After tinkering with formulas at home, you’re ready to start and scale a line of men’s botanical skin care products. You have machinery for mixing and packaging your products, but now you need a steady supply of materials to make your creams and lotions. So you begin looking for sources of those materials.
Every business that makes a product needs either raw materials or intermediate materials to make final goods. Learn more here about material sourcing and how it can help your business operate smoothly and grow.
What is material sourcing?
Material sourcing is how a manufacturer obtains supplies that it uses for production. Materials can range from basic inputs such as water, sand, and limestone in concrete, to semi-finished materials such as microchips in computers and other electronics. The sourcing process may involve both indirect and direct material sourcing. Direct materials are components of your product itself (say, wood if you’re making tables), while indirect materials are not part of the final product (like the gloves and glasses your team wears in the workshop).
The material sourcing process is the first stage of a business’s entire supply chain, which includes procurement, establishing contracts and payment terms with suppliers, and storing materials until they’re used. The goal of sourcing and procurement is to get materials that are high quality, consistently available, and at the lowest possible cost.
Managing the supply and cost of materials can play a big part in a company’s profitability and long-term viability. Many larger businesses include material sourcing as part of enterprise resource planning (ERP), a process that uses software and data systems to manage inventory, personnel, financial recordkeeping, and more.
How to source materials
- Assess your needs
- Compile a list of potential suppliers
- Develop a sourcing strategy
- Negotiate with suppliers
- Contract and procurement
The best ways to source materials include the following steps:
1. Assess your needs
Assess your production objectives and the materials you’ll need before looking for suppliers. How much of each material do you need? How often will you need deliveries? What’s the estimated cost? Will you need regular deliveries indefinitely or only until a project is finished?
Procurement professionals typically compile a list of all materials required for production, called a bill of materials (BOM), which is used as a reference by a company and its suppliers. Having a sample product or prototype can also serve as a basis for materials planning.
2. Compile a list of potential suppliers
Research materials markets and suppliers. Focus not just on prices, but also supplier location, transit routes, and developments that could bog down your supply chain. Gather background on potential suppliers, such as information on how long they’ve been around, how they get their materials, and how they handle environmental and ethical issues. Get references from other customers, make sure you understand billing and payment terms, and ask about any certifications for industry standards. This is known in procurement as a request for information (RFI) and it helps ensure that you’ve found a reliable supplier.
3. Develop a sourcing strategy
Consider developing a strategy for material sourcing. Do you want to reduce supply costs or shorten delivery lead times? Maybe you want to improve supply quality or to establish durable long-term relationships with suppliers.
You may want to provide information about your business’s key performance indicators, and explain how you expect reliable suppliers to help you reach those goals. Then, ask each supplier to make a bid with a price estimate, known as a request for quote (RFQ). This can serve as a starting point for further negotiation.
4. Negotiate with suppliers
Study each supplier’s background, track record, and operating procedures. Have some hard data to support your negotiations, such as the latest statistics on supply markets.
5. Contract and procurement
Once negotiations conclude, you and the supplier will enter a contract spelling out payment and invoicing terms, tracking, and delivery. Then you can begin the procurement process by sending detailed purchase orders that adhere to the contract’s stipulations.
Some specific questions to consider asking include:
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Beyond meeting today’s needs, can the supplier scale up if your business grows?
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Does it have multiple sources of its own, or does it rely on one source?
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What is the lead time for delivery?
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Can the supplier offer you any concessions or discounts, for instance, in return for a larger order or longer commitment from you?
Tips for sourcing materials
- Diversify suppliers
- Be specific
- Balance cost and quality
- Buy local
- Keep up with trends
- Predict changes
Material sourcing is important for your business’s cost control, profitability, quality of finished products, and, ultimately, for your customers’ satisfaction. Here are some tips that might help:
Diversify suppliers
Establish a mix of supplier relationshipsin case one faces a shortage, a delivery delay, or even financial distress. Diverse sources give you a better chance of finding materials and maintaining your production schedule in the face of supply chain risks like natural disasters, armed conflicts, political changes like increased tariffs, and changes in demand.
Be specific
Be clear and precise with suppliers. Give them the complete specifications for your product and the materials required. Vague requirements could result in receiving the wrong materials and delivery delays, slowing your production and potentially hurting product quality.
Balance cost and quality
You want the lowest costs for materials while also ensuring that they are of good quality and help you make the best product. Weigh the temptation of the cheapest option against the risk of poor materials that may result in shoddy products and unhappy customers.
Buy local
When navigating supply chain challenges, it’s easier to deal with a supplier that’s only 50 miles away than one on the other side of the country or in another part of the world. You can also save money because shipping costs often are lower when you use local suppliers.
Keep up with trends
Diligently track developments in your industry. Stay in regular contact with suppliers, and ask about general trends they’re seeing in the materials market or any particular changes regarding availability, costs, transportation, or regulations. Industry and trade publications are also good sources of information.
Predict changes
A supply chain management solution is software that can help manage material sourcing, procurement, and inventory. This type of tool can also provide accurate demand forecasting and inventory forecasting while reducing human error.
Material sourcing FAQ
What is an example of material sourcing?
A maker of skin care products, for example, would seek suppliers for the various ingredients in its creams and lotions. It would need some suppliers for essential oils and herbal extracts, different suppliers of emulsifiers, still other suppliers for antioxidants, and finally suppliers who sell packaging such as tubes, bottles, and boxes.
What is sourcing vs. procurement?
Sourcing is a business’s process of seeking and identifying suppliers of materials used in production. Procurement follows through on sourcing by purchasing from suppliers based on contracts that specify the amount of materials ordered, price, delivery procedures, and payment terms.
How do you find reliable suppliers?
To find suppliers, seek out trade organizations that may organize conventions and trade shows and publish industry directories and trade journals. Word of mouth can also work. Personal referrals from other business owners might give you some promising leads.
