Materials Management – Process, Examples, and Best Practices for SMEs

Keeping the right materials on hand without overstocking is a constant challenge for small manufacturers and distributors. Materials management coordinates the flow of materials, connecting purchasing, inventory, and production to keep operations supplied and costs under control.

Key takeaways

• Materials management is the process of planning, purchasing, storing, tracking, and controlling the materials a business needs for its operations. It connects procurement, inventory, and production to keep materials available without unnecessarily tying up money in stock.
• The Five Rights of materials management are the right materials, quantity, time, place, and price. Meeting these means you need to consider material quality, production schedules, supplier reliability, and total purchasing costs alongside.
• Inventory accuracy depends on recording what happens on the shop floor. Receipts, transfers, material consumption, and returns need to be tracked consistently. Regular cycle counting and appropriate lot or serial number tracking help prevent discrepancies and traceability problems.
• Different materials call for different replenishment policies. Frequently consumed components may warrant reorder points and safety stock, while specialized parts can be purchased against specific orders. Supplier lead times, minimum order quantities, and changing demand should inform these decisions.
• Manufacturing software connects material planning with purchasing, inventory, and production. MRP and ERP systems help calculate requirements, identify shortages, and track material movements without relying on separate spreadsheets. Their accuracy still depends on reliable input data.

What is materials management?

Materials management is the process of planning, procuring, storing, tracking, and controlling the materials a business needs for its operations. The goal is to have everything you need available in the required quantities, at the right time and in the right place, also considering cost management, cost control, quality, and waste.

A factory can have thousands of dollars’ worth of stuff sitting in storage and still have to stop production because a critical component is missing. Meanwhile, excess stock takes up valuable space and ties up money that could be spent elsewhere.

In manufacturing, materials management connects raw material purchasing, inventory control, and production – someone needs to calculate how much steel the next batch requires, confirm that purchased components will arrive on time, and make sure warehouse staff know which production orders need which materials.

Distributors rely on many of the same activities, although their material flows generally end with picking and shipping customer orders rather than adding value to their inventory through fabrication.

What types of materials are managed?

Materials management covers several essential categories of physical inventory.

• Raw materials. The basic inputs transformed during production, such as sheet metal, timber, plastic resin, or food ingredients. Raw materials also include more intricate stuff:
  • Purchased components and parts. Ready-made items incorporated into finished products, including motors, bearings, fasteners, electronic components, etc.
  • Subassemblies. Partially completed products used in larger assemblies, either sourced from suppliers or manufactured in-house.
• Maintenance, repair, and operations (MRO) supplies. Items used to maintain equipment and support daily operations, such as machine spare parts, lubricants, and cleaning supplies.
• Other indirect materials. Supplies used during production that don’t become part of the finished product, such as cutting fluids, protective materials, and all kinds of consumables.

A note on inventory cost terminology. Manufacturing materials are commonly divided into direct and indirect materials. Direct materials become part of the finished product and can be traced to it, meaning they’re included in the product’s BOM (bill of materials). Indirect materials support production without becoming part of the product itself. It can get confusing, though. The screws installed in an electrical cabinet are direct materials, while identical screws holding a rack together in your paint shop are indirect materials.

Materials management vs. inventory and supply chain management

Materials management overlaps with inventory management and supply chain management, but the terms differ in scope.

Inventory management concerns stock quantities, locations, movements, values, and traceability throughout a product’s lifecycle. It answers questions such as how many components are available, where they’re stored, and when inventory needs replenishing.

Materials management extends this to material planning, purchasing, supplier coordination, quality checks, and supplying materials to production. It links purchasing and stock decisions to actual production needs and customer orders.

Supply chain management covers the wider network involved in sourcing, producing, transporting, and delivering goods, including relationships with suppliers, manufacturers, logistics providers, and customers.

In practice, these responsibilities overlap, particularly in smaller companies where purchasing, inventory, and production are often handled by the same people.

Objectives and functions of materials management

The main inventory consideration for manufacturers and distributors is maintaining a dependable supply of suitable materials without buying or storing more than the business needs.

A useful shorthand is often called the 5 Rs, or the five rights of materials management. These are:

1. Right materials. Source items that meet your spec and quality standards. An incorrect material grade can promptly land you in a heap of trouble, from defective products and constant rework to entire batches being scrapped, along with your reputation.
2. Right quantity. Buy or produce enough to meet demand without accumulating excesses. Too little interrupts production, while too much ties up working capital and increases inventory holding costs.
3. Right time. Deliveries should arrive, or subassemblies be complete, ideally as production needs them, with suitable safety stock included. This means accounting for supplier lead times, production schedules, and potential delays.
4. Right place. Materials need to be at the correct warehouse or workstation when required. Proper labeling, location tracking, and organized handling prevent wasting time searching for components that are technically in stock.
5. Right price. Purchase prices should reflect material quality, supplier reliability, and total procurement costs. A cheap component can end up costing more if it causes quality problems, needs expensive shipping, or arrives late.

Some versions add a sixth R, emphasizing the right source or quality separately. The principle remains the same: your inventory needs to meet actual operational requirements at a reasonable total cost.

Three main business functions contribute to achieving this:

Material requirements planning (MRP)

Material requirements planning (MRP) determines which raw materials, components, and subassemblies are needed for planned production, in what quantities, and by when. It uses BOMs, production schedules, inventory records, and incoming supply information to calculate requirements.

For make-to-stock manufacturers, material needs are calculated ahead of upcoming production periods using demand forecasting. A master production schedule (MPS) translates expected demand into planned manufacturing quantities over longer timeframes, incorporating forecasts alongside confirmed orders without double-counting demand.

Make-to-order workshops, meanwhile, usually plan around confirmed customer orders. In either case, MRP systems translate production plans into component-level requirements for purchasing and internal manufacturing.

Read more about material requirements planning from our guide.

Purchasing and procurement

Purchasing and procurement concern where materials come from, how much they cost, and whether suppliers can deliver them as needed. This covers supplier evaluation, negotiating terms, issuing purchase orders, and following up on deliveries.

Unit price is an obvious consideration, but there’s always more to it. A supplier selling cheaper components might have twice the lead time of a local alternative, demand a large minimum order quantity, or regularly miss agreed dates. Savings quickly disappear if production has to wait or you end up paying for expedited shipping.

Good procurement means acting on reliable information about upcoming material requirements, not merely a list of items that have run out.

Inventory management and material flow

Inventory management covers the in-house handling of stock, from quantities and locations to receiving, storing, picking, and issuing materials to production. It also involves tracking materials through work-in-progress (WIP) to finished goods.

Accurate stock records and allocation are essential here. Picture having 500 bearings in storage for an upcoming job, only to find out that 400 are already reserved and nobody knows which shelf the remaining 100 are on.

Quality control and traceability also fall into the picture. Incoming materials need to meet specs, while lot or serial number tracking helps identify defective batches and trace components through production. You need to know what you have, where it is, whether it’s usable, and which orders it’s intended for.

Materials management benefits

Plenty of everyday production headaches start with materials being unavailable, incorrectly recorded, or purchased without considering actual requirements. Having your material flow in order offers several benefits:

• Inventory cost reduction. Purchasing based on actual requirements reduces overstocking, holding costs, and obsolescence risks, freeing up working capital otherwise sitting on warehouse shelves.
• Fewer production interruptions. Knowing what upcoming jobs require allows planners to identify shortages and avoid production downtime before operators discover missing components halfway through assembly.
• More timely deliveries. Accurate stock availability and replenishment information help planners set realistic production dates and meet customer commitments.
• Better purchasing decisions. Visibility into future requirements allows time to compare suppliers, consolidate orders, negotiate terms, and avoid expensive emergency purchases.
• More accurate inventory records and easier compliance. Recording receipts, transfers, reservations, and consumption makes inventory valuation, stocktakes, and financial or manufacturing audits more dependable.
• Less waste and better product quality. Material specifications, inspections, and consumption records help identify unsuitable inputs, excessive scrap, and recurring defects.

The materials management process in 6 steps

The materials management process follows materials from the initial need for a product through purchasing, receiving, production, and replenishment.

The exact workflow depends on what your business manufactures and how it operates. A custom furniture workshop does and should do things differently from a company that produces standard electronic devices to stock. However, both need to know what’s needed, when it’s needed, and whether there’s enough inventory or incoming supply to cover the demand. So let’s go over the basics.

1. Determine material requirements

First, establish what needs to be made, by when, and in what quantities. For make-to-order, this starts with confirmed customer orders and their delivery dates. Make-to-stockers also factor in demand forecasts and inventory targets, which a master production schedule can consolidate into a manufacturing plan, ideally accounting for production capacity and lead times.

The plan then needs to be translated into material requirements, and the best way to do that is by using BOMs. Multi-level BOMs, in turn, extend these calculations through intermediate subassemblies, whether procured or made internally.

Work backward from when materials are actually needed. If an assembly must be finished on Friday but its housing takes a week to fabricate, the raw materials for that housing are needed well before final assembly. Requirements should also reflect the correct BOM revision, units of measure, and expected production losses. A cutting operation with a typical 10% material loss, for example, needs more input material than the finished product’s dimensions suggest.

This is particularly relevant for customized products and frequent engineering changes. Using last month’s BOM after a product revision is an easy way to order perfectly good components for the wrong version of a product.

2. Check available stock and incoming materials

With gross requirements established, determine how much can be covered by existing and incoming inventory. This is commonly called material netting, and it’s where planning mistakes often creep in.

You should distinguish between physical stock, already reserved quantities, materials awaiting inspection, and incoming purchase or manufacturing orders (MOs). Keep the calculations time-phased, meaning availability is checked against requirement dates, not just total demand and supply.

For example, suppose a manufacturing order needs 300 bearings next Wednesday. You have 260 in stock, but 100 are already reserved. Another 80 are due Tuesday, while 40 more are expected Friday. Assuming Tuesday’s delivery is usable on arrival, only 240 bearings can cover Wednesday’s requirement. You’re still 60 short, even though total stock and incoming supply add up to 380.

A simplified calculation would be:

Net requirement = Gross requirement + Required buffer − Available uncommitted inventory − Incoming supply available by the requirement date

Safety stock, expected scrap, and current allocations need to be accounted for. Also, incoming supply is only as reliable as its delivery commitments. A purchase order with an unconfirmed date shouldn’t look the same as materials sitting in your warehouse.

For manufacturers juggling concurrent jobs, shortage calculations should identify the affected production orders and their priorities, not merely list missing quantities.

3. Procure the required materials

Once shortages are identified, purchasing should issue purchase orders for the required items, or they should be made in-house.

For purchased items, again, work backward from the required date through receiving, transportation, and supplier lead times. A component needed at a workstation might have to reach the warehouse several days sooner to allow for inspection. Suggested purchase quantities also need reviewing against minimum order quantities, packaging multiples, and price breaks. Buying 500 units because they’re cheaper per piece makes little sense when production needs 80, and the component risks becoming obsolete.

Long-lead-time or critical materials should get heightened attention. Consider blanket orders, scheduled deliveries, alternative suppliers, or extra safety stock.

Purchase order confirmation and follow-up are as important as placing the order. A requested delivery isn’t a supplier commitment until it’s confirmed. You should track changes in quantities and dates, for example, through regular shortage and overdue reviews. If a delivery slips, split the order, approve a substitute, or reschedule production. The earlier the planner hears about the change, the more options you usually have.

4. Receive, inspect, and store materials

When materials arrive, Receiving should compare deliveries with purchase orders and packing documents, and check item numbers, quantities, and damage.

Depending on the material and industry, quality checks for incoming may involve dimensional inspection, certificates, batch documentation, or testing. Materials awaiting approval should remain unavailable for production planning. You want to avoid showing sufficient stock in your inventory system when half of it is still awaiting inspection.

Accepted materials enter the available inventory and are assigned storage locations. Items should be easily identified in the warehouse with proper bin labeling to reduce picking errors.

5. Allocate and issue materials to production

Material allocation reserves stock for particular manufacturing orders, preventing the same inventory from being promised elsewhere. But reservations don’t physically move anything. Warehouse staff still need to pick the correct items, transfer them to production, and record the change.

How materials are supplied depends on the production setup. In assembly manufacturing, material kitting is often used to prepare the components required for a job in advance. Repetitive production may be better served by just-in-time inventory practices, such as two-bin or Kanban replenishment directly at workstations.

Multi-stage production adds another consideration. Components and subassemblies move according to the production routing, so some materials are required immediately while others are required at later operations. Issuing everything at once creates unnecessary WIP and complicates tracking.

Any material issues should be associated with the correct MOs, including relevant lot or serial number information. Any substitutions also need to be recorded. Like if an operator uses a different bearing because the specified one isn’t available – that shouldn’t disappear into an unexplained inventory adjustment.

Finally, issuing materials to the shop floor and recording their actual consumption aren’t necessarily the same transaction. The distinction depends on the production process and reporting method.

6. Track material consumption and replenish inventory

Materials rarely end up being consumed exactly as planned, especially with processes like cutting, machining or manual assembly. Scrap, rework, and unused returns all create differences that should be reported against orders so inventory levels and production costs remain accurate.

There are different ways to handle this. In repetitive operations with stable BOM quantities, backflushing can record material consumption automatically based on completed production quantities. For expensive components, variable usage, or significant scrap, reporting actual consumption may be more appropriate. Some manufacturers combine both approaches for different materials.

The important part is making sure the reporting method reflects what happens on the shop floor. If a job consumes 110 meters of material against a planned 100, that difference needs to show up somewhere. It could be normal scrap, a production error, an outdated BOM, or unsuitable material. Without proper reporting, the extra 10 meters becomes an inventory discrepancy.

Unused materials should be returned to available stock when appropriate, while completed subassemblies and finished goods must be reported so they become available for subsequent operations or orders. Once these transactions are recorded, material requirements can be recalculated against the current production plan, accounting for new demand, changed deliveries, and actual consumption.

This closes the materials management cycle. Instead of automatically replacing everything consumed, the next purchasing decisions can reflect upcoming requirements, actual inventory, and established stock policies.

Common materials management challenges and solutions

Materials management can get tricky even in a small factory. Orders share components, supplier lead times vary, recording errors skew the picture, etc. Let’s look at four common problem sources and how you should approach them.

Inventory records don’t match actual stock

Discrepancies usually start with bad stock movement reporting. Materials might be issued without registering their consumption, returned to the wrong location, or counted incorrectly in Receiving. Delayed reporting can be as problematic as misreporting, especially when many people work on the same inventory and orders.

A planner seeing 200 components available, whereas 40 have actually been consumed by another order, can result in a heap of scheduling headaches later in the week when the next job should be starting.

What to do: Establish standard operating procedures and clear responsibility for recording stock movements as they happen. Regular cycle counting, with a focus on critical and high-value components, helps catch discrepancies earlier. And investigate recurring errors rather than just adjusting the recorded quantities.

Missing materials and delayed deliveries disrupt production

A single missing component can prevent an assembly or indeed an entire order from shipping. Supplier delays, unexpected demand, and underestimated lead times are the common causes. A postponed MO may also force several others to be rescheduled.

Poor communication makes things even worse. Imagine if purchasing knows that a delivery has slipped by a week, but production planning is still working with the old data.

What to do: Continuously check material availability against upcoming orders and always follow up on critical ones before they’re due. Maintain realistic lead times and suitable safety stock for difficult-to-source components. When material shortages occur, prioritize affected orders, investigate alternative suppliers or approved substitutes, and update the production schedule before the disruption spreads.

Excess stock ties up capital and risks obsolescence

Buying more than you need may feel safer than risking a shortage, and often it is.

But inventory:

1) takes up space,

2) ties up working capital, and

3) usually has a shelf life, even if it’s not a perishable per se.

What to do: Review slow-moving and aging inventory, compare purchases against actual consumption, and reconsider reorder policies as demand changes. Distinguish everyday stock items from components needed only for specific jobs – the latter might not require replenishment until another order arrives. For large minimum purchases, consider negotiating scheduled deliveries instead of accepting the entire stock burden at once.

Poor material tracking causes visibility gaps

Materials can be transferred, issued, consumed in subassemblies, or returned without movements being recorded. You might know how much stock the company owns but have little idea where it’s sitting or which orders consumed it.

This gets even worse when materials are only tracked at the lot level. If a supplier reports a defective batch, you need to know which manufacturing orders used it and which finished products could be affected. If you want to avoid a relatively small quality issue from turning into an expensive investigation, that is.

What to do: Record transfers, issues, returns, and WIP movements close to when they happen. Keep locations identifiable and link consumption to the appropriate manufacturing orders, preserving lot or serial number information where applicable. Barcode scanning, RFID, and integrated inventory systems can reduce manual work, but consistent procedures remain essential.

Materials management best practices

Besides addressing problems as they occur, manufacturers should regularly review the policies behind material planning, inventory control, and purchasing. Three areas deserve particular attention.

1. Maintain reliable material data and inventory records

Incorrect units of measure, duplicate item codes, outdated lead times, and old BOM revisions can produce material requirements that look reasonable on paper but turn out wrong. Assign responsibility for maintaining master data and approving changes, particularly when engineering updates product specifications or multi-level BOMs. Repeated differences between planned and actual consumption may indicate outdated item data rather than poor shop floor performance.

Inventory accuracy needs similar attention. Use ABC analysis to prioritize stock control, alongside operational factors such as component criticality and replenishment time. High-value, fast-moving, and shortage-prone items generally deserve more frequent counts. Regular cycle counting and clear inventory statuses help ensure that reserved, quarantined, and issued materials aren’t mistaken for freely available stock.

2. Adapt replenishment and material handling to your operation

Different materials call for different policies. A frequently used fastener, a long-lead-time electronic component, and a custom part purchased for a one-off job shouldn’t all follow the same replenishment logic.

For regular stock items, reorder points and safety stock can provide sensible purchasing parameters. Order-specific materials may be better managed through time-phased MRP. Review these settings as demand and supplier performance change, rather than relying on minimum stock levels established years ago.

Apply the same thinking to shop floor supply. Assembly operations may benefit from kitting components for individual jobs, while repetitive workstations can use Kanban or two-bin replenishment. Consider material movement frequency, shared components, and the space available beside equipment. The aim is to provide ready access to materials without accumulating unnecessary WIP or losing track of stock.

3. Review supplier performance and material consumption

Supplier performance should be evaluated against delivery commitments, rejected quantities, and quality issues, not merely unit prices. A cheap supplier causing repeated shortages can end up costing more through downtime and expedited shipping.

Review planned versus actual material consumption with similar scrutiny. Recurring scrap or unexplained losses may indicate incorrect BOM allowances, process problems, or material quality issues. If a workstation consistently consumes more material than planned, finding the root cause is more useful than increasing the purchasing buffer. Regularly reviewing these differences with purchasing, engineering, and production helps keep material plans aligned with what actually happens in the factory.

How materials management software improves manufacturing operations

As product ranges, order volumes, and inventory grow, coordinating material requirements manually becomes increasingly difficult. Dedicated software connects purchasing, inventory, and production information so changes in one area are reflected in the others.

Spreadsheets vs. dedicated materials management systems

Planning inventory and scheduling using spreadsheets may be adequate for businesses with limited inventory and predictable purchasing needs, but the trouble is not far away when several people start maintaining separate files.

If a warehouse manager updates inventory in one spreadsheet, production planning keeps another, and purchasing works from a third, an order change might not reach purchasing until components have already been ordered. Reservations, incoming purchases, and stock issued to production are similarly difficult to coordinate.

A dedicated system connects these records, allowing receipts, reservations, and consumption to affect stock availability and material planning without updating multiple files. Of course, software still depends on correct input. Outdated BOMs or unrecorded material issues will produce unreliable results regardless of the system.

The role of MRP and manufacturing ERP software

Manufacturing ERP software, or enterprise resource planning software, connects MRP calculations with sales, purchasing, inventory, production scheduling, and manufacturing costs. Purchasing teams can see what needs ordering, while sales and production planners can check available production capacity.

MRPeasy brings these functions together in a cloud-based ERP system designed for small manufacturers. Its Master Production Schedule supports longer-term production and material planning, while predictive analytics and Sales Forecasting can be incorporated to plan manufacturing according to expected demand alongside confirmed orders.

For growing manufacturers, this means less time reconciling spreadsheets and fewer situations where purchasing, warehousing, and production are working with different numbers.

Frequently asked questions (FAQ)

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