What is Material Index in E-commerce?
The material index is a measure in e-commerce that helps businesses decide their location to reduce transportation costs. It looks at the ratio of the weight of local materials used in manufacturing to the weight of the final product. The material index helps businesses optimize their efforts to drive more sales and increase customer satisfaction.
Significance of Material Index in E-commerce
The material index is an important metric for e-commerce platforms, as it indicates the quality of the materials a product is made from. The significance of using the material index is –
- The material index can have an impact on the cost of transportation. Companies try to locate their business either close to their raw material source or its market.
- A good material index can help an e-commerce platform increase sales, as it can assure customers that the products they buy are of high quality.
Prerequisites to Calculate Material Index and How It Works
The prerequisites to calculate the material index includes –
- Weight of the localized raw material input (Rw)
- The weight of finished goods (Fw)
The material index is calculated using this formula
M= Rw/Fw
According to economist Alfred Weber, the material index (M) will provide a ratio indicating whether the company will be raw or market-oriented.
- If the material index is more than 1, it highlights that the raw materials lose some weight in the manufacturing process.
- If the material index is less than 1, weight is gained in the process, so the finished products’ overall weight is more than the raw materials used.
Use Case With Material Index
Assume a store ABC deals with tea packaging wherein tea leaves are the raw materials. Here, the packing material is considered as other inputs. Now, after packing, the finished product’s weight becomes 5 kgs and the raw materials used are 3 kgs.
Then, the material index = (3 kgs/5kgs)
= 0.6
As the material index is less than 1, the e-commerce company will be located near the market to reduce transportation costs.
