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Raw materials management is a process that is considered part of the overall supply chain management process, and focuses on the tasks of securing the highest quality materials at the lowest rates possible, while also working within the company structure to make sure those materials provide the best possible benefit within the production process. This means that the wide scope of raw materials management begins with the evaluation and acquisition of the raw materials, moves on through the use of those materials in the manufacturing process, and even involves assessing the amount of waste that is present after those materials are made into finished goods. At its best, this type of management process not only saves the company money in terms of expenses but also aids in reducing waste and allowing the company to enjoy more profit from each finished unit that is sold.
The tasks of raw materials management begins with the assessment and selection of the materials needed in order to manufacture goods. Buying raw materials calls for identifying the standards that must be met in order to produce the qualify of finished goods desired. To that end, the manager will devote time and effort to finding the right materials, using company resources to ensure they are of the right quality level, and then make arrangements to purchase the materials in the quantities desired.
As part of the acquisition process, the manager will also attempt to negotiate the best possible price of raw materials for use in the production process. This is often a simpler task when the business volume of the company is high enough to require large amounts of the materials. Here, the focus of raw materials management moves on from the task of finding the right materials and concentrates on using contractual arrangements complete with discounted pricing or volume purchase pricing to make sure the company has an adequate supply of the right materials to sustain the operation.
Even after the raw materials are evaluated and purchased, the function of raw materials management will continue. As part of the support for the production process, the manager will work with others in the organization to help streamline how those materials are used in the manufacture of goods. The idea is to identify any phases of production in which waste of the materials is occurring, and identify changes that would keep that waste to a minimum. This effort helps to trim production costs, since less waste means more of the purchased materials ultimately are used for finished products. Lower production costs in turn leads to the generation of a higher rate of return off each finished goods that is sold, allowing the company to generate more profits.
The process of raw materials management is ongoing. At all times, the efforts to secure raw materials of the right quality level and for the most competitive price is in progress, making it possible for the manager to locate new vendors and possibly save the company more money on the front end. By always being aware of the options open to the company to secure the materials needed for production purposes, the business can minimize any disruptions to production that could occur if the usual vendor is suddenly unable to meet the demand for some reason.
@Soulfox -- That can be somewhat stressful, but it doesn't have to be. Most companies know when they need raw materials and buy around that time without sweating too much over whether they save a few cents here and there.
The problem, of course, is when there is an overall increase in the price of raw materials. Those increases can drive up the cost of finished products and those costs are passed right on to us consumers.
If a company doesn't have flexible enough pricing mechanisms, it can send out a bunch of goods at the old price for a loss when raw materials prices go up. That can be a real problem.
A lot of buying raw materials had to do with dealing with the Chicago Board of Trade (in the United States) and the futures market. That can get very complex as you are dealing with futures prices, trying to decide whether to lock in at a certain price or wait and hope for a lower one, etc.
For companies that buy a lot of raw materials, the difference of a few cents can mean tons of money that is saved or lost.
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