The material planning process is the process of appropriately planning the demand versus the supply of materials, to ensure that the business can optimize the availability of materials when they are needed. It is important to have efficient material planning processes to ensure that materials are available when they are needed. For example, in the case of properly estimating the demand of a good, if the respective raw materials are not available when a customer places an order, then the production of the good will be delayed, which could potentially cause the customer to stop doing the business with the company. On the flip side, it is important that the purchase/production of materials is properly planned so that there isn’t an excess of inventory. Having an excess of inventory can be harmful because the material can decrease in value over time or even become obsolete. This is also harmful because the company could have instead spent the same money on other materials that were in demand. There are also additional storage that will incur as a result of excess inventory.
In the text book, there is an example of how in 2001, Cisco placed large orders of networking equipment and materials to keep up with the high demand for its products during the dot-com boom. However, when the dot com boom later crashed, demand for its products decreased, and Cisco was stuck with an excess of raw materials, leading to a loss of 2.5 billion dollars.
Source: Integrated Business Processes with ERP Systems – Ch.8 Page 270