Management Of Innovation And Business Development Raw Materials Commerce Essay

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Raw materials are the basic material from which the products are made or manufactured . This term is usually used for the materials those come from nature and also those are unprocessed. Crude oil, iron and wood can be the examples of raw materials.

Raw materials are the resources being part of the input to produce desired output. They play an important role in production and quality of production depends upon the quality of raw materials. Their characteristics significantly influence the outcomes. The value, the rareness, the imperfect limitability as well as substitutability are the major impacts not only for a certain outcome but for sustainable advantage, which implies the long-term perspective of a manufacturing company (Bendiksen and Dreyer, 2003). All these factors cause uncertainty and risk. That is related to the general purpose of companies either decrease costs or increase profits. An economic point of view is; managers need some guide for managing the risks efficiently.

Raw materials management is the process that is considered part of the process of overall supply chain management. Costs of raw material affect the whole supply chain. RMM process focuses on the tasks of the maintaining lowest rates possible and securing the highest quality materials. It is to make sure that materials provide the best possible benefits within the production process (Bendiksen and Dreyer, 2003). Often the causes of price change are outside of their control, including war, natural disasters, or simply a decrease or increase in demand. To understand the impact that they have on the business and the ability to manage these kind of fluctuations has considerable strategic importance. Often these raw materials are purchased by the organizations those are not the immediate suppliers and you have no direct business relationship.

This means that the large volume of raw materials management begins with evaluation and acquisition of raw materials, moving on through the use of these materials in manufacturing process, and it also involves assessing amount of waste available in these materials after those are made into the finished goods. When it is at its best, this type of process of management not only saves the company's money in terms of cost, but also support to reduce waste and allow the company to enjoy more profit from each completed unit sold.


I look at the RMM from a managerial perspective and application in the manufacturing companies. I focus primarily on the operational and strategic aspects of materials handling. Since one of my tasks is to try to create concept for raw material management. It means that I do not have a lot of related items that I can use when I need to search for content related to the handling of raw materials from a variety of aspects of the operational procedures. I identified relevant research streams and keywords by looking from the course "Production and Service Management".

I tried general and efficient search engine Google Scholar, which is connected to all of our schools databases. I searched key words "resource management", "supply chain management" "raw material", and "material requirements planning" which I thought would be of some of terms related to my subject. I got a lot of hits under these keywords while after reading and downloading some of them, I found some problems. Although these articles have been very related to my topic, but not all of them were much quoted and it was difficult for me to identify their properties. Because of the large amount of articles, I felt that it is a lot of overlap between these articles. Moreover, at this stage I also found more specific areas. I searched deeper and more specific keywords I can use.

Then I started searching according to the suggestions I got from the teacher. Since my search area is quite wide, because of the limitations of time and energy, I need only to read the best quality articles with high citation in each area. Therefore, I determined primarily using the database "ISI" which provides articles with A or B ranks in the Journal quality lists. My search also expanded to the "resource management", "resource allocation", "raw material", "production planning", "supply chain management", "inventory" and "material requirements planning". When I used the database, for example, enter the keyword "supply chain management" by selecting search range "topic", I got about 7012 hits.

I also wanted to find some of the review articles to guide my reading and use of articles. So I chose the document type "review" and then I got around 166 review articles. Among them, I chose the order of the articles sorted by "times cited-highest to lowest" and just picked the articles that are cited over 100 times. When I clicked back to all kinds of documents and followed the same principles for selecting articles by reading abstracts to identify whether I need them or not. I used this search procedure on all keywords and each specific research area. Finally I got high quality articles quotes from all aspects. During this procedure, if any good articles without full text in ISI then I went back to Google Scholar and tried to find in other databases. This was my approach to search for articles and it greatly improved not only search efficiency, also reading efficiency. The disadvantage was, I narrowed my research range in quality articles but missed some other articles that were very useful.

Literature review

What are raw materials?

By reading a lot of articles with keyword "raw materials" in the titles, I found no clear definition of it that I referred explanation from the Oxford English Dictionary (OED staff, 2008): the basic materials from which a product is made or manufactured that are unprocessed materials. According to some of web resources, I got more extended understanding of raw material. These used in the manufacturing or primary production in the form of natural resources such as wood oil, and iron (Anon, 2012a). As Marx (1867) stated in "Capital", Volume 1, All raw materials are the subject of labor, but not all subject of labor are raw materials, it can only be so, after it undergoes some alteration with the help of labor. The point is that Marx emphasizes the raw materials are processed by the labor but not in its original form. In addition, the term "raw materials" used extendedly substance in its natural, partially processed or modified sate as input into commodity production (Anon, 2012b). Watkins (1944) has considered raw material from the first stages of production: extraction or cultivation and preliminary refining, processing or blending of natural products.

Furthermore, the item "raw materials" is used extendedly as substance in its natural, modified or semi-processed sate to be input in goods production (Anon, 2011b). Similarly, Watkins (1944) considered raw materials were yield from the initial stages of production: the cultivation or extraction and preliminary refining, preparation, or compounding of natural products. However, more extendedly, there are also some articles treat raw materials as the materials used in production no matter they are natural resource or not so that the finished product of one firm can be the raw material of another firm. We do not agree this extended use since it blurs the difference between raw materials and the general materials for production. We decide to define raw materials as the basic substances, in natural or modified forms, for primary production, but originally come from natural resources. More precisely, the primary production means the production process exist in the low of the industrial value chain. Examples from agricultural can give us a clear understanding of "natural or modified forms" and "primary production" in our definition. For example, the crucial material of chocolate cocoa mainly produced in Africa, South America. In these areas, the farmers plant cocoa tree, pick cocoa fruits and then processed them: taking the cocoa seed from the fruits and drying them into the cocoa bean. After that, they sell or export these cocoa beans to the second cocoa processing factories to make these beans into solid cocoa pieces. Here, the farmers are the producers of raw material-cocoa bean, and the later processing factories are the receiver or buyer of raw materials. Both of them stay in the low-value stage in this industry because after chocolate factories or stores buying these cocoa pieces, adding other materials such as milk or sugar, the products-chocolate's value is much higher than the original cocoa bean or the solid cocoa pieces. Another similar example is Australian mining companies export to iron ore to steel companies to make steel products.

Here, we give out some more specific examples of raw materials talked in some articles. In Kelly (2002)'s paper, stone, sand and gravel, industrial minerals, recycled metals, primary metals, non-fuel organics, recycled and primary paper, wood products and non-food agricultural materials are seen as raw materials. Also, from the categories of raw material industry such as petroleum processing and coking, chemical products manufacturing, non-metallic mineral and ferrous metal (Lin & Ge, 2011), we can also get some clues of what are raw materials. After the industrial revolution, the most important change of raw material provision was the substitution of inorganic for organic source of supply, of mineral for vegetable, wood or animal raw materials (Wrigley, 1962). With the development of technology, the categories of raw materials are expanded for example by the chemical synthetics.

The roles in RMM

Tasks of the raw materials management begins with assessment and selection of materials that is needed to manufacture goods. Buying raw materials requires to identify the standard that must meet in order to produce a certain quality of finished products. The manager devote effort and time to find the right materials, by using company resources to ensure that they are of the right level of quality, and then do arrangements to buy the material in the desired quantities. However, the concept of "resource" is broad here which includes the company's physical, human, organizational, technological, financial, and intangible resources (Grant, 1991).

As part of acquisition process, the manager also try to negotiate the best price that is possible on raw materials used in the production process. It is often an easier task when the volume of business of the company is high enough that require large amounts of material. The focus moves from raw materials management on the task of finding the right material by using the contractual arrangements complete with volume purchase pricing or discount prices to ensure that the company has adequate supply of the right material to sustain the operation (Bodt & Wassenhove, 1983).

After the raw materials are purchased and evaluated, function of raw materials management still continues. As part of the aid to production, manager works with others in the organization to streamline how these materials are used in manufacture of goods. Idea is to identify every phase of production where waste of material occurs, and to identify changes that keep the waste to a minimum level. These efforts help to trim production costs. Less wastes mean more of the purchased material is used for finished products. The lower production costs in turn lead to generation of a higher return of each finished goods sold, that allows the company to generate more profit.

The process of RMM is ongoing. These are the efforts to ensure the right quality raw materials and the most competitive price, making it possible for the managers to find new suppliers and save the company's money on the front end. RMM process is also responsible to secure the quantity of materials needed for production. The company can minimize the disruption to production that may occur if the regular supplier is suddenly unable to meet the demands for any reason (Cachon, 2004).

Terms used in RMM


Resource is a quite abroad concept which contains many aspects but difficult to give an accurate definition. It can be seen from an economic perspective such as the manufacturing substance input, money or capital; from a human perspective as the labor; from a geographic perspective such as land or mineral; from an intangible perspective such as the information or social network between people or organizations. Narrowing the scope down to an enterprise, according to Grant (1991), the resources of a company contains the aspects financial, physical, human, organizational, technological and intangible reputation. Obviously, the difference between raw materials and the general resource is that raw materials are some specific kinds of resources especially the natural resources that used in primary production with processed or unprocessed forms.


Commodities or primary commodities are another used as raw materials frequently. Commodity, in neoclassical economy is anything that can be bought and sold in the market place in ex-change for another commodity or money (McDonald & Ruiters, 2005, pp.19). However, the term in modern market economy has another different meaning. Though did not give out clear definition, from Fabozzi, Fuss and Kaiser's (2008, p. 5-10) introduction about commodities, we can conclude that commodities are primarily consumption products traded in the market which supply and demand are uncertain. In order to avoid the risks especially the flexible price risk, many financial tools such as future, option and hedging are used in commodities which make commodities as assets themselves (Fabozzi, Fuss & Kaiser, 2008, pp.5-10). As the three main categories of commodities are energy, mental and agricultural, we can say there are some overlaps between raw materials and commodities. However, differences also exist. Firstly, according to Geman (2008, pp.1-2), the commodities can be divided into storable commodities and non-storable commodities such as electricity. So the raw materials which are in the form of physical substances can only be the storable part of commodities but not all the commodities.

Supply chain management

Resource allocation (SCM)

Material Requirement Planning (MRP)

Production planning