexpected demand spikes or supply disruptions.
• Carrying Costs: Calculates the total costs associated with holding inventory, including storage, insurance, and obsolescence, which helps in optimizing inventory levels.
• Order Fulfillment Rate: This shows the percentage of orders fulfilled on time and in full, reflecting the effectiveness of inventory management and procurement strategies.
• Supplier Performance Metrics: Evaluates supplier reliability, delivery times, and quality of materials, aiding in better supplier management and risk mitigation.
• Markup : added percentage of the cost to the price of their product to ultimately make a profit. 

Depending on which system or platform you use for analytics or forecasting, this information may come in the form of a dashboard or a report. A robust IMS system or ERP can handle this with ease.

Inventory Accuracy and RM Stockout Prevention

Preventing stockouts of raw materials is critical to maintaining production schedules and meeting customer demand. Inventory accuracy plays a key role in this process, as inaccurate data can lead to unexpected shortages or overstocking.

Regular cycle counts and audits can help ensure that inventory records align with actual stock levels. Implementing automated inventory management systems can further enhance accuracy by providing real-time updates on raw material levels , helping to prevent costly disruptions.

Common Reasons for Stockouts

Stockouts can occur for various reasons, including:

• Inaccurate Inventory Data: Errors in record-keeping or data entry can lead to discrepancies between actual stock levels and what is reported.
• Demand Forecasting Errors: Misjudgments in predicting future demand can result in ordering too little or too much inventory.
• Supply Chain Disruptions: Delays or interruptions in the supply chain, such as transportation issues or supplier problems, can prevent timely restocking.
• Production Delays: Issues in the production process, such as equipment breakdowns or labor shortages, can impact material usage and availability.
• Poor Inventory Management: Inefficient inventory practices, such as inadequate safety stock or infrequent cycle counts, can lead to stockouts.
• Unexpected Demand Spikes: Sudden increases in customer orders or seasonal demand can outpace current inventory levels.
• Supplier Reliability Issues: Problems with suppliers, such as quality issues or missed deliveries, can affect the availability of raw materials.
• Order Fulfillment Errors: Mistakes in order processing or picking can lead to incorrect inventory levels and unfulfilled customer orders.

Raw Materials Quality Control, Compliance, and Lot ID/Serialization Tracking

In industries where traceability is mandatory, such as pharmaceuticals, food and beverage, and electronics, quality control and compliance are non-negotiable. Lot IDs and serialization tracking are essential tools for ensuring that each batch of raw materials can be traced back through the supply chain. This capability is critical for identifying and addressing quality issues, managing recalls, and meeting regulatory requirements. By implementing robust tracking systems, businesses can enhance transparency, protect consumer safety, and maintain compliance with industry standards.

In a pharmaceutical manufacturing facility, for example, the production batch is assigned a Lot ID, such as LOT123456 . This Lot ID allows the facility to track all tablets from that specific production batch. If a quality issue is discovered, the Lot ID helps in tracing and recalling the affected tablets.

Serialization is when each item manufactured gets a unique serial number. For instance, a smartphone might have a Serial Number like SN20240901-001 . This unique identifier allows the company to track each individual device throughout its lifecycle, from manufacturing and distribution to sales and warranty service. If a specific phone has a defect, the Serial Number helps in identifying and addressing the issue for that particular unit.

Lot IDs and serialization are essential for effective raw material management. Lot IDs provide traceability and quality control by tracking batches from source to production, facilitating quick resolution of issues and ensuring consistent quality. Serialization offers detailed tracking of individual units, enhancing inventory management and preventing loss. Together, these practices improve oversight, compliance, and efficiency in managing raw materials throughout the supply chain.

Cost-Saving Opportunities

There are several cost-saving opportunities in raw material procurement that can significantly impact a company’s bottom line. Bulk purchasing is one way to reduce costs, as suppliers often offer discounts for larger orders. Negotiating supplier discounts based on long-term contracts or consistent order volumes can also result in savings. Additionally, sourcing raw materials from alternative suppliers—especially local or regional sources—can reduce shipping costs and lead times, further lowering overall expenses.

Tip: By building a strong relationship and negotiating long-term agreements, you can leverage your buying power for better discounts and terms. Additionally, regularly review market conditions and supplier performance to identify opportunities for cost reduction and ensure you are getting the best deals available.

Raw Material Safety Stock

Safety stock is the buffer of raw materials that a company keeps on hand to protect against supply chain disruptions, demand fluctuations, or production delays. While JIT inventory management focuses on minimizing stock levels, maintaining a small safety stock ensures that production can continue even if there are unforeseen supply chain issues.

The key is finding the right balance between having enough safety stock to prevent disruptions while avoiding the costs associated with overstocking.

Bill of Materials (BOM) used in Manufacturing

A Bill of Materials (BOM) is a comprehensive list of all raw materials, components, and assemblies required to build a product. Effective BOM management is crucial for production planning, as it helps ensure that the necessary materials are available when needed. Accurate BOMs also enable better tracking of raw material usage, allowing businesses to optimize procurement and minimize waste. By keeping BOMs up to date, companies can streamline their production processes and improve overall efficiency.

A common mistake people make with Bills of Materials (BOMs) is failing to update them regularly. As product designs and production processes evolve, BOMs need to reflect these changes accurately. When BOMs are outdated, it can lead to several issues.

Managing Raw Materials

Managing raw materials within the supply chain and inventory management requires a multi-faceted approach that balances cost efficiency, quality control, and responsiveness. By leveraging advanced technologies like predictive analytics, MRP systems, and real-time tracking, businesses can optimize their raw material management and gain a competitive edge in their industry. Emphasizing principles such as JIT inventory management, lean manufacturing, and safety stock planning ensures that operations run smoothly, minimizing waste and maximizing value throughout the supply chain.

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Raw Materials

Published on :

21 Aug, 2024

Blog Author :

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya

Raw Material Definition

Raw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods. These materials undergo processing and transformation into intermediate substances, further used to make final products for sale. Examples include cotton, crude oil, coal, raw biomass, rubber blanks, mineral ores, wood, etc.

Sometimes known as primary commodities, these unprocessed or less processed materials are critical components of primary production. There may be direct or indirect materials, depending on their use in the production of end products. These factors of production trade on commodities exchanges. They also play a crucial role in the economic growth of a nation.

Table of contents

Understanding raw materials, sources of raw materials, accounting for raw material, frequently asked questions (faqs), recommended articles.

• Raw materials meaning describes unprocessed substances or natural resources used to manufacture finished products for sale. They form an integral part of the inventory management and factors of production.
• Primary commodities can be plant-based (corn, lumber, and sugar), animal-based (like leather, wool, and silk), and mineral-based (iron ore, natural gas, coal, and precious metals).
• Multiple countries depend on their mineral reserves that act as unfinished materials for other countries. These factors of production play a crucial role in their economic growth.
• Classification of unfinished materials into direct (used directly in the final product) and indirect (utilized only in the production process of the end product) will make their accounting more straightforward.

Raw materials form an essential aspect of inventory management for manufacturing businesses. Hence, keeping track of these supplies becomes critical to avoid any production issues. Almost everything manufactured and sold comes from processing unfinished materials dug up from the earth. For example, steel is a raw commodity for the automobile industry.

Naturally available in different forms, these resources act as primary inputs in the mass production of several products. On the other hand, recyclable waste becomes a secondary commodity in the manufacturing of finished goods.

Many countries rely on their mineral reserves, which serve as unprocessed materials for others. Also, a country with abundant natural resources has the potential of becoming a self-sufficient economy.

Export is the ideal way for nations to generate revenue to improve their domestic production and create more jobs. However, exporting raw or unfinished materials could be detrimental to a country's economy. For example, importers opt-out of such an agreement because of export taxes and restrictions imposed by the exporter, which affects the former's revenue collection.

These materials can be classified into three categories, depending on how they are derived:

• Animal-Based : Agro-industries are the most common users of these commodities. Textile, leather, dairy, and other industries, process substances like leather, wool, silk, etc., to produce finished products.
• Plant-Based : These are forestry and agriculture-derived materials. Sometimes referred to as vegetable-based unrefined resources, this category of unprocessed substances includes sugar, cellulose, cooking oil, corn, lumber, cork, cotton, etc.
• Mineral-Based : These materials obtained through extraction include clay, sand, marble, iron ore, gasoline, natural gas, coal, precious metals, etc. Substances from this category are utilized in industrial settings or carving beautiful jewelry items.

Practical Examples

Let us consider the following raw materials examples for an in-depth understanding of the concept:

A  study  conducted by the Organization for Economic Co-operation and Development (OECD) examined how mineral commodity exports can contribute to overall economic growth. It analyzed export restrictions on metals and minerals put forth by four African nations.

Gabon, South Africa, Zambia, and Zimbabwe banned the export of copper, manganese, lead, chromite, respectively, to encourage domestic downstream industries. OECD studied their export control measures, such as export tariffs, outright export bans, and non-automatic export license requirements.

The study revealed that these restrictions did not do any good to downstream mineral processing industries. On the contrary, the results harmed the mining sector. It also indicated that the economic impact of export restrictions depends on the mineral that a particular country exports.

The phenomenon where a nation has plenty of natural resources to benefit from but still suffers from a lack of economic growth and development is termed "Dutch disease" or "resource curse." The OECD concluded that reducing mineral export obstacles can have a favorable impact on global economic prosperity.

Recently, the European Union and Ukraine signed a Memorandum of Understanding (MoU) to boost raw material supplies after the negative impact of COVID-19 on various industries. These supplies will help support green and digital projects in defense, aerospace, automotive, renewable energy, healthcare, electronics, and other industries.

It came following the introduction of the Action Plan on Critical Raw Materials by the European Commission in September 2020. In 2020, the EU announced to increase supplies of bauxite, strontium, titanium, and lithium to reinforce mineral supply chains post-pandemic economic recovery.

Budgeting and accounting of  raw materials inventory  on a balance sheet are critical for manufacturing units. In the balance sheet , the inventory label lists unprocessed commodities as current assets. An entry is made in the debit side of the inventory account when documenting an unrefined resource. On the other hand, the accounts payable account shows the purchase of these materials as a credit.

After the completion of the production, the finished goods inventory is debited while the work in process account is credited. Also, if the production process is short, the work in the process portion is omitted.

Categorizing raw or unfinished materials into direct and indirect will make the accounting process simple.

• Direct Materials   –  These are primary input goods or unprocessed resources, such as wood, cotton, etc., used directly by companies to manufacture a finished product. For direct materials, the work in process account is debited with unrefined materials used for the manufacturing process. On the contrary, the same account is credited when there is no inventory.
• Indirect Materials -  These are unprocessed materials that do not directly form a part of the end product. Instead, they contribute to its production only. Examples of these long-term factory supplies include glue, tape, oil, etc. Additionally, accounting of indirect materials used in the manufacturing process considers their nature and type.

A separate inventory account tracks the historical cost of direct materials . When goods are sold, raw materials prices reflect in the Cost of Goods Sold (COGS) account. The overhead account is debited for indirect materials, and the raw materials inventory asset is credited. The remainder is subsequently split between the cost of goods sold and closing stocks after the accounting period.

Raw materials are unfinished materials or natural resources used to produce or manufacture finished products for sale. These materials can be used in their unprocessed or processed form as found suitable. Examples include cotton, crude oil, coal, rubber blanks, mineral ores, wood, etc.

Direct materials are substances used directly by companies to manufacture a finished product. These include unrefined natural resources like wood, cotton, etc.  Indirect materials do not directly form a part of the finished product but contribute to its production. Examples of these long-term assets include glue, tape, oil, etc.

In the balance sheet, the inventory label puts unfinished materials as a current asset. An entry is made in the debit side of the inventory account while recording the unprocessed material. The acquisition of primary commodities is shown as a credit in the accounts payable account.

This has been a guide to Raw Materials and its meaning. Here we discuss accounting for raw materials along with sources, types, and examples. You can learn more from the following articles -

• Bill of Materials
• Direct Material
• Globalization

What are Raw Materials?

Home › Accounting › Assets › What are Raw Materials?

Definition:  Raw materials are the inputs or resources that a company uses to manufacture its finished products. In other words, this is the unprocessed material like metal stock, rubber blanks, or unrefined natural resources that companies use in there manufacturing processes to produce  finished goods  to sell to consumers.

• What Does Raw Materials Mean?

Summary Definition

What is the definition of raw materials?  A good example of raw material is lumber for a guitar manufacturer like Fender Guitars. When Fender gets a shipment of lumber, it records the lumber as raw material inventory because the wood will eventually be finished goods inventory or guitars.

There are many different types of inventory across the business spectrum. Manufacturers have different types of inventory than retailers and retailers have different types of inventory than restaurants. These materials are most often associated with manufacturers.

Let’s take a look at an example

There are two main types of raw materials:  direct  and  indirect . Direct materials are unprocessed resources that can be specifically traced to an end product. Lumber is a good example of a direct raw material. When Fender receives a batch of lumber, it sorts the woods and stamps it for specific guitars. These direct materials are designated to specific finished goods.

Indirect materials are unprocessed materials that can’t really be designated for specific finished goods. Most of the time indirect materials are called factory supplies on the balance sheet. Fender Guitars would probably consider guitar finish an indirect raw material. Guitar finish is delivered in 55-gallon barrel drums. You can’t really designate finish for each guitar, so the drums of guitar finish and lacquer are usually called factory supplies.

Smaller amounts of direct materials are sometimes labeled indirect unrefined materials too. The screws that bolt pick guards onto Fender’s guitars might be considered a factory supply as well. The decision to classify a direct raw material as a factory supply depends on the materiality principle. Smaller costing items usually fall into this category.

Define Raw Materials:  Raw material means the inputs to producing a finished product.

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Supply Planning: Definition, Process, and Best Practices

Supply planning is a business management tool that impacts supply, demand, and inventory levels. Retailers use supply chain planning systems to provide projected demand for products and materials needed to support those demands. 

The process is designed to balance plans for future demand with the availability of goods in inventory. Supply planning helps companies determine how much product they need to keep in stock. Order entry, review and release of orders with suppliers, and inventory management within warehouses and distribution channels are all factors that inform the supply planning function. 

The lead times for supplier products to be received, the complexity of managing multiple vendors, the need for material handling equipment, and the availability of labor complicate the process. Let’s take an in-depth look at the supply chain planning process and its best practices.

What Is Supply Planning?

Supply planning is a process that involves analyzing demand forecasts, comparing the forecasted demand to existing inventory, and coordinating the supply chain activities needed to meet that demand. It determines the production level of goods or services, the materials that are required, and when they must be acquired. 

Supply planning, also known as raw material or material planning, is often the cornerstone of optimized supply chain management . A supply chain planning strategy is designed to ensure that the right product is available at the right place and time while minimizing costs and risks associated with the supply chain. Inventory levels are intended to meet projected sales volume. 

Inventory management is vital to sales and operations planning because it affects sales volume and product pricing. The inventory levels are adjusted as demand volumes change. When there is a change in demand, there must be a production adjustment to align with the change, which may require companies to adjust inventory levels. 

Changes in sales volume directly affect inventory levels. Stores must control their inventories to meet customer demand. Doing these processes well can result in higher sales because inventory is available for customers when they want to make a purchase. They can support their companies by increasing sales and reducing costs by having the right amount of products on hand. 

The Supply Planning Process

The supply chain planning process involves coordinating the movement of goods, from raw materials to finished products, in a supply chain. Here are the steps in the supply planning process.

Forecast Demand

Forecasting demand for products is the first step in the process. It involves analyzing historical sales data and market trends to predict the level of product demand in the future. It is important to develop these forecasts regularly because there are many external factors – such as inflation or the inability to get raw materials due to trade sanctions – that could impact sales of your products. These potential disruptions must be considered when planning for future inventory requirements to support an efficient supply chain.

Demand can be determined by analyzing sales levels, historical data, customer surveys, and past trends. The forecast relies on sales forecasts because they show how market demand will change over the product’s life. 

Depending on the type of product you are selling, you must also project custom orders. You can project the custom order from various sources, and each custom order should be considered a separate demand element rather than a single lump sum for each item in the sale. It’s more efficient to handle your customers as individual buyers.

Determine Sources of Supply

Once the forecast demand is known, the next step is identifying the sources required to meet that demand. This process includes identifying suppliers, negotiating contracts, and establishing inventory levels.

For retail stores, this step involves identifying the supplier’s location and establishing a contract to buy products. For consumer goods producers, this step would include finding suppliers to provide raw materials for their production process. 

With this step, you may also identify changes in payment terms, such as requiring immediate payment or accepting open account credit terms with your suppliers. Your objective is to set up a supply plan that supports your business strategy while managing cash flow and working within your company’s budget allocations.

Schedule Production

Based on the forecast demand and the sources of supply, the company creates a production schedule based on the availability of goods necessary for production. Scheduling production affects the order of the usage of raw materials and the manufacture of finished products. 

It involves setting up production schedules to meet demand and coordinating with suppliers to schedule plant production runs. For example, a manufacturer may set up a production schedule based on raw material and labor availability, known as manufacturing resource planning (MRP) . MRP is a computerized system that schedules resources to meet demand.

Plan Transportation

Plan the transportation of goods from the supplier to the manufacturer and from the manufacturer to the customer. This requires selecting carriers, coordinating with multiple carriers, and determining the most efficient modes and routes to get the product where it needs to be when it needs to be there.

Manage Inventory

Inventory management involves allocating space and other containers required for storing materials in a distribution center. It determines the optimal inventory levels to maintain for production schedules’

A key component of inventory planning is understanding what drives demand for an item. Inventory monitoring is automated to identify trends in the market, order patterns, and sales history. This information determines how much product should be acquired to have sufficient supplies before selling at the optimum price.

Monitor and Adjust the Plan

The supply chain management planning process is ongoing, and the plan may need to be adjusted as market conditions change or new information becomes available. Regularly review and update the supply plan to ensure that it remains effective.

Why Supply Planning Matters

Supply planning is a vital function to ensure a company has enough raw materials to meet production demands. If a company lacks enough raw materials, it can lead to production delays, which can be costly and disrupt the smooth operation of the business. 

On the other hand, if a company has too much raw materials inventory, it can tie up valuable financial resources that can boost other sectors elsewhere in the business. Proper supply planning is, therefore, essential for maintaining an efficient and cost-effective production process.

An adequate supply plan helps a company strike the right balance between these extremes. It ensures enough inventory to meet customer demand while minimizing excess inventory and associated costs. 

A supply plan is the foundation of a company’s entire supply chain, including coordinating the procurement of raw materials and scheduling production. The effectiveness of the supply chain can impact a company’s profitability and its level of customer service.

Supply Planning Best Practices

Through continuous improvement efforts, supply chain planners work to improve sales and operations planning performance. Here are a few best practices to consider when planning your global supply chains.

Collaborate With Suppliers

Establish strong relationships with your suppliers and work with them to ensure a consistent and reliable flow of goods. To communicate with suppliers effectively, you should use a single system to request, track, and manage all customer requests.

Use Technology to Improve Supply Planning

Use technology to support and improve the supply plan. You can use various software applications, such as inventory management systems or sales forecasting software, to track inventory levels, delivery schedules, and other key performance metrics .

Implement Demand Forecasting

Demand forecasting involves assessing market trends to determine the anticipated level of demand for your product. It helps set production volumes, track product introduction schedules, and plan for future on-hand inventory levels. Use real-time data and analytics to anticipate demand and plan accordingly to help avoid shortages or overstocking.

Build Flexibility Into Your Supply Chain

While the supply chain is your customer’s lifeline to product availability, you must ensure it is flexible enough to meet changing needs. The components of your supply chain should include various elements that enable production in different quantities at different locations. 

You also need the flexibility to adjust production timing or manufacturing schedules when conditions warrant. Consider implementing multiple sources of supply and incorporating flexible manufacturing approaches to reduce the impact of disruptions.

Here are frequently asked questions regarding supply planning and supply chain processes.

What is the purpose of supply planning?

Supply planning provides a framework for managing supply and demand in your company. The supply plan is designed to identify the most cost-effective and efficient methods for acquiring, stocking, and distributing raw materials, components, and finished goods. You may experience shortages or overstock and incur excess costs without proper supply planning.

What is demand planning vs. supply planning? 

Demand planning is forecasting the future demand for a company’s products or services and determining how much of those products or services the company will need to produce to meet that demand. Supply planning involves how to source, manufacture, and distribute the necessary products to meet the demand forecasted by the demand planning process.

Final Thoughts

The supply planning process is a critical component of effective logistics. Supply chain planning involves anticipating future demand and planning the most efficient methods of acquiring and distributing raw materials or finished goods. It ensures a timely supply of materials and finished goods.

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What is a Business Plan?

A business plan is a document that contains the operational and financial plan of a business, and details how its objectives will be achieved. It serves as a road map for the business and can be used when pitching investors or financial institutions for debt or equity financing .

A business plan should follow a standard format and contain all the important business plan elements. Typically, it should present whatever information an investor or financial institution expects to see before providing financing to a business.

Contents of a Business Plan

A business plan should be structured in a way that it contains all the important information that investors are looking for. Here are the main sections of a business plan:

1. Title Page

The title page captures the legal information of the business, which includes the registered business name, physical address, phone number, email address, date, and the company logo.

2. Executive Summary

The executive summary is the most important section because it is the first section that investors and bankers see when they open the business plan. It provides a summary of the entire business plan. It should be written last to ensure that you don’t leave any details out. It must be short and to the point, and it should capture the reader’s attention. The executive summary should not exceed two pages.

3. Industry Overview

The industry overview section provides information about the specific industry that the business operates in. Some of the information provided in this section includes major competitors, industry trends, and estimated revenues. It also shows the company’s position in the industry and how it will compete in the market against other major players.

4. Market Analysis and Competition

The market analysis section details the target market for the company’s product offerings. This section confirms that the company understands the market and that it has already analyzed the existing market to determine that there is adequate demand to support its proposed business model.

Market analysis includes information about the target market’s demographics , geographical location, consumer behavior, and market needs. The company can present numbers and sources to give an overview of the target market size.

A business can choose to consolidate the market analysis and competition analysis into one section or present them as two separate sections.

5. Sales and Marketing Plan

The sales and marketing plan details how the company plans to sell its products to the target market. It attempts to present the business’s unique selling proposition and the channels it will use to sell its goods and services. It details the company’s advertising and promotion activities, pricing strategy, sales and distribution methods, and after-sales support.

6. Management Plan

The management plan provides an outline of the company’s legal structure, its management team, and internal and external human resource requirements. It should list the number of employees that will be needed and the remuneration to be paid to each of the employees.

Any external professionals, such as lawyers, valuers, architects, and consultants, that the company will need should also be included. If the company intends to use the business plan to source funding from investors, it should list the members of the executive team, as well as the members of the advisory board.

7. Operating Plan

The operating plan provides an overview of the company’s physical requirements, such as office space, machinery, labor, supplies, and inventory . For a business that requires custom warehouses and specialized equipment, the operating plan will be more detailed, as compared to, say, a home-based consulting business. If the business plan is for a manufacturing company, it will include information on raw material requirements and the supply chain.

8. Financial Plan

The financial plan is an important section that will often determine whether the business will obtain required financing from financial institutions, investors, or venture capitalists. It should demonstrate that the proposed business is viable and will return enough revenues to be able to meet its financial obligations. Some of the information contained in the financial plan includes a projected income statement , balance sheet, and cash flow.

9. Appendices and Exhibits

The appendices and exhibits part is the last section of a business plan. It includes any additional information that banks and investors may be interested in or that adds credibility to the business. Some of the information that may be included in the appendices section includes office/building plans, detailed market research , products/services offering information, marketing brochures, and credit histories of the promoters.

Business Plan Template

Here is a basic template that any business can use when developing its business plan:

Section 1: Executive Summary

• Present the company’s mission.
• Describe the company’s product and/or service offerings.
• Give a summary of the target market and its demographics.
• Summarize the industry competition and how the company will capture a share of the available market.
• Give a summary of the operational plan, such as inventory, office and labor, and equipment requirements.

Section 2: Industry Overview

• Describe the company’s position in the industry.
• Describe the existing competition and the major players in the industry.
• Provide information about the industry that the business will operate in, estimated revenues, industry trends, government influences, as well as the demographics of the target market.

Section 3: Market Analysis and Competition

• Define your target market, their needs, and their geographical location.
• Describe the size of the market, the units of the company’s products that potential customers may buy, and the market changes that may occur due to overall economic changes.
• Give an overview of the estimated sales volume vis-à-vis what competitors sell.
• Give a plan on how the company plans to combat the existing competition to gain and retain market share.

Section 4: Sales and Marketing Plan

• Describe the products that the company will offer for sale and its unique selling proposition.
• List the different advertising platforms that the business will use to get its message to customers.
• Describe how the business plans to price its products in a way that allows it to make a profit.
• Give details on how the company’s products will be distributed to the target market and the shipping method.

Section 5: Management Plan

• Describe the organizational structure of the company.
• List the owners of the company and their ownership percentages.
• List the key executives, their roles, and remuneration.
• List any internal and external professionals that the company plans to hire, and how they will be compensated.
• Include a list of the members of the advisory board, if available.

Section 6: Operating Plan

• Describe the location of the business, including office and warehouse requirements.
• Describe the labor requirement of the company. Outline the number of staff that the company needs, their roles, skills training needed, and employee tenures (full-time or part-time).
• Describe the manufacturing process, and the time it will take to produce one unit of a product.
• Describe the equipment and machinery requirements, and if the company will lease or purchase equipment and machinery, and the related costs that the company estimates it will incur.
• Provide a list of raw material requirements, how they will be sourced, and the main suppliers that will supply the required inputs.

Section 7: Financial Plan

• Describe the financial projections of the company, by including the projected income statement, projected cash flow statement, and the balance sheet projection.

Section 8: Appendices and Exhibits

• Quotes of building and machinery leases
• Proposed office and warehouse plan
• Market research and a summary of the target market
• Credit information of the owners
• List of product and/or services

Related Readings

Thank you for reading CFI’s guide to Business Plans. To keep learning and advancing your career, the following CFI resources will be helpful:

• Corporate Structure
• Three Financial Statements
• Business Model Canvas Examples
• See all management & strategy resources
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Raw Material

This article covers meaning, importance, types & example of Raw Material from operations perspective.

What is Raw Material?

Raw material is defined as the crudest form of product possible, which is used as an input for making another product. Raw material is essentially the unprocessed product and is the chief constituent of the primary product that is processed or manufactured.

Raw materials are also an important part of a firm’s inventory management. They are component parts of the stock of inventories carried by a manufacturing firm at a given time. Every organization has inventories of some type and the economics and techniques of inventory management are critical for efficient operation, profitability and survival; especially in a highly competitive environment.

Importance of Raw Materials

There are mainly 4 factors of production. Raw material falls in the category along with labor and capital. This crucial element makes these goods an indispensible commodity for a manufacturing enterprise and a country. If a country has succinct raw materials, it need not import them from other countries. Thus, it can improve its current account deficit. Abundance of these goods is directly linked with the prosperity of a region.

• Material Planning
• Materials Management
• Bill of Materials (BOM)
• Production Related Materials

Types of Raw Materials

The basic classification of raw materials are:

1. Direct: These are basic unprocessed materials or resources. Goods like metals, wood, sand etc are direct raw materials i.e. they are in their natural form.

2. Indirect: Materials, which are not required to make the finished product, but without which production of final goods cannot be done. Goods like helmet, gloves, tools, office chairs etc.

Examples of Raw Materials

Raw material is bottleneck assets as the production of other materials depends directly on their availability. Commonly used basic goods in industry are crude oil; used in various industries like pharmaceuticals, chemical and plastic, lumber; used in wood and furniture etc. In industrial parlance, they are often called commodities. That makes them eligible for trading across various Commodity Exchanges round the world.

Hence, this concludes the definition of Raw Material along with its overview.

This article has been researched & authored by the Business Concepts Team which comprises of MBA students, management professionals, and industry experts. It has been reviewed & published by the MBA Skool Team . The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 1800 business concepts from 5 categories.

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• Inventory Management
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What are Raw Materials? A Guide for Manufacturers.

If you are a small manufacturer, it is important to understand what raw materials are and how they are used in a bill of materials (BoM). This article covers the basics of raw materials and includes some tips on how to streamline your operations.

In the manufacturing world, there are a lot of terms and phrases that can be confusing for those who are not familiar with them. One such misunderstood term is “raw materials.”

In this article, we’ll define what raw materials are and how they can be applied to a Bill of Materials (don’t worry - we’ll also cover what this is at the same time if you were wondering about this one too!).

We’ll also cover why it’s important to track your raw materials as part of your production process.

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What are raw materials?

So, what does “raw materials” mean? In short, raw materials are materials or substances that are used in the manufacturing process to create a product.

In this context, “raw” denotes that the material has not been processed or changed since you received it into your supply chain. It doesn’t necessarily mean that it has not been modified and constructed in a previous process before you purchased it.

Raw materials can be anything from clasps, fabric, and lumber to metals to chemicals - they obviously can differ based on your industry and manufacturing process.

They are also commonly referred to as:

• “ingredients” (this is usually used in food production)
• “stock” (usually used when looking at inventory levels)
• “unprocessed material” (again, to denote that the material has not yet been through a production process inside your manufacturing flow)

Indirect vs. Direct Raw Materials

Once you have a grasp of what a raw material is, you’ll want to note that these are categorized into two main types: indirect and direct.

Direct materials

Direct materials are simply a subset of raw materials that specifically refers to the materials that become part of the final product.

For example, if you were making a cake, some of the direct materials would be flour, sugar, eggs, etc. These materials are completely consumed in the making of the cake.

Indirect materials

On the other hand, there are also indirect materials. These are materials that are used in the manufacturing process but don’t become part of the finished product.

Some examples of indirect materials include:

• cleaning supplies
• office supplies

To further illustrate the difference between direct and indirect materials, let’s say you run a small furniture business and you want to make a coffee table.

The direct raw materials you would need for this project would be wood, screws, nails, sandpaper, paint, and varnish. These are all materials that you will use to create the final product - the coffee table.

The indirect raw materials you may need for this project may be cardboard and foam, to securely package the coffee table for shipping to the customer. These raw materials are not involved in producing the finished product itself, however, they are used as part of the packaging process.

Read more about the difference between direct and indirect expenses

How are raw materials different to sub-assemblies?

You might be wondering how raw materials differ from sub-assemblies. After all, both are used in the manufacturing process and become part of the final product, so what’s the difference?

The main distinction is that raw materials are used to create sub-assemblies. So, while a raw material can become part of the final product, a sub-assembly cannot.

Confused? Let’s use an example to make this clearer.

Say you were making a pair of shoes. The direct materials would be things like the leather for the upper, the fabric for the lining, and the soles.

The raw materials would be things like the chemicals used to treat the leather, the thread used for stitching, and the glue used for bonding.

The sub-assemblies would be things like the upper (which is made from direct materials), the lining (also made from direct materials), and the insole (made from a combination of direct and raw materials).

Sub-assembly processses can be designed and tracked using multi-level BOMs .

Why is it important to track your raw materials as a small manufacturing business?

It’s really important for any business that manufactures products from raw materials to ensure that they have a robust system for tracking their raw materials inventory.

If you don’t track what raw materials you have on hand, it can be difficult to know what you need to order and when. This can lead to production delays, unhappy customers as well as extra costs associated with rush shipping or expedited fees.

There are many other benefits of tracking your raw materials, including:

Improved production planning and coordination : By understanding what raw materials you have on hand, you can better plan and coordinate your production. This can help you avoid manufacturing delays and disruptions.

Reduced risk of stock outs and production delays : By tracking your raw materials, you can avoid stock outs and production delays. This is because you will always know what raw materials you need and when

Increased visibility into the manufacturing process : Tracking raw materials can give you greater visibility into your manufacturing process. This can help you identify bottlenecks and optimize your process.

More accurate bookkeeping and financial reporting : Tracking raw materials can also help you with your bookkeeping and financial reporting. This is because you will have a more accurate picture of your inventory and what it is worth.

Streamlined inventory management : Tracking raw materials can help you streamline your inventory management . This is because you will have a complete picture of what raw materials you have on hand and what you need to order. This can save you time and money.

As a small manufacturing business, tracking your raw materials is essential to ensure that you are in control of your complete supply chain.

How are raw materials used in a bill of materials?

Let’s now cover how raw materials are used in a Bill of Materials .

Before we do, let’s briefly take a look at what a Bill of Materials is. A Bill of Materials (aka “BoM”) is a list of all the raw materials, components, and required to build a product.

This list includes the finished products and sub-assemblies, what type of raw material is needed (i.e. wood, fabric etc.), how much is needed, who the supplier is, and any other pertinent information.

Raw materials are used in a bill of materials to build products and sub-assemblies. The bill of materials includes the finished product, what type of raw material is needed, how much is needed, who the supplier is, and any other pertinent information.

Interested in learning more about how to create your own bill of materials?

• What is a Bill of Materials? Examples for small manufacturers
• How to creating a BoM in 7 simple steps

How are raw materials tracked in bookkeeping?

In bookkeeping, raw materials are typically tracked in your accounting balance sheet as inventory. This is because, like finished goods, raw materials are a physical product that the company owns.

When a company purchases raw materials, this is recorded as a credit to the Accounts Payable account and a debit to the Inventory account. When the raw materials are used in manufacturing, they are then transferred to the Work in Progress inventory account.

Finally, when the product is complete and ready to be sold, it is then moved to the Finished Goods inventory account.

As you can see, tracking raw materials through the manufacturing process can be quite complex. However, it is essential for ensuring that your business has a clear understanding of what materials it has on hand, what is needed to complete production, and when products will be finished and ready for sale.

If you manufacture products from raw materials, chances are you already have some sort of system in place to track your inventory. However, if you’re still using manual methods like paper spreadsheets or even a whiteboard, it might be time to consider upgrading to a perpetual inventory software solution.

Perpetual inventory software is designed specifically for businesses that need to track inventory levels in real-time. This means that as soon as a raw material is used in production, the software will automatically update the inventory records.

Not only does this make it easier to keep track of what materials you have on hand, but it can also help prevent errors in your bookkeeping.

Using MRP software to track your raw materials

If you find that tracking your raw materials manually is proving to be too complex and time-consuming, you may want to consider using MRP software.

MRP (Material Requirements Planning) software is designed specifically for manufacturing businesses and can automate many of the tasks associated with managing inventory. This includes things like creating and updating BOMs, generating purchase orders, and tracking material usage.

If you are a small manufacturer that is looking to streamline your operations, MRP software may be a good solution for you.

Craftybase is MRP software that includes bill of materials and perpetual inventory tracking. Craftybase is designed for small manufacturers to take control of their inventory and streamline their operations.

With Craftybase, you can easily create and update your BOM, generate purchase orders, and track material usage. This gives you a clear understanding of what raw materials you have on hand, what is needed to complete production, and when products will be finished and ready for sale.

In addition, Craftybase offers a free 14 day trial so you can try out the software before committing to it. So if you are a small manufacturer looking for an MRP solution, be sure to check out Craftybase today.

Nicole Pascoe Written by Nicole Pascoe Nicole is the co-founder of Craftybase, inventory and manufacturing software designed for small manufacturers. She has been working with, and writing articles for, small manufacturing businesses for the last 12 years. Her passion is to help makers to become more successful with their online endeavors by empowering them with the knowledge they need to take their business to the next level.

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Raw Material Inventory Management: Manufacturer’s Guide

• Oliver Munro
• 11 months ago

• October 17, 2023

Every manufacturer knows the importance of raw materials – without them, there’s no final product. But it’s not easy keeping track of all the essential elements needed to keep the production line productive .

Raw material inventory management oversees the procurement, handling, and storage of raw materials. It ensures you maintain optimal raw materials inventory levels, and therefore plays a crucial role in optimising your manufacturing processes.

This guide explores the ins and outs of managing raw materials in a manufacturing business, with examples and actionable tips for improving your processes. Let’s dive in.

In this guide:

What is raw material inventory management.

Raw material inventory management is the process of managing the material goods used to create a product. It aims to ensure you always have enough raw materials available to meet demand and maintain production levels while avoiding operational lost time.

By accurately controlling the inventory levels of raw materials, manufacturers can achieve two goals at once:

• Bring costs down (by limiting the required storage space for raw materials to a minimum)
• Complete production jobs and fulfil orders faster (by reducing the risk of understocked items)

Raw materials inventory management deals with raw materials stock throughout the entire supply chain. It encompasses the processes involved in purchasing, tracking, consuming, and relocating raw materials.

Without an effective system in placing for managing raw materials inventory , there’s a good chance you will end up overstocked – and pay extra in storage costs – or understocked and unable to produce goods when you need them.

Definition of raw material

Raw material can be defined as any unprocessed materials or ingredients used to create a product. It refers to commodities bought and sold by businesses for the purpose of manufacturing goods to be sold or used in the production of products. For example, the raw materials used to produce a child’s toy may include plastic, wood, paint, and glue.

Examples of raw material inventory

Raw material inventory refers to the materials and ingredients used in manufacturing and production. In other words, raw materials are input goods or inventory which manufacturers use to produce their products .

When it comes to production, there are two ways raw materials can be used – and so two ways of classifying raw material goods.

Let’s break down the two main types of raw material inventory with some examples:

• Direct materials : Direct raw material inventory refers to materials directly used in producing or manufacturing a product. It is a part of the bill of materials for the finished goods. For example, the direct raw materials for LED lights can include LED boards, connection wires, rectifier circuits, soldering flux, LED chips, and packaging.
• Indirect materials: Indirect raw material inventory refers to the supplementary items that are needed in the production process but do not go into the finished product itself. Indirect materials are not part of the product’s bill of materials. The indirect raw materials for a manufacturer of LED lights can include drill bits for machining, disposable gloves, and cleaning supplies such as mops or detergent.

Why inventory management of raw materials and finished goods is important for manufacturers

Inventory management is critical for manufacturers when dealing with raw materials and finished goods because it has a direct impact on workflow efficiency and production costs.

When you know the value, location, and quantities of your stocked items you’re in a better position to make informed decisions around procurement and sales – ultimately resulting in reduced production costs and improved profitability.

On the flip side, if you fail to implement strategic inventory management for your raw materials and finished goods your manufacturing costs will go up . Productivity will also take a hit, as your processes will not be optimally streamlined.

Raw material inventory management challenges

Managing raw material inventory can be a complicated task.

Even firms with smaller production volumes can struggle due to limited resources or inefficient processes.

To mitigate the associated risks, these challenges of raw material inventory management must be met with strategic planning, effective inventory management, and strong supplier relationships .

Let’s look at four of the biggest raw material inventory challenges you’re likely to face.

1. Inventory planning

Planning inventory is a common challenge for manufacturers due to factors such as demand variability, product lead times, and supply chain disruptions.

Poor planning can result in overstocking of goods, which is an inefficient and costly use of your storage capacity. And it can also result in understocking, meaning you’re unable to reliably fulfil customer orders in full and on time.

Effective inventory planning is essential to ensure you have the right inventory quantities to keep your operations running smoothly. Demand forecasting tools , accurate inventory reporting and an optimised warehouse layout can all help improve your inventory planning.

2. Financial constraints

Financial constraints that reduce the opportunity to invest in large quantities of raw materials affect your ability to negotiate price and delivery times with suppliers.

Balancing inventory costs with cash flow constraints can also be a challenge.

While budgetary restrictions can stop you from taking advantage of volume discounts offered through bulk purchasing, holding too much inventory ties up cash flow that could be better used elsewhere in the business.

Your best defence against cash flow challenges is to minimise the amount of capital tied up in stock. This is achieved through accurate demand planning and effective warehouse management.

3. Reliance on a few suppliers

How you procure and manage your suppliers will impact how they perform.

Manufacturers can experience disruptions to production when raw materials suppliers have issues with production, delivery delays, or price fluctuations. This is particularly challenging for producers of perishable products or products with a short shelf life.

It can be helpful to have backup suppliers should your regular vendor have any issues fulfilling an order. Similarly, it’s important to set accurate safety stock levels for all of your regular inventory items.

4. Quality control

Quality control to guarantee the consistent quality of raw materials from suppliers is also a challenge for manufacturing companies.

Maintaining outstanding quality control is imperative for food manufacturers where freshness and food safety are vital. And for manufacturers of medicines, supplements, and nutraceuticals, quality control ensures the purity of active ingredients.

Additionally, the value of your finished product is partially determined by how well you manage the quality control of your raw material inventory.

An optimised raw material inventory management strategy can aid in ensuring high-quality goods are produced every time.

How to manage raw material inventory

Managing raw material inventory can be simplified if you employ an inventory management system in your business. Inventory software solutions will provide you with a real-time view of your inventory – what’s in stock, what’s being delivered, and what is on backorder.

If you’re a small business, you may find a simple spreadsheet system sufficient for getting started. But as you grow in complexity and scale, you’ll probably find that this method requires too much admin or can’t do everything you need it to.

Cloud-based manufacturing software can help you not just manage raw materials inventory but also automate many of your daily production and procurement processes as well.

In addition to raw material inventory systems, here are some techniques you may find useful.

Raw material inventory management techniques

The raw material inventory management techniques listed below are methods for monitoring and optimising stock. Consider your specific business requirements and capabilities before deciding which techniques to implement.

Five effective raw material inventory management techniques:

• Just-in-time (JIT) – JIT is an inventory management technique that helps reduce inventory-related manufacturing costs. This approach aims to improve manufacturing productivity while reducing waste by producing only what is needed when it’s needed.
• Demand forecasting – Demand forecasting involves determining the approximate quantities of stock you’ll need for a future period based on historical performance and other factors. When done accurately, it ensures that you have the right amount of inventory on hand to satisfy customer expectations.
• Economic order quantity (EOQ) – EOQ is an inventory management technique that considers the ordering, holding, and storage costs of inventory. EOQ helps manufacturers establish the ideal order quantity of their raw materials to reduce overall inventory costs while managing to ensure sufficient on-hand inventory to meet consumer demand.
• Six Sigma – Six Sigma is an inventory management technique that centres around reducing inventory defects and variations. Six Sigma takes a data-driven approach and uses statistical analysis to identify and eliminate unnecessary steps, thus improving efficiencies within your inventory management process.
• Materials requirement planning (MRP) – MRP is an inventory management method that is sales-forecast dependent. It’s used to estimate the quantities of raw materials required to maintain your inventory levels sufficiently to meet your production needs.

These are just a few of the ways you can manage your raw materials inventory. We recommend diving deeper into the topic of inventory management techniques to find the right solution for your unique needs.

• Learn more: ERP vs MRP Systems – What’s the Difference?

Best practices for managing raw material inventory

Once you’ve settled on your approach for managing raw material inventory, the next step is to optimise it. Here are some best practices to help you improve your processes:

• Develop a system of stock-keeping units (SKU). This is done by allocating each type of raw inventory item a unique code. SKUs are the basis of efficient inventory management, as they help you to track the movements and current inventory levels of all stocked items.
• Utilise an inventory control system for raw materials. Good inventory control is crucial to tracking and managing your inventory levels, raw material reorder points, and raw material inventory lead times.
• Adopt a data-driven approach to your inventory management. Data-driven strategies improve reporting, providing you with a more accurate picture of your inventory status. They also help you to make better-informed decisions about your inventory needs.
• Avoid understocking and overstocking inventory. Understocking can lead to stockouts and lost production time, while overstocking may result in lost sales and dissatisfied customers. Overstocking can also lead to increased carrying costs that affect your cash flow and profitability. Both are undesirable outcomes, so setting optimal inventory levels early on is vital.
• Improve your inventory data by automating operations. Automation can help you improve the accuracy of your inventory management operations and reduce the risk of human error. Research systems and tools that could help with your production processes.
• Focus on the raw material inventory items that are critical to your business operations. Use inventory ratios and KPIs to help determine which items add the most value or are the most essential to your business. These are the raw materials that you should care about the most.
• Be precise with your cost estimations for raw material inventory. Accurate cost estimations are essential for effective inventory management. Be sure to include all costs associated with acquiring, storing, and managing your raw materials when calculating total manufacturing costs.

In general, prioritise accuracy and efficiency when dealing with raw materials inventory.

These are the two focus areas that will help to bring costs down and lift manufacturing productivity . And that’s how you make more profit and keep customers happy.

Inventory accounting for raw materials

In accounting, raw materials inventory refers to the total cost of all material currently on hand that has not been used in any production processes. The value of direct raw material inventory is recorded as a current asset on your balance sheet.

Accurately accounting for raw materials gives you a better insight into your business’s financial health and helps you to keep track of your inventory investment throughout your production processes.

Let’s look at a few accounting metrics you may find useful when dealing with raw materials inventory management.

Useful metrics for raw material accounting

These raw material  inventory metrics can help you to make more informed business decisions and help to enhance your business operations.

Some useful metrics to help you keep track of your raw material inventory accounting include:

• Inventory turnover ratio : This measures the number of times you sell and replace your raw material stock over a specified timeframe. This metric helps you to determine if you are carrying too much inventory compared to the amount of inventory you’re selling.
• Days on hand: The average number of days it takes to sell your inventory. Days on hand measures the rate at which your inventory turns daily. This metric helps you determine how quickly and efficiently your business is using its raw material inventory.
• Weeks on hand: This metric shows the average amount of time inventory sells each week. A greater number of weeks on hand indicates inefficiencies in your stock movement, while fewer weeks on hand indicates a more efficient turnover of your inventory.

How to calculate your raw materials inventory value

Whatever the size of your manufacturing business, you’ll need to account for your raw materials, business supplies, and finished goods. You can do this by first determining your ending raw materials inventory value at the end of each accounting period.

To determine ending raw materials inventory, add your opening inventory for the period to your net purchases and subtract the total cost of goods sold.

This will tell you the final value of your raw materials inventory for the period.

The formula for valuing ending raw materials inventory is :

Opening Inventory + Net Purchases – COGS = Ending Inventory

• Learn more: A Guide to Inventory & Manufacturing Costing Methods

Raw material inventory management software

Raw material inventory management software refers to digital systems designed to help you streamline your inventory processes and optimise your inventory control processes.

These systems can come in all shapes and sizes. Some will help with the tracking of your raw material goods, while others may also offer production management and procurement functionality.

Key features to look for in raw material inventory software :

• User-friendly, easy to navigate, and has an intuitive interface that allows you to quickly access the information you need.
• Scalable to grow with your business, meet your production needs, and capable of handling large volumes of data.
• Consolidative to easily integrate with other business applications, accounting software, and sales management systems.
• Instantaneous with real-time visibility and tracking of inventory levels, so you can identify any issues quickly and take any necessary corrective action.
• Secure enough to protect your information from unauthorised access.

Can you perform raw material inventory management in Excel?

Yes, Excel offers several ways to perform raw material inventory management. But as we’re about to explain, these tools can be limited and may hinder productivity for large or complex organisations.

Excel can be a great tool for beginners or firms with limited inventory.

Using Excel’s customisable spreadsheets and formulas you can create an inventory management system with interactive functionality that allows you to create raw material inventory reports. Excel offers many ways to sort, explore, and extract this data.

The results can be visually presented in charts and tables. With the Power Pivot add-on, you can also import and analyse large amounts of data from various sources to create more complex reports.

However, one of the key disadvantages of performing raw material inventory management in Excel is its limited scalability. Keeping track of your inventory control spreadsheets as your production and sales increase can become time-consuming.

Another downside is that Excel needs to be manually updated whenever there are changes to your stock levels; it cannot provide you with inventory levels in real time. Manual data entry is prone to human error with data entry errors leading to inaccurate inventory records and potentially resulting in stockouts or overstocking.

Excel also lacks the built-in features for tracking historical data to identify patterns and analyse trends, which help you to make informed, data-driven decisions.

Article by Oliver Munro in collaboration with our team of specialists. Oliver's background is in inventory management and content marketing. He's visited over 50 countries, lived aboard a circus ship, and once completed a Sudoku in under 3 minutes (allegedly).

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Not Just for Manufacturing, Material Requirements Planning (MRP) Is Indispensable for Any Business

By Andy Marker | April 21, 2017 (updated November 18, 2021)

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Joseph Orlicky, author of the definitive Material Requirements Planning (MRP): The New Way of Life in Production and Inventory Management , said, "Never forecast what you can calculate." Nowhere is this rule more evident than in the manufacturing industry, where determining the right amount of raw material for current demand is a challenge. Underestimating will force you to short your clients, causing them to seek the products elsewhere. Overestimating will cost you money in either waste or storage. 

However, manufacturing is only one industry that relies on the appropriate balance between supply and demand. Whether you work in a bakery or in a technology firm, implementing material requirements planning (MRP) concepts can dramatically benefit your company. Although originally intended exclusively for the manufacturing and fabrication industries, MRP is applicable to almost any industry, including the service industry. This is because MRP focuses on two universal concerns of business — customers and resources. MRP analyzes all company activities in terms of customer demands and manages all company resources via its own logic and data processing. 

The following guide will teach you all about MRP, from basic concepts to more advanced topics, including a detailed definition of the system itself, its benefits and processes, its problems, and its history. It also includes a discussion of similar systems, such as manufacturing resource planning (MRP II), enterprise resource planning (ERP), distribution resource planning (DRP), and production planning. In addition, we offer tips on MRP best practices culled from around the web and from the experts. Finally, we review MRP software, tell you how to select the best one for your needs, and help you determine whether you should consider taking an MRP software course.

What Is Material Requirements Planning?

Material requirements planning (MRP) is a planning and control system for inventory, production, and scheduling. MRP converts the master schedule of production into a detailed schedule, so that you can purchase raw materials and components. Used mostly in the manufacturing and fabrication industries, this system is a push type of inventory control, meaning that organizations use forecasting to determine the customer demand for products. The manufacturing or fabrication company will forecast the amount and type of products they will purchase, along with the quantity of materials to produce them. They then push the products to the consumers. This contrasts with a pull system, where the customer first places an order. The main disadvantage of a push system is its vulnerability when sales vary. In this scenario, the forecasts become inaccurate, which for manufacturing, cause either a shortage of inventory or an excess of inventory that requires storage. 

Inventory is divided into two categories, independent and dependent demand. Independent demand is a desire for finished products, such as cell phones or automobiles, whereas dependent demand is the demand for components, parts, or incomplete assemblies (sometimes called sub-assemblies), such as phone screens or tires for automobiles. You determine quantities for the dependent demand by determining quantities for the independent demand. For example, if you forecast your independent demand for the number of completely assembled cell phones that you expect to sell, you can forecast the quantities of your dependent demand materials, such as your screens, processors, batteries, and antennas. These part quantities depend on the quantity of cell phones you want to produce. This relationship between the materials and the finished product are shown on a bill of materials (BOM) and are calculated with MRP. 

The three key questions that you must ask when planning for dependent demand are:

• What components do we need?
• How many of each component do we need?
• When do we need the components?

In determining how much material your product needs, MRP differs from consumption-based planning (CBP). MRP logic uses information received either directly from customers or from the sales forecast, calculating the material required based on the dependencies of other materials. CBP calculates material requirements only via historical consumption data. CBP does not consider the dependencies between different materials, as it presumes that future consumption will follow the same pattern that the historical data did. 

MRP synchronizes the flow of materials, components, and parts in a phased order system, considering the production schedule. It also combines and tracks hundreds of variables, including:

• Purchase orders
• Sales orders
• Shortage of materials
• Expedited orders
• Marketplace demand
• Bill of material

For all companies, MRP has a few goals in common. These include making sure that the inventory level is at a minimum, but high enough to provide for the customer need, and that you plan all of the activities, including delivery, purchasing, and manufacturing. 

There are some terms that will come up in MRP repeatedly. Some are terms related to MRP as a concept, and some are specific to MRP software. These terms are as follows:

• Item: In MRP, an item is the name or code number used for the event you’re scheduling.
• Low-Level Code: This is the lowest level code of an item in the bill of materials and indicates the sequence in which you run items through an MRP. You use low-level code because an MRP system recognizes and connects the level that an item appears in the product chain and uses it to plan the proper time to meet all of the system demands.
• Lot Size: This is the quantity of units you order during manufacturing
• Lead Time (LT): This is the time you need to assemble or manufacture an item from beginning to end. Two types of lead time are ordering lead time and manufacturing lead time. Ordering lead time is the time it takes from  starting the purchase  to receiving the purchase. Manufacturing lead time is the time it takes for the company to completely manufacture a product from start to end.
• Past Due (PD): This is the time during which you consider orders behind schedule.
• Gross Requirements (GR): You generate this MRP calculation  through forecast scheduling using the number of produced units, the amount of required material for each produced unit, the current stock, and the ordered stock /stock in transit. This is the total demand for an item during a specific time period.
• Scheduled Receipts (SR): These are the open orders for products that the company currently possesses but has not yet fulfilled.
• Projected on Hand (POH): This is the amount of inventory you’ve estimated to be available after you meet the gross requirements. To calculate this sum, you add the POH from the previous time period to the scheduled order receipts and the planned order receipts and then subtract the gross requirements. (Current POH = Previous POH + SR + POR – GR)
• Net Requirements (NR): You generate this MRP calculation through master scheduling using gross requirements, on-hand inventory, and other quantities. This is the actual, required quantity to be produced in a particular time period.
• Planned Order Receipts (POR): The quantity of orders during a time period that is expected to be received. This planning for orders keeps the inventory from going below the threshold necessary.
• Planned Order Releases (PORL): This is the amount you plan to order per time period. This is POR offset by the lead time.
• Cumulative Lead Time: This is the greatest amount of time that it takes to develop the product. You may calculate it by looking at each BOM and figuring out which one takes the longest.
• Product Structure Tree: This is a visual depiction of the bill of materials, showing how many of each part and how many sub-parts  you need to produce the product.

• Net-Change Systems: These are systems which identify only the changes between the new and old plan.
• Master Production Schedule (MPS): This is the schedule of finished products that drives the MRP process. The quantities in MPS represent what you need to produce to meet the forecast.
• Lumpiness: This is when product/material that is low or at zero suddenly spikes. Examples of lumpy or uneven demand include the need for service parts. You only need service parts when an appliance breaks, so forecasting the need for the parts may be difficult, as the demand is not continuous. 
• Time Fence: Time fences are boundaries between different MRP planning periods. They offer the opportunity for programming changes, such as rules and restrictions. 

What Is the Benefit of Material Requirements Planning?

You may use MRP concepts in a variety of different production environments. You may also use them for service providers, such as job shops. Examples of production environments include instances in which products are complex, products are only assembled to order, or demand items are discrete and dependent. In these cases, MRP can reduce the stored inventory, the component shortages, the overall manufacturing cost, and, therefore, the cost to purchase. This more accurate scheduling improves your company’s productivity by decreasing the necessary lead time, giving your customers a higher quality of production and service. Overall, your company is more competitive in the marketplace.

However, with these advantages come a few drawbacks. Foremost, MRP is only successful if the accounting is accurate. You must keep records of inventory and BOM changes up to date. Inaccurate input causes inaccurate output. Another potential downside to MRP is that it can be costly. If you don’t keep the input in a timely fashion, it can be difficult and expensive when switching over to a new system. 

Material Requirements Planning Steps and Processes

MRP works because it is a well-organized framework of processes and calculations. An MRP system can completely transform a company’s operational procedures. Many people within an organization contribute to the MRP process, including sales, production, purchasing, receiving, stockroom, and shipping personnel. 

MRP consists of three basic steps: 

• Identifying the Quantity Requirements: Determine what quantity is on hand, in an open purchase order, planned for manufacturing, already committed to existing orders, and forecasted. These requirements are specific to each company and each company location and change with the date.
• Running the MRP Calculations: Create suggestions for materials that you consider critical, expedited, and delayed.
• Complete the Orders: Delineate the materials for the manufacturing orders, purchase orders, and other reporting requirements. 

The calculations that MRP performs are based on the data inputs. As shown in the diagram above, these data inputs include:

• Customer Orders: This refers to the specific information you receive from customers and includes one-offs and regular ordering patterns.
• Forecast Demand: This is a prediction from the marketplace about how much probable demand there will be for a product or service. It is based on historic accounting and current trend analysis. 
• Master Production Schedule (MPS): Both forecast demand and customer orders feed into the master production schedule. The MPS is a plan that a company develops for production, staffing, or inventory. It is the production future plan that includes the quantities you need to produce the products in a specified time period. It also includes inventory costs, production costs, inventory information, supply, lot size, lead time, and development capacity.
• Bill of Materials (BOM): Also called a product structure file, this includes the details and quantities of the raw materials, assemblies, and components that make up each end product.
• Inventory Records: These are the raw materials and the completed products that you either have on hand or have already ordered. 

After MRP receives the input, it generates the output. There are four main outputs. These include: 

• Purchase Orders (PO): This is the recommended purchasing schedule that includes the order you give to suppliers to send the materials. The PO includes a schedule with quantities and start and finish dates to meet the MPS.
• Material Plan: This details the raw materials, assembly items, and component needs to make the end products with quantities and dates. We recommend that you use attribute settings to set the time fences and to firm orders.
• Work Orders: This details the work that goes into producing the end product, including which departments are responsible for what part, what materials are necessary, and what the start and end dates are.
• Reports: MRP generates primary and secondary reports. The primary reports include all three of the above — those that deal with production and inventory planning and control. Secondary reports are those that detail things, such as performance control, exception data (e.g., errors or late orders), deviations, and predictors of future inventories and contracts.

The MRP technique can be vague at times because we call it a calculation process without necessarily indicating how to compute the data outputs. MRP is about putting mathematical controls into place using formulas that yield optimal results. MRP is an optimal control problem that calculates the initial conditions, the dynamics, the constraints, and the objective. The variables are the local inventory, the order size, the local demand, the fixed order costs, the variable order costs, and the local inventory holding costs. MRP comprises many methods and calculations. To find the order quantities, you can use any number of methods. Three of the most popular are:

• Dynamic Lot-Sizing: In inventory theory, this model assumes that the demand for product fluctuates over time. This complex algorithm generalizes the economic order quantity model. It requires dynamic programming to perform, so mathematicians also developed the following models.
• Silver-Meal Heuristic: This is an inventory control algorithm, also called least period cost, that minimizes the total relevant cost per unit of time. In other words, you use it to calculate the production quantities needed to meet the operational requirements at the lowest cost possible. 
• Least-Unit-Cost (LUC) Heuristic: Although quite similar to Silver-Meal, LUC chooses the period in the future based on average cost per unit rather than on average cost per period.

Problems with Using Material Requirements Planning Systems

Although using an MRP system is vastly superior to cobbling together a system of spreadsheets and hand calculations, problems do arise. The biggest issue is data integrity. Data that is either not up to date or has errors gives output that is inaccurate and can end up costing your business serious money. You should carefully screen inventory and BOM data. Errors often occur during cycle-count adjustments, input and shipping, and reporting of scrap, damage, waste, and production. Barcode scanning and pull systems can minimize these types of errors. 

Moreover, MRP systems can be rife with error when companies with facilities in different countries do not set up by individual location. For example, the MRP system could indicate that there is plenty of raw material available for production when, in fact, that raw material is on the other side of the world. Staffpower is also not always accounted for in MRP. In these cases, the MRP creates a capacity issue.

In addition, lead times can throw off MRP. The required lead time can change based on the product. MRP assumes that the lead time is always the same for each product, regardless of changes in supply, required quantities, or the possible simultaneous production of other products.

Solving your data-integrity issues may take some concentrated effort. Best practices for ensuring that your data is high-quality before you start your MRP process include:

• Using barcode scanning or a pull system to replace stock and enter products into inventory
• Making sure that shipping prints the container labels
• Requiring advance shipping notifications (ASN) from your suppliers that feed into a label system. In order to detect shortages and over-shipments, match labels with internal company numbers as product arrives. 
• Recording scrap daily
• Troubleshooting and fixing causes of cycle counts that incorrectly change your inventory 
• Confirming the bill of material at the production site

The History of Material Requirements Planning

During the early part of the 20th Century, material and planning control systems started using mathematics to calculate manufacturing lot sizes. In 1913, Ford W. Harris introduced the economic order quantity (EOQ) model , and it is still studied today for inventory management. 

Joseph Orlicky developed MRP in 1964, while working for IBM to perform computerized supply planning. Dr. Orlicky was on a mission to educate senior executive customers to use computer technology to manage their inventory and control processes. At IBM, Dr. Orlicky worked with Oliver Wight, who ended up co-authoring a book with George Plossl in 1967, Production and Inventory Control: Principles and Techniques . 

Long considered a bible of production and inventory control practices, the book’s influence was almost immediate. Black & Decker implemented MRP right away. The three professionals, Orlicky, Wight, and Plossl began the movement that saw nearly 700 companies adopt MRP by the time Dr. Orlicky’s book, Material Requirements Planning , came out in 1975. 

By 1981, about 8,000 companies had adopted MRP. The next generation of MRP was considered closed-loop MRP, because it added a feedback feature that enabled the synchronization and adjustment of the master production schedule, effectively closing the loop . Helmed by the three professionals, APICS, formerly the American Production and Inventory Control Society, undertook a huge campaign called the “MRP Crusade” to tout the benefits of the MRP system and make it the standard  for manufacturing planning in America. Still going strong, APICS now serves as a professional association for supply-chain operations, logistics, and management research and publications.

In 1983, Oliver Wight took MRP a step further and developed manufacturing resource planning (MRP II), also known as material planning. Considered a significant innovation, MRP II includes additional data, such as employee and finance information.

The most recent development for MRP came in 2011 when a new book was published by Joseph Orlicky’s original publishing company, McGraw Hill. This update to Orlicky’s work is the third edition of Orlicky's Material Requirements Planning . This edition introduced demand-driven MRP (DDMRP), with five components, including strategic inventory positioning, buffer profiles, level, dynamic adjustments, demand-driven planning, and highly visible and collaborative execution. 

What Is Manufacturing Resource Planning?

Specific to the manufacturing industry is manufacturing resource planning (MRP II). MRP was so successful that organizations using it wanted more improvements and more automation. MRP II takes the principles of MRP and adds some additional areas, such as rough-cut capacity planning and capacity requirement planning (CRP), to give companies a comprehensive manufacturing plan. CRP is an accounting method that determines the load for each process according to the manufacturing order. CRP takes data from MRP. 

MRP II isn’t solely about the computational needs, but is a management concept that can take many forms. MRP II works within a hierarchy that divides planning into the long range, medium range, and short term. The three main characteristics of MRP II are: 

• A company-wide system
• A financially and operationally integrated  system
• A system with the ability to perform “what-if” scenarios that show different ways to do things

MRP II also relies on the quality and timeliness of the inputted data. Inaccurate information or consistent lead-time fluctuations result in poor planning. These plans can lead to execution failure and even reimplementation. 

What Is Enterprise Resource Planning?

Enterprise resource planning (ERP) is an extension of MRP systems that came about in the 1990s. MRP is a planning and control system for the resources in a company and was essentially the harbinger of ERP systems to come. ERP is a solution for the enterprise as a whole, with more functionality built in, extending the concepts of MRP and MRP II. All the functions in an enterprise are tightly integrated, including internal and external information. For example, an ERP system would possess advanced functionality in the areas of financial , customer relationship, and sales order management.

Today, the difference between MRP and ERP is that MRP can be a stand-alone application or just a piece of an ERP, whereas ERP can support the whole company. ERP is a single solution that addresses all business needs, not just the scheduling of resources. ERP has moved away from its manufacturing roots and gone on to support many different types of businesses. It decreases any information redundancies and adds elements, like user-level security. The line between MRP and ERP has blurred, as the more recent ERP systems rely on similar database structures and linkages . To clarify, MRP only concentrates on:

• Job costing
• Controlling stock
• Manufacturing 

Using an ERP system gives your company some strategic opportunities. Companies report that the biggest benefits of their ERP system are increased efficiency, integrated information, more customized reports, higher-quality customer service, and more secure data. A well-used ERP system can enable your teams to be forward-looking and support your strategic vision for growth. A good ERP strategy improves your key business processes. 

ERP systems do come with challenges, however. Once you’ve allocated substantial financial resources to a system, you must address the organizational culture, so your staff utilizes the system adequately. With an integrated system, the return on investment depends on the breaking down of company silos to achieve seamless processes. 

What Is Distribution Requirements Planning?

Distribution requirements planning (DRP), also known as distribution replenishment planning, is a continuation of MRP logic that came about in 1981. DRP takes MRP one step further and calculates how to move the materials out of the facility. The product delivery is more efficient because DRP calculates the quantity of each type of goods that requires delivery, as well as where to meet the demand.  DRP is a time-based approach to guarantee that inventory that’s likely to be low has a replenishment plan. DRP is similar to MRP but can work by either a push or pull system.  ERP took over this functionality when it came about in the 1990s. Now, DRP can still be a stand-alone system or act as a module within an ERP system. 

What Is Production Planning?

Production planning is the process ensuring that there are sufficient raw materials in a manufacturing business to create the products on schedule.  More advanced than MRP, it extends the latter’s functionality. Developed to address some of the deficiencies of MRP, production planning expands upon MRP in the following ways:

• While MRP does not assume any limitations on production, production planning takes into account any production constraints.
• Production planning prioritizes and first completes the jobs that are the most lucrative.
• Production planning considers ordered-part lead time.
• Production planning uses more complex algorithms.

Material Requirements Planning Expert Advice

Although MRP may be challenging to implement, it is clearly worth the time, effort, and financial investment. Whether you are with a large organization or are a small business owner, it is important that you figure out how to best implement MRP and what software to use. Across the web, experts in MRP consistently make two suggestions: choose the right software, and keep your data accurate. With the right software for your company, you can harness the power of MRP. Whether you capture MRP in a comprehensive program, on an Excel spreadsheet, or with a stubby pencil and a legal pad, accurate data can consistently get you the right results and keep your business on track. The following are more tips culled from around the web on using MRP successfully. For more regularly updated MRP practice information, check out APICS magazine.

• Review Your MRP Reports with Everyone: MRP should not be only one person’s responsibility in your company, but should be dispersed so that everyone understands and can help solve problems that arise. Help resolving conflicts should come from the department responsible.
• Know Your Production Limitations: Most MRP systems will create a suggested schedule, but it is up to you to put into place your company capacity limits.
• Understand How Your System Accounts for Blanket Orders: It is easy for your system to get thrown off when you put in huge quantity orders without indicating release dates. Ensure that you have multiple dates entered when using blanket ordering, or at least understand how your system can account for these omissions.
• Stay Up to Date: Inaccurate dates on open sales orders, open purchase orders, or production tickets can create the illusion that you are low in materials. As a result, you’ll order more to meet your sales orders that are past due and waste money.
• Have Accurate Lead Times: Know how long it takes to get your materials, and keep accurate sales order dates. Each supplier may take slightly longer than another in getting you your critical supplies, so your MRP will only work if the lead time it calculates includes accurate data. 
• Audit Your Lead Times: Regularly review and adjust your lead times based on your own historical data and your customers’ feedback. Ask customers how long it took to receive their products. Then document those responses. 
• Make Sure Your Orders Consume Your Forecast: You should not be scheduling your production based on the higher number of forecast or sales order. As orders come in, your sales should be eating up your entire forecast. Your MRP report should summarize this for you, so you can figure out how well your production is meeting your demand without having excess inventory.
• Make Forecast Adjustments on a Rolling Basis: Whether your forecast is for sales or production, your system will produce your requirements that match. A forecast should never be a static figure, but should be tweaked constantly to reflect your market trends.
• Audit Your Inventory Balances: Especially when setting up a new system, you should have an accurate count of your on-hand inventory. Bad data in will give you bad data out. MRP excels at giving you data on your material requirements, but it will not do so if your initial counts are wrong.
• Account for Your Loss Factor: Every business will have some loss through the process of making their products. Whether you are a baker and have flour spills or a pharmaceutical manufacturer and have occasional chemical spills, there will be loss in the process. Without putting in a loss factor, you will be consistently short of raw materials. 
• Know the Difference between Safety Stock and Reorder Point: MRP automatically assigns these two factors as hard numbers, but if they need to be more suggestive in nature, you should specify that in your system. Your reorder point should reflect the level at which you need to take action.
• Flag Your Unusual Orders: Odd or atypical orders should not be a part of your MRP history because they are outliers that can throw off your whole forecasting system.
• Match Your Forecasting Period to the Sales Period: Use cumulative data because sales are generally not regularly spaced events. Data based on periods that are longer gives more precise forecasts.

Yury Rachitsky is CEO and Co-Founder of LuxeDecor . He is a consultant specializing in ERP implementations. Here are his own words, including his experience and tips for successful MRP implementation and use:

“I was involved in implementing ERP systems for various manufacturers. MRP was an essential part for production planning and scheduling and was an integral part for ensuring the materials were ordered on time to meet customer demand. During our user-training seminars, it was always challenging to explain MRP to system users not directly involved with production planning and scheduling processes.   

To simplify the MRP process explanation, we created a user-friendly chart that showed how MRP interfaces among different business departments. In short, MRP takes input from customer demand and forecast and produces scheduling recommendations for production and purchasing. MRP can go as far as automatically creating manufacturing work orders and purchase orders to meet customer and forecasted demand.

It is essential to have all the parameters set up correctly, such as manufacturing lead times and safety stock, to make sure that the resulting MRP recommendations are accurate. For example, if product includes wrong manufacturing or purchasing lead times, MRP will recommend starting production on a wrong date, and that can result in product being produced later than the customer demands it. This can result in loss of customers and decrease in revenue. However, if the data is accurate, MRP plays an integral part in guaranteeing on-time shipping and scheduling. 

There is no question that MRP is a necessary part of every company that strives for efficient production planning and scheduling processes.”

Material Requirements Planning Software

Although MRP is often an integrated, automated system, it can also be handwritten or consist of different applications or modules in disparate software systems. MRP software focuses on the period during which you create a product, identify and purchase raw materials , determine resources, and plan the steps for production. This subset of modern ERP systems is usually available as a module and looks for efficiencies in each step.  The cost of MRP software is a big concern for small businesses, but it’s clear that the investment is a huge money saver in the long run. Furthermore, your business may fiscally require a software system due to the risk of human error, slowed production times, and excessive manual labor costs. Still, companies need to consider what type of software is most appropriate for them category-wise, size-wise, and expectations-wise. For a small business, purchasing a comprehensive ERP suite may not only be wasteful, but also time-inefficient, defeating the system’s purpose.

Although the marketplace has a wide variety of providers, each  claiming to offer the best system available, experts recommend that you carefully consider your needs and options before purchasing software. And while it’s always good to consult your network for a consensus on what others are using, remember that what works for your colleagues may not work for you. Before looking at any features or products, consider your business goals, as well as your current requirements. Some of the features you should consider when choosing MRP software include the following:

• Flexible requirements
• Advanced filtering
• Comprehensive drill-down capability
• Exception management
• Agile order management
• Aggregate requirements
• Workflow support
• Designated time frames
• Multiple quantity display
• Forecast consumption
• Supply-chain visibility
• Integration into multiple environments
• Software support 
• Free trials

‌ Download Microsoft Excel Template for Choosing MRP Software

Should You Take a Course on Material Requirements Planning?

Accurately forecasting for materials in your business is a big responsibility, whether you produce automobiles or veal dishes. MRP is meant to assist you in getting the quantities right, so you don’t have critical shortages or a surplus of raw material spoiling or taking up critical storage space. There are numerous online  courses available concerning the concepts and use of MRP. The majority of courses teach you about specific software systems and cost anywhere from nothing to a few hundred dollars. Some of the courses come with certification, especially those for larger software systems, such as SAP. Courses are recommended for all MRP end users and analysts and any new MRP software users. We recommend some type of training for all staff who are new to the software. 

Course topics usually answer the following questions:

• What is the process to plan MRP?
• What are the key settings that influence MRP?
• How do you generate demand through your forecast?
• How do you generate supply with MRP to create planned orders?
• How do you run MRP as a single or as an organization-wide process?
• How do you evaluate your MRP reports?
• How do planned orders become purchase orders?
• How do you resolve your MRP exception messages?

If this guide and taking a course on MRP still does not give you the confidence or proficiency to use an MRP system, you can always hire a consultant who specializes in MRP/ERP implementation and solutions. An outside expert can get to know your business and help you decide what software is right for you, as well as take your business through the steps to implement the system correctly. An independent pro may very well be worth the cost, but be aware that most consultants have their favorite software systems, so they may be biased in their recommendations.

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Table of Contents

Mastering raw material procurement: main steps and 7 strategies for success.

Get ready to optimize your raw material procurement process! In this blog, we will explore the main steps of procurement and unveil seven effective strategies to enhance your sourcing efforts. Whether you're a seasoned supply chain professional or a business owner, these insights will empower you to strengthen supplier relationships, mitigate risks, and achieve sustainable growth. Let's dive in and discover the key to mastering raw material procurement !

Main Steps of the Raw Material Procurement Process

Raw material procurement planning is a crucial aspect of efficient supply chain management, ensuring a seamless flow of materials for production. Organizations employ various modes of procurement of raw materials, each tailored to meet specific requirements and optimize costs. The process of raw material purchase involves several steps, collectively forming the material purchase procedure, which aims to streamline sourcing and ensure the acquisition of high-quality materials. Let's delve into the main steps of the raw material procurement process, highlighting the significance of raw material sourcing and the material purchase process.

1. Need Analysis for Raw Material Procurement Planning

The process begins with a comprehensive need analysis, where the procurement team collaborates with different departments to identify the required raw materials. This collaborative effort ensures that raw material procurement planning aligns with the specific needs of each department, supporting operational efficiency and production goals.

2. Modes of Procurement of Raw Materials

Organizations leverage various modes of procurement to acquire raw materials efficiently. These modes may include direct sourcing from suppliers, engaging with distributors, and exploring global sourcing options to capitalize on cost advantages. The choice of procurement mode depends on factors like volume requirements, geographic considerations, and supplier capabilities.

3. Purchase Requisition and Material Purchase Procedure

Upon compiling the list of required raw materials, the procurement manager conducts a detailed review and cross-verifies the items with various departments. The raw materials are approved based on operational priorities, and items of lower importance are carefully re-evaluated in consultation with relevant teams. This rigorous material purchase procedure ensures that the procurement process considers the overall organizational goals and fosters interdepartmental cooperation.

4. Contract Negotiation and Raw Material Purchase

With the list of approved raw materials, the organization initiates contact with selected suppliers to solicit detailed quotations. Contract negotiation becomes a critical step to strike a balance between cost-effectiveness and product quality. The organization evaluates suppliers based on their reputation, reliability, and compliance with ethical and environmental standards. The supplier offering the most competitive quotation without compromising on quality is selected for the raw material purchase.

5. Raw Material Sourcing and Shipping

Raw material sourcing is a continuous effort involving timely coordination between the procurement team and suppliers. In some instances, suppliers may take responsibility for arranging the transportation of the raw materials to the organization's manufacturing units. However, it is primarily the organization's responsibility to ensure efficient shipping and logistics management, minimizing any potential disruptions to the supply chain.

6. Invoice Approval and Material Procurement Payment

Upon the arrival of the raw materials at the manufacturing units, a meticulous inspection is conducted to ensure their conformity with the invoice and quality standards. This thorough verification process safeguards the organization against discrepancies and ensures that the procured raw materials meet the specified requirements. Once the inspection is completed and the conformity is confirmed, the accounts department proceeds with approving the invoice for payment, facilitating smooth material procurement.

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Top 7 Strategies for Efficient Raw Material Procurement 

1. Implement Just-in-Time (JIT) Inventory Management

In the raw material procurement process , Just-in-Time (JIT) inventory management is a highly effective strategy. With JIT, you order and receive raw materials only when they are needed for production, eliminating the need for excessive inventory holding. This approach helps you optimize storage costs and reduces the risk of holding obsolete or excess inventory during uncertain times. By closely aligning raw material supply with production demand, you can improve cash flow, reduce carrying costs, and free up warehouse space for other critical items.

2. Establish Long-Term Contracts

To ensure a stable and reliable raw material supply, establishing long-term contracts with reputable suppliers is essential. These contracts define agreed-upon terms, including prices, delivery schedules, and quality standards. By committing to long-term partnerships, you provide suppliers with the assurance of continuous business, fostering stronger ties and loyalty. In return, they are more likely to prioritize your orders and extend preferential treatment during times of supply scarcity or disruptions in the market.

3. Implement Supplier Relationship Management (SRM)

Building strong relationships with your key suppliers is a cornerstone of successful raw material procurement planning. Effective Supplier Relationship Management (SRM) involves regular communication, mutual understanding, and collaboration. By understanding the capabilities and limitations of your suppliers, you can better align your procurement needs with their capabilities, ensuring a smoother raw material sourcing process. Regularly sharing market insights and upcoming production requirements with your suppliers enables them to plan and adjust their operations accordingly.

4. Diversify Supplier Base

Relying on a single supplier for critical raw materials can expose your business to significant risks. Diversifying your supplier base is a prudent approach to mitigate these risks through a vendor risk management strategy and maintain a reliable supply chain. By identifying and onboarding additional suppliers who meet your quality and delivery requirements, you create a safety net against potential disruptions from any individual supplier. Diversification also provides the opportunity to leverage competitive pricing and negotiate better terms with multiple suppliers.

5. Utilize Advanced Technology and Data Analytics

Incorporating advanced technologies and data analytics into your raw material procurement process can significantly enhance efficiency and decision-making. Utilize Artificial Intelligence (AI) and data analytics tools to predict demand patterns, identify trends, and optimize inventory levels. These technologies help you make data-driven decisions, ensuring that you procure the right quantity of raw materials at the right time. Additionally, data analytics can enable you to identify potential risks in your supply chain, empowering you to take proactive measures to address and mitigate these risks.

6. Enhance Supplier Collaboration

Improving collaboration with your suppliers goes beyond mere transactions. Engage in open and transparent communication with your suppliers, sharing relevant information about your business plans, production schedules, and market dynamics. By involving them in the raw material procurement planning process, you can gain valuable insights into their capabilities and constraints. This collaboration fosters a sense of partnership, encouraging suppliers to align their operations with your needs and enabling quicker adjustments during unforeseen supply chain challenges.

7. Conduct Regular Supplier Performance Assessments

To ensure consistent quality and delivery reliability, conduct periodic assessments of your suppliers' performance. Regular evaluations help you monitor adherence to contractual obligations, product specifications, and delivery timelines. Use performance metrics to objectively assess your suppliers' performance and identify areas for improvement. Engaging in constructive feedback sessions with your suppliers can lead to better understanding and foster a continuous improvement mindset.

Streamline Your Raw Material Procurement for Success

Mastering raw material procurement is vital for your business success and a streamlined supply chain. Each step in the process, from analysis to approval, plays a critical role in enhancing efficiency and optimizing costs. By adopting various procurement modes and standardized procedures, you can improve collaboration with suppliers, leading to better sourcing outcomes.

The seven strategies presented here offer valuable insights for optimizing your raw material procurement. Implementing JIT inventory management, entering into long-term contracts, and leveraging advanced technology will boost efficiency and reduce supply chain risks for your organization. Emphasizing supplier relationship management and diversifying your supplier base will strengthen your supply chain against potential disruptions, while fostering collaboration with suppliers will bring flexibility to your procurement process.

With Bizongo 's Vendor Digitization Platform with Embedded Financing , you can access cutting-edge solutions. Digitize your vendor ecosystem, access supply chain financing, and gain real-time insights for agility, reliability, and compliance in your operations. Embrace the presented steps and strategies, alongside Bizongo's platform, to unlock your business's full potential and achieve procurement excellence. Empower your supply chain, drive growth, and succeed in your raw material procurement journey. 

Fill the form below to optimize your raw material procurement today.

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The Importance of Effectively Managing Raw Materials Inventory

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In today’s world, the system of vendors, activity, and data required to source, produce, and deliver products to customers is increasingly complex. And the supply chain represents the steps required to make this happen. But as product companies extend their reach globally to capture the lowest material and operating costs, managing the supply chain has become increasingly difficult.

One major component in any supply chain is raw materials, the unprocessed materials, components, or partially finished assemblies that are required to build or produce a product. These are both the building blocks and the starting point for any final product and ensuring adequate supply and proper management of raw materials is critical. Moreover, they represent an investment that affects the cash flow and financial health of an enterprise as the cost is accrued at the point of acquisition and is listed as a current asset on a company’s balance sheet. As a result, it is important to use best practices for managing raw material inventory.

Raw Materials Fundamentals

There are two basic subcategories of raw materials. Direct materials are those that are incorporated into the final product. Whereas indirect materials (often referred to as supplies or consumables) are not included in the final product but include things such as oils, rags, cleaners, markers, gloves, support material, and many other items used in the making of the final inventory items. Both types must be included in materials planning to ensure enough material is on hand to build the required number of units to fit the sales position or sales projection. It is also critical to plan for any established “safety stock” to address quality fallout, returns, or buffer stock against sudden increases in demand.

Materials planning is the method used to determine the requirements and quantities of raw materials to implement production. Many companies use traditional Material Resource Planning (MRP) systems to help calculate the requirements for the current product mix. Materials planning may also include data based on past consumption. And in many cases, while it is always better to calculate than to predict, materials planning may include forecasting due to seasonality, market volatility, or other external factors.

Purchasing is also a key fundamental in maintaining the correct level of raw materials inventory. As material requirements take shape, purchasing must coordinate the flow of materials into the production process on time and in the right quantities. And in a global economy that utilizes far-flung supply chains, this is no easy task.

Factors that complicate the purchase, and therefore influx, of raw materials, include:

• Lead Time: Lead time can affect delivery depending on what is purchased. In some cases, such as in complex subassemblies or electronics components, the vendor’s component lead times for their production cycle will be a necessary factor to consider.
• Mode of Production: A company’s mode of production can also impact the purchasing plan and the raw material level. For Make to Stock (MTO) goods, consistent and established patterns can be leveraged to plan purchasing. But for Make to Order (MTO) items, where materials are not purchased until needed, raw material is more episodic. As a result, different practices and expectations are employed to maintain an appropriate level of stock to allow production to remain steady.
• Long/Short Supply Chain Legs: A reality of the global sourcing economy is that purchasing is further complicated by long and short supply chain legs. Purchasers of raw materials must balance locally sourced materials with low minimum requirements against materials purchased from overseas suppliers that will likely carry higher minimums. This further complicates material costing as “landed costs” must be factored into the cost structure if not the valuation of the raw material. This creates an imbalance of low- and high-volume materials that must be closely managed.

Keeping Track of Raw Materials Inventory

All these factors come into play and bring focus to the importance of keeping track of raw materials inventory. As a critical part of a delicately balanced ecosystem, managing raw materials inventory can make or break the supply chain effort. As the material plan and purchasing coordinate to deliver raw materials, there are several issues to watch for and manage tightly:

Overstocking can result from many factors outside of the traditional slowdown in order position, including:

• Overly optimistic forecasting from sales.
• Early arrivals against quoted lead times from overseas volume vendors.
• Miscalculation of safety stock based on historical data that is no longer valid or on the anecdotal or “gut” instinct of planners.

Understocking too can result from several different factors and threaten productivity through work stoppage. These factors include:

• Under-forecasting due to missed seasonal trends.
• Longer than quoted lead times due to weather, or due to freight, customs, or transportation issues not factored into the materials plan.
• Shortages from “short leg” supply vendors who may be local but are not given enough time to react when orders ramp up as schedulers and planners defer these purchases on a more JIT basis.

Quality and Compliance Issues

Quality management and traceability should be built into any supply chain. But when it isn’t, quality rejections for raw materials can cause severe shortages or increased costs due to expediting. Compliance issues are also a concern for assemblies and subassemblies for parts such as electronics and automotive parts where full traceability is often regulated by the receiving country’s government.

These concerns are important for any company, but small to medium-sized companies often face a heightened level of exposure when raw materials are not adequately managed. Each variable adds cost through higher warehousing costs, added labor, or paused production. And many SMB organizations do not have the ready cash flow and reserved resources to recover from excess inventory nor the resources to expedite when faced with shortages. In addition, the skillsets deployed within SMBs may also be of concern as these functions may often be done using staff that “wear many hats” and perform several functions.

Overcoming Challenges with Data Management

In seeking to answer the challenges of modern inventory management within a global supply chain, companies should assess their methodology. If the optimal frequency for ordering materials is determined using a combination of disparate spreadsheets and a collection of “tribal knowledge”, it is possible that the company will not be able to handle the complexity of raw materials management. Likewise, if the calculation of safety and buffer stock levels is inconsistent and not formalized or data-driven, then chances are there will be shortages. And finally, if the calculations used to generate the materials plan and procure materials isn’t really a “calculation” at all, but instead consists of multiple, incomplete, and overlapping spreadsheets, then there will be gaps in the inventory in various degrees. Fortunately, with the increased complexity of the modern supply chain, data management software has come of age to help formalize and manage raw materials inventory and to optimize inventory control and eliminate these gaps.

Software for effective data management of raw materials inventory should have several key features:

• Planning and Forecasting: Today’s planning software can combine firm orders with forecasting. Combining the elements that can be computed and calculated with the more subjective elements in forecasting, means inventory management is less likely to experience spikes and shortages.
• Data-Driven Management: Planning software can help move a company’s calculating ability for inventory from multiple spreadsheets to powerful computational models that can be envisioned across production requirements. Historical data, current confirmed orders, and projected sales can all be incorporated at the click of a button.
• Advanced Analytics: Software today can also offer advanced analytics to calculate economic order quantities and factor in lead times and stock levels needed to support existing and forecasted orders. Modern systems also support reporting by revenue, cost, units, and other configurations to give decision makers accurate tools at their fingertips to move away from “gut feeling” decision making and archaic spreadsheet-based plans.
• Cost Reduction: With the right planning software, raw materials can be managed and optimized at a professional level while reducing overall inventory costs by 25% or more. Keeping an eye on raw materials inventory can provide a significant competitive advantage as well as a cost advantage for most companies.

With the challenges faced by small and medium companies as globally sourced supply chains continue to become more complex, data-driven, analytically capable software, such as DemandCaster , is the best option for managing raw materials inventory without losing track.

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What Is Material Requirements Planning (MRP)?

Material requirements planning (MRP) is a software-based integrated inventory and supply management system designed for businesses.

Companies use MRP to estimate quantities of raw materials, maintain inventory levels, and schedule production and deliveries .

Key Takeaways

• Material requirements planning (MRP) is the earliest computer-based inventory management system.
• MRP helps develop a production plan for finished goods by defining inventory requirements for components and raw materials.
• MRP assures that materials and components will be available when needed, minimizes inventory levels, reduces customer lead times, and improves customer satisfaction.
• MRP relies on data accuracy, has a high cost to implement, and maintains a strict production schedule.

How Material Requirements Planning (MRP) Works

MRP helps businesses and manufacturers define what is needed, how much is needed, and when materials are needed and works backward from a production plan for finished goods.

MRP converts a plan into a list of requirements for the subassemblies, parts, and raw materials needed to produce a final product within the established schedule. MRP helps manufacturers get a grasp of inventory requirements while balancing both supply and demand.

Using MRP, managers can determine their need for labor and supplies and improve their production efficiency by inputting data into the MRP scheme such as:

• Item Name or Nomenclature : The finished good title, sometimes called Level "0" on BOM.
• Master Production Schedule (MPS) : How much is required to meet demand? When is it needed?
• Shelf life of stored materials.
• Inventory Status File (ISF):  Materials available that are in stock and materials on order from suppliers.
• Bills of materials (BOM) : Details of materials and components required to make each product.
• Planning data : Restraints and directions like routing, labor and machine standards, quality and testing standards, and lot sizing techniques.

Manufacturers manage the types and quantities of materials they purchase strategically and cost-effectively to ensure that they can meet current and future customer demand. MRP helps companies maintain appropriate levels of inventory so that manufacturers can better align their production with rising and falling demand.

A  bill of materials (BOM) is an extensive list of raw materials, components, and assemblies required to construct, manufacture or repair a product or service.

The MRP process:

• Estimates demand and required materials. After determining customer demand and utilizing the bill of materials, MRP breaks down demand into specific raw materials and components.

• Allocates Inventory of materials. MRP allocates inventory into the exact areas as needed.

• Schedules Production. Time and labor requirements are calculated to complete manufacturing and a timeline is created.

• Monitors the process. MRP automatically alerts managers of any delays and even suggests contingency plans to meet build deadlines.

Material requirements planning was the earliest of the integrated information technology (IT) systems that aimed to improve productivity for businesses by using computers and software technology.

The first MRP systems of inventory management evolved in the 1940s and 1950s, using mainframe computers to extrapolate information from a bill of materials for a specific finished product into a production and purchasing plan. MRP systems expanded to include information feedback loops so that production managers could change and update the system inputs as needed.

The next generation of MRP, manufacturing resources planning (MRP II), also incorporated marketing, finance, accounting, engineering, and human resources aspects into the planning process. A concept that expands on MRP is enterprise resources planning (ERP), developed in the 1990s, which uses computer technology to link various functional areas across an entire business enterprise.

Advantages and Disadvantages of MRP

Materials and components are available when needed

Minimized inventory levels and associated costs

Reduced customer lead times

Increased manufacturing efficiency

Increased labor productivity

Heavy reliance on input data accuracy

Expensive to implement

Lack of flexibility in the production schedule

Tendency to hold more inventory than needed

Less capable than an overall ERP system

Enterprise resource planning (ERP) is an extension of MRP systems. While MRP is a planning and control system for the resources in a company, ERP is a solution for the enterprise as a whole and an ERP system includes advanced functionality in the areas of financial, customer relationships, and sales order management.

MRP can be a stand-alone application or a piece of an ERP, a single solution that addresses all business needs, not just the scheduling of resources. It decreases any information redundancies and adds elements, like user-level security.

Benefits of an ERP system include increased efficiency, integrated information, customized reports, and higher-quality customer service,

What Are the 3 Main Inputs for MRP?

The three basic inputs of an MRP system include the Master Production Schedule (MPS), Inventory Status File (ISF), and Bill of Materials (BOM).

How Does MRP Benefit a Business?

MRP ensures that materials and components are available when they're needed, inventory levels are optimized, manufacturing efficiency is improved, and customer satisfaction increases.

What Are the Outputs of an MRP System?

Using required inputs, the MRP calculates what materials are needed, how much is needed to complete a build, and exactly when materials are needed in the build process.

This allows businesses to use just-in-time (JIT) production , scheduling production based on material availability. This minimizes inventory levels and businesses can move materials through the manufacturing process efficiently.

Material requirements planning (MRP) is a software-based integrated inventory and supply management system that companies use to estimate quantities of raw materials and schedule production. By inputting information like the Master Production Schedule, Inventory Status File, and the Bill of Materials (BOM), MRP calculates the materials needed, how much are needed, and when they are needed in the manufacturing process.

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Controlling chemical contamination in agricultural raw materials must: FSSAI

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Kolkata, Sep 7 (PTI) Food Safety and Standards Authority of India (FSSAI) on Saturday asserted that controlling chemical contamination in agricultural raw materials is essential for advancing the food industry.

FSSAI executive director Inoshi Sharma said enforcing Maximum Residue Levels (MRLs) in crops, fruits, and spices presents a significant challenge.

Speaking at an event organised by the Bharat Chamber of Commerce here, she stressed the need for regular audits and the rejection of non-compliant produce at farm gates.

Sharma also underscored the importance of educating buyers about the detrimental effects of excessive pesticide use, which can lead to contamination in raw materials.

She announced plans to form a committee with representatives from various ministries and departments to address this issue.

Furthermore, Sharma emphasised the necessity for accurate labeling and the avoidance of misleading claims by Food Business Organizations (FBOs). She advocated for a culture of 'Self-Compliance' among FBOs and suggested that they employ certified third parties to ensure adherence to standards.

Bharat Chamber senior vice-president Naresh Pachisia pointed out that the detection of chemical residues used during crop production often leads to penalties for food processors and, in many cases, results in the cancellation of export consignments of processed food.

He called for increased awareness and vigilance regarding the chemicals used in agri-horticultural cultivation and post-harvest processes.

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Environment solution: New metals refinery for nickel and cobalt opens in Ohio

A sign stands outside Nth Cycle, Thursday, Sept. 5, 2024, in Fairfield, Ohio. (AP Photo/Joshua A. Bickel)

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In a step forward for efforts to acquire the metals crucial to addressing climate change, on Monday a new plant that can extract nickel and cobalt from scrap material opens in Fairfield, Ohio. The resulting metals will be used in new batteries and other clean energy markets.

Extracting metals out of old material avoids the environmental damage of open pit mining and prevents the metals from ending up in the landfill. Many see this as the future, even if it takes decades to become reality.

Climate change is largely caused by burning dirty fuels for two broad purposes: to make electricity and to move vehicles. Batteries can substitute for both much of the time, but this changeover is still in its infancy and the need for more minerals is great.

The metals refining company Nth Cycle builds systems that yield nickel and cobalt from a form of shredded lithium ion batteries and nickel scrap from electric vehicles and consumer electronics. There are a growing number of companies, including Redwood Materials and Li-Cycle, that are expanding the young U.S. battery recycling industry.

Currently, even when battery materials are collected for recycling in the U.S., they’re mostly shipped overseas to be refined. Building a traditional metals refinery in the U.S. could cost upward of $1 billion, but Nth Cycle uses a modular design it says is ideal because it can be added onto existing manufacturing facilities.

“We have no refining capacity in the U.S. at all for these types of materials,” said Megan O’Connor, CEO of Nth Cycle. “We will be the first commercial cobalt nickel refinery in the U.S., which we’re very excited about.”

Some experts heralded the development.

“I think it’s very encouraging to hear the scaling has reached a stage where this is a possible revenue-making business,” said Shirley Meng, a professor at the University of Chicago’s Pritzker School of Molecular Engineering.

Craig Arnold, engineering professor and university innovation officer at Princeton University, said this type of advancement is “huge” for the industry. “If we had a stronger domestic supply of these critical materials, it would absolutely benefit the battery industry,” he said.

Right now the only U.S. source of nickel is the Eagle Mine in Michigan. Ore mined there is shipped internationally for refining.

The demand for critical minerals for battery usage is surging as the world becomes more electrified. The need for nickel for electric vehicles grew nearly 30% in 2023 over the year before, according to the International Energy Agency . EV battery demand for cobalt increased 15% in the same period.

Critical minerals are currently extracted from the Earth from mines in Australia, Indonesia, Congo and Brazil, among other countries. The supply chain is complex, involving an international matrix of labor rights concerns, tribal land conflicts and environmental damage . China is the dominant player in minerals crucial to the energy transition and also leads in battery recycling.

The supply chain can be shaken by geopolitical conflict and also emits carbon emissions as materials are transported from country to country. This puts U.S. battery ambitions at risk, which is why experts say carrying out more of these processes domestically will make it easier to reach sustainability goals.

The Inflation Reduction Act is incentivizing the expansion of the battery supply chain in the U.S. and Nth Cycle received $7.2 million under the law’s Advanced Energy Project Tax Credit (48C) program. The IRA also offers credits for EV’s containing battery materials and components from the U.S. or a country that has a free trade agreement with the U.S.

The Associated Press’ climate and environmental coverage receives financial support from multiple private foundations. AP is solely responsible for all content. Find AP’s standards for working with philanthropies, a list of supporters and funded coverage areas at AP.org .

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Raw Material: Definisi, Jenis, dan Tips Pengelolaannya

Raw material merupakan elemen penting dalam industri manufaktur. Pemilihan raw material serta pengelolaan persediaan yang tepat dapat memengaruhi kualitas hasil sehingga dapat memiliki nilai jual yang terbaik.

Definisi Raw Material

Mengutip dari Wikipedia , raw material atau feedstock , atau dalam Bahasa Indonesia adalah bahan baku, adalah bahan yang digunakan untuk menghasilkan barang, barang akhir, energi, atau barang setengah jadi untuk proses produksi selanjutnya.

Berdasarkan pendapat para ahli, bahan baku adalah seluruh bahan produksi yang meliputi semua bahan yang digunakan dalam suatu perusahaan, kecuali berbagai macam bahan yang secara fisik akan dijadikan satu dengan produk yang dihasilkan dari suatu perusahaan (Sofjan Assauri).

Pendapat lainnya, bahan baku adalah suatu bahan yang berguna untuk menghasilkan barang jadi. Bahan-bahan tersebut akan saling terikat dan berubah menjadi barang jadi setelah melalui proses produksi (Hanggana).

Maka dapat disimpulkan bahwa raw materials adalah bahan baku yang digunakan perusahaan manufaktur dan sejenisnya untuk menghasilkan barang jadi maupun barang setengah jadi.

Jenis-Jenis Raw Material

Saat ini, terdapat 2 jenis raw material yang digunakan oleh industri manufaktur, yaitu direct material (bahan baku langsung) dan indirect material (bahan baku tidak langsung).

• Direct Material

Secara sederhana, direct material merupakan bahan utama yang diperlukan oleh perusahaan dan terlihat secara langsung. Artinya, proses produksi dapat berjalan dengan lancar dengan adanya bahan baku langsung.

Karena itu, perusahaan perlu mengelola ketersediaan bahan baku langsung secara akurat untuk menjaga kelancaran proses produksi. Ketika direct material terlihat menipis, perusahaan perlu memesan kembali ke supplier dengan cepat untuk menambah pasokan bahan baku.

• Indirect Material

Indirect material adalah bahan baku yang menjadi pendukung kelancaran proses produksi. Bahan ini tidak terlihat secara langsung pada saat proses produksi. Namun, perannya turut penting untuk membantu bahan baku menjadi barang.

Contoh sederhana bahan baku tidak langsung adalah oli mesin, peralatan kebersihan untuk menjaga kebersihan mesin, hingga alat-alat perlindungan diri yang dikenakan oleh operator mesin.

Jadi pada saat oli mesin habis, perusahaan tetap perlu membeli dan menjaga stoknya agar mesin tetap dapat berjalan.

Baca Juga: Peran Supplier dalam Rantai Pasok Bisnis Anda

Perusahaan perlu melakukan pembelian dan pembayaran kepada supplier/pemasok bahan baku langsung maupun tidak langsung. Untuk mempermudah pembayaran invoice, perusahaan dapat menggunakan aplikasi bisnis OnlinePajak. 

Pengelolaan dan pembayaran invoice dalam 1 aplikasi terintegrasi, dengan metode pembayaran yang beragam sehingga membantu perusahaan dalam mengelola kas usaha. Rekonsiliasi pun hanya dengan 1-klik sehingga siap audit kapan saja.

Untuk dapat melakukan pembayaran invoice melalui OnlinePajak, silakan daftar sekarang dan selesaikan proses registrasinya.

Selain itu, bahan baku juga terbagi ke beberapa jenis berdasarkan sumber dan bentuknya, yaitu:

• Bahan baku primer, yaitu bahan baku yang diambil dari sumber alam dan belum mengalami proses pengolahan, seperti kayu, biji kopi, emas, minyak bumi, dan sebagainya.
• Bahan baku sekunder, adalah bahan baku yang telah mengalami pengolahan awal untuk mempermudah proses produksi selanjutnya, seperti baja, kertas, plastic, dan sebagainya.
• Bahan baku terbarukan, merupakan bahan baku yang dapat diperbarui secara alami dalam jangka Waktu pendek, seperti bioplastic, serat alam, bahan bakar biofuel, bambu, dan sebagainya.
• Bahan baku non-terbarukan, adalah bahan baku berupa sumber daya alam yang tidak dapat diperbarui dalam jangka Waktu pendek, seperti minyak bumi, gas alam, batu bara, dan sebagainya.

Baca Juga: 10 Tips Mengelola Stok dengan Efektif

Tips Mengelola Persediaan Bahan Baku

Pengelolaan raw material yang efektif dapat menjaga kualitasnya serta menghindarkan perusahaan dari kerugian. Misalnya jika bahan baku disimpan terlalu lama dalam Gudang, akan mengalami kerusakan alami yang akhirnya tidak dapat diolah menjadi barang jadi. Karena kejadian ini, perusahaan mengalami kerugian karena tidak dapat melakukan produksi barang, atau kerugian berupa pengeluaran berlebihan karena harus membeli bahan baku baru.

Ada beberapa tips mengelola persediaan bahan baku yang dapat dicoba:

• Membuat Perencanaan Stok Bahan Baku

Buat perencanaan kebutuhan bahan baku dengan mempertimbangkan tren pasar, rentang Waktu pengiriman bahan baku, standar penggunaan, hingga stok yang tersisa di gudang perusahaan. 

Dengan mempertimbangkan faktor-faktor tersebut, perusahaan dapat membuat perencanaan yang akurat, memastikan raw material tersedia pada Waktu yang tepat dan dalam jumlah sesuai kebutuhan produksi sehingga dapat menghindari risiko stok berlebihan.

• Menerapkan Strategi Persediaan yang Tepat

Perusahaan harus menggunakan strategi persediaan yang tepat untuk mencegah terjadinya kerusakan bahan baku. Ada 2 strategi yang dapat diterapkan, yaitu:

• Metode FIFO (First In, First Out), artinya bahan aku yang masuk pertama, akan digunakan pertama. Dengan begitu, dapat menghindari kerusakan akibat terlalu lama disimpan.
• Metode JIT (Just In Time), artinya bahan aku dipesan dan diterima saat dibutuhkan untuk produksi. Dengan strategi ini, perusahaan memperkecil risiko kelebihan stok dan dapat menghemat biaya penyimpanan bahan baku.
• Memilih Pemasok Bahan Baku yang Tepat

Pemasok yang tepat dapat mendukung kelancaran proses produksi perusahaan. Pilih pemasok yang dapat menyediakan bahan baku dengan kualitas terbaik, memiliki kredibilitas yang baik, serta berada di lokasi yang strategis (karena hal ini akan berpengaruh kepada Waktu pengiriman dan kualitas bahan baku).

Setelah memilih pemasok yang tepat, perusahaan perlu menjaga agar relasi bisnis tetap berjalan dengan baik. Salah satunya adalah memastikan pembayaran invoice selalu tepat waktu, atau bahkan lebih awal.

Pembayaran invoice dapat berjalan lebih mudah ketika dapat memanfaatkan kartu kredit bisnis. Metode pembayaran seperti ini sudah tersedia di OnlinePajak.

Perusahaan dapat melakukan pembayaran invoice dengan kartu kredit dan menikmati benefit tambahan, seperti masa jatuh tempo hingga 55 hari dan mendapatkan rewards tambahan. Lebih dari itu, perusahaan juga dapat melakukan rekonsiliasi dengan lebih mudah. 

Hubungi sales OnlinePajak sekarang untuk informasi penggunaan fitur Pembayaran Invoice ini.

• Memanfaatkan Sistem Manajemen Terintegrasi

Saat ini, perusahaan dapat memanfaatkan system manajemen terintegrasi yang mempermudah pengelolaan persediaan stok. Pilih system yang dapat membantu perusahaan untuk melacak stok secara real-time, mencatat pembelian bahan bakuk, serta pengingat otomatis Ketika jumlah bahan baku sudah menipis.

• Melakukan Audit dan Evaluasi Secara Berkala

Audit dan evaluasi persediaan secara berkala untuk menjaga kualitas raw material. Audit membantu perusahaan dalam mengidentifikasi jika stok bahan baku masih dalam jumlah yang aman atau tidak, atau menemukan jika ada bahan baku yang sudah rusak. Selanjutnya, perusahaan melakukan evaluasi dari hasil audit tersebut untuk menentukan langkah-langkah yang harus dilakukan.

Demikian pembahasan mengenai raw material yang digunakan oleh industri manufaktur dan sejenisnya. Pemilihan dan pengelolaan raw material yang tepat, tidak hanya membantu perusahaan dalam menghasilkan barang yang berkualitas, tetapi juga meningkatkan penjualan serta menghindarkan dari risiko-risiko yang mungkin terjadi. 

Wikipedia, Raw Material, 2024

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Environment solution: New metals refinery for nickel and cobalt opens in Ohio

Mining raw materials, like nickel, for batteries harms the environment, and new mines are very difficult to get approved, so the search is on to recycle metals that have already come out of the earth

In a step forward for efforts to acquire the metals crucial to addressing climate change, on Monday a new plant that can extract nickel and cobalt from scrap material opens in Fairfield, Ohio. The resulting metals will be used in new batteries and other clean energy markets.

Extracting metals out of old material avoids the environmental damage of open pit mining and prevents the metals from ending up in the landfill. Many see this as the future, even if it takes decades to become reality.

Climate change is largely caused by burning dirty fuels for two broad purposes: to make electricity and to move vehicles. Batteries can substitute for both much of the time, but this changeover is still in its infancy and the need for more minerals is great.

The metals refining company Nth Cycle builds systems that yield nickel and cobalt from a form of shredded lithium ion batteries and nickel scrap from electric vehicles and consumer electronics. There are a growing number of companies, including Redwood Materials and Li-Cycle, that are expanding the young U.S. battery recycling industry.

Currently, even when battery materials are collected for recycling in the U.S., they're mostly shipped overseas to be refined. Building a traditional metals refinery in the U.S. could cost upward of $1 billion, but Nth Cycle uses a modular design it says is ideal because it can be added onto existing manufacturing facilities.

“We have no refining capacity in the U.S. at all for these types of materials,” said Megan O’Connor, CEO of Nth Cycle. “We will be the first commercial cobalt nickel refinery in the U.S., which we’re very excited about.”

Some experts heralded the development.

“I think it’s very encouraging to hear the scaling has reached a stage where this is a possible revenue-making business,” said Shirley Meng, a professor at the University of Chicago’s Pritzker School of Molecular Engineering.

Craig Arnold, engineering professor and university innovation officer at Princeton University, said this type of advancement is “huge” for the industry. “If we had a stronger domestic supply of these critical materials, it would absolutely benefit the battery industry,” he said.

Right now the only U.S. source of nickel is the Eagle Mine in Michigan. Ore mined there is shipped internationally for refining.

The demand for critical minerals for battery usage is surging as the world becomes more electrified. The need for nickel for electric vehicles grew nearly 30% in 2023 over the year before, according to the International Energy Agency . EV battery demand for cobalt increased 15% in the same period.

Critical minerals are currently extracted from the Earth from mines in Australia, Indonesia, Congo and Brazil, among other countries. The supply chain is complex, involving an international matrix of labor rights concerns, tribal land conflicts and environmental damage . China is the dominant player in minerals crucial to the energy transition and also leads in battery recycling.

The supply chain can be shaken by geopolitical conflict and also emits carbon emissions as materials are transported from country to country. This puts U.S. battery ambitions at risk, which is why experts say carrying out more of these processes domestically will make it easier to reach sustainability goals.

The Inflation Reduction Act is incentivizing the expansion of the battery supply chain in the U.S. and Nth Cycle received $7.2 million under the law's Advanced Energy Project Tax Credit (48C) program. The IRA also offers credits for EV's containing battery materials and components from the U.S. or a country that has a free trade agreement with the U.S.

The Associated Press’ climate and environmental coverage receives financial support from multiple private foundations. AP is solely responsible for all content. Find AP’s standards for working with philanthropies, a list of supporters and funded coverage areas at AP.org .

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