Posted in Operations and Supply Chain Terms, Total Reads: 341
Definition: Production Related Materials
Production-related materials are those items or goods which are classified as material purchases and included in Cost of Goods Sold (COGS in a Balance Sheet) as raw material purchases. It is also sometimes called as “Factors of Production” and it refers to all inputs or resources which are used in the production process to generate the required output that is the finished goods and services.
The amounts of various inputs used to produce a unit quantity of the output determine the relationship called as the production function. The term “raw materials” stands for material in unprocessed or minimally processed states such as crude oil, raw cotton, coal, wood, etc.
Production related raw materials is procured from the suppliers by paying a part of the full payment and the balance is paid once the material is received by the manufacturer. Management of these materials is very critical. This is because a lot of money and space go into procuring and storing these materials. The amount of raw material to be procured must be strategically decided after taking into account the sales and cost of holding inventory.
It is always economical for firms to adopt efficient engineering practices like “Just-In-Time”, “Kanban” and others to reduce the costs of production and thus reduce the inventory hold-up at any point of time.
The money saved from holding inventory can be used for more productive purposes like branding and marketing the product, developing efficient customer relations practices, etc.