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What Is a Material Index?

Peter Hann
Peter Hann

The material index is a measure often considered by an industrial enterprise when deciding where to locate. This index represents the ratio of the weight of local materials used in the manufacture of a product to the weight of the manufactured product in its final form. When the material index is greater than 1, it indicates that the raw materials lose a part of their weight during the manufacturing process. If the material index is less than 1, it indicates that weight is gained during the process so the final weight of the finished product is greater than that of the local raw materials used. This is significant in determining the cost of transporting raw materials in relation to the costs of delivering the finished product.

Economist Alfred Weber’s model of industrial location assumes an enterprise selects the least-cost location for setting up operations. A business would want to be situated close to either the source of its raw materials or its markets, a decision that would be affected by the transportation costs of the materials. A decision on where to locate also would, in reality, be affected by other factors in business economics, such as labor costs that might outweigh any savings on the transportation of goods.

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The model put forward by Weber suggests that industries with a high material index would tend to locate near the source of their local raw materials to reduce the transportation costs for those materials. In this situation, the business is said to have a material orientation. Examples of industries with a high material index may be found in the food processing industry, where substances are extracted from agricultural inputs, such as in sugar refining. Other factors being equal, such industries would likely achieve savings from locating near where the agricultural raw materials are grown.

Industries with a low material index would be more likely to locate nearer to their end markets, thereby reducing the costs of transporting the manufactured goods to the markets. These businesses would have what is known as a market orientation. An industry with a low index might use materials that are widely available and not specifically local. A soft drinks manufacturer, for example, would use considerable quantities of water in the production process. Even if the business were to use local fruits in its production, the end product would outweigh the local materials used in the process.

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