Direct Materials Operating Plan


Every business requires other businesses to supply them with either finished or unfinished products. Moreover, a manufacturer would purchase unfinished products called raw materials or direct materials. The manufacturer would then "process" the raw materials into finished products - ready for resale. For example, a furniture manufacturer would purchase raw materials such as wood, screws, glue, sanding materials, varnish, and so on to produce a table. The same furniture manufacturer would require raw materials such as cloth, springs, wood, nails, glue, and so on in order to produce a chair. A retailer and service provider, on the other hand, usually purchase finished product which are consider finished direct materials. A finished product is one that requires few changes or alterations before it can become ready for resale.  For example, a restaurant owner for example would purchase food products and a clothing retailer would purchase clothing. These items are considered finished products because very few changes or alternations are required before they are ready for resale.

Readers of the business plan will want to know what direct materials are needed for your business.  The discussion of direct materials, raw materials, or suppliers of finished product should be placed under the operating plan section of the business plan. 

As you might expect, the direct materials needed will depend on the products you plan to sell as well as the type of business you plan to operate. A manufacturer for instance should list all the products he/she plans to sell. In addition, the manufacturer would discuss all the direct materials needed in order to produce each finished product. Direct material costs for each finished product should also be indicated.

The direct materials section for a retailer or service provider should list all the products (finished) the company intends to sell. Be sure to include the cost of each direct material needed for each product. A clothing retailer, for example, would list their planned product lines and all planned brand names within each product line. Beside each brand-name, the retailer would indicate the cost to purchase each item. Be sure to include per unit shipping charges in your direct material cost estimations. A restaurant owner could provide a brief discussion such as each "dish" he/she plans to offer, the direct materials needed for each dish and the cost to "fully" prepare each dish. In addition, the restaurant owner would discuss information regarding such items as beverages, wine lists, complimentary items etc.

After you have discussed the direct materials and their associated costs, it's time to provide the readers of the operating plan with information on who will supply your company with the required direct materials. Many inexperienced business plan writers simply name each supplier without providing any detail on why each was selected. Possible reasons for selecting a supplier over another supplier may include;

Quality of the supplier's product
The reputation of a supplier
The reliability of a supplier
The availability of product
The cost of a supplier's product
Credit terms provided by the supplier
Location of the supplier
A supplier's warranty
The liability assumed by one supplier over another
Shipping damages to product covered by supplier
Quantity discounts offer by the supplier

Whatever your reasons for choosing one supplier over another, you will need to communicate them in the Operating Plan or section of your business plan. Also, it is wise to discuss each of the above items for each supplier.  For more information relating to the Components of the Operating Plan, refer to Operating Plan.

Categories: Operations