Every business needs positive supplier relationships. This allows them to access the materials they need on time and affordably. In this guide, DeepStream explains the intricacies of material sourcing and why it’s important and offers a step-by-step guide on best practices in material sourcing.
Say one particular business creates steel scaffolding polls – they would need a supplier of raw iron and carbon to forge the alloys. This is where material sourcing comes in. It is the process of finding the right materials at the right price point, and it requires an effective strategic sourcing team.
What Is Material Sourcing?
Material sourcing is the process of identifying key suppliers and procuring materials from them – negotiating terms and prices through the procurement process and arranging for material delivery.
The goal of material sourcing is to ensure that materials are purchased at competitive rates that are beneficial to the buyer, while making sure all materials purchased are of high quality and delivered in a safe and timely manner.
DeepStream’s RFX software provides a strategic approach to sourcing and procurement. Our virtual platform is full of essential features to improve the strategic sourcing process for businesses, including efficient evaluation, flexible templates, centralized exchanges and more.
Why Is Material Sourcing Important?
Material sourcing can be make or break for businesses – with the supplier performance and costs determining whether or not they are viable and profitable.
One of the main reasons why having an effective strategic sourcing plan in place is that it is proven to increase the liquid capital of a business by lowering overall supply costs. By using supplier competition to gain competitive prices for goods, supply prices are lowered.
Strategic material sourcing can also help businesses mitigate supply chain disruption, such as the bullwhip effect, and counter them with an increased reserve of liquid capital. With a constant supply of raw materials, businesses can relieve worries around stock shortages.
How To Source Materials
Sourcing materials is a relatively simple process, but certain tips and tricks can help businesses gain an advantage.
The best way to source materials is by reviewing the market for a pool of supplier candidates and offering them an invitation to bid for the contract. However, this can be an intricate process.
Below are the key steps involved in the material sourcing process, and the best practices associated with them:
Material Sourcing Key Steps
Understand Company Needs
Before embarking on any long-term sourcing plan, it’s important to understand what a company needs from the sourcing process. Which raw materials, how many and how frequently? A sourcing strategist needs to ask themselves ‘What am I trying to achieve with this sourcing strategy?’.
Identify Potential Suppliers
Next, it’s important to do thorough market research, looking for competitive rates on supplier deals that are most advantageous for the company. Draft up a shortlist of potential suppliers and reach out to them, sending bid invites to key candidates.
Develop a Sourcing Strategy
Next, it’s important to develop a sourcing strategy. This means determining how the company will approach selecting the best suppliers, outlining exactly what the company needs, in what quantity and for how long.
Negotiate With Suppliers
This part of the process involves vetting potential suppliers and negotiating with them to access the most competitive rates.
Implement The Strategy
This means ordering the stock, organising delivery, and taking the necessary steps to secure the supply chain.
Lastly, it’s important to measure the success of a particular strategy over an extended period, identify any key weaknesses and implement changes to secure those areas.
How Can We Identify Reliable Suppliers for The Materials We Need?
Finding the right supplier can be challenging. Some suppliers may be unable to offer the right quantity of raw materials, some may pull out of the deal at the last moment, and others may be out of budget.
Here, DeepStream suggests six ways to identify a reliable supplier, to mitigate some of the challenges associated with the process:
Narrow the Search
Focus on a smaller pool of qualified suppliers. This creates a manageable shortlist of candidates that allows for more time to dedicate to research and supplier communications.
Investigate suppliers by requesting information on relevant previous work and industry experience. These questions should be used to determine whether the supplier has a track record of delivering similar projects.
Conduct In-depth Analysis
In addition to qualitative data gathered through conversations with suppliers, it’s important to consider quantitative data, such as supplier lead times, to conduct cost and benefit analysis.
Enquire About Certifications
Ask for evidence of industry qualifications as an additional layer of comparison between suppliers.
Pick Financially Stable Suppliers
Those with a history of financial problems may not be able to fulfil obligations after the agreement is made.
Ask About Shipping Locations
It’s also essential to understand supplier shipping locations. This includes where the goods are produced, how large their global network is and how stable it is.
Material Sourcing – Risks and Challenges
The task of sourcing materials doesn’t come without risks and challenges.
Below is a list of some of the main challenges a strategic sourcing team may encounter and how to mitigate them:
Poor Quality Control
One of the more common risks associated with supply chains. A supplier may not have comprehensive quality control procedures in place, and materials may be below quality expectations on arrival. The best way to mitigate this risk is with adequate supplier research before entering a contract. A reliable supplier will do their best to avoid delivering poor-quality materials.
Long Lead Times
Some suppliers may take longer than expected to deliver goods, and this isn’t always the fault of the supplier. Supply chain issues can cause unexpected delays. The best way to mitigate this risk is through accurate demand forecasting.
Limited Stock Availability
Certain materials may not be available to suppliers due to unexpected trade restrictions or economic circumstances. Demand forecasting can also help mitigate this risk by actively planning for future stock shortages and creating reserves.
Prices can fluctuate on a month-to-month basis and even the smallest change can impact profitability and the viability of supplier relationships. To mitigate this risk, maintain regular contact with suppliers. This will make it easier to spot any signs of disruption at the earliest opportunity. Always keep a reserve of emergency liquid capital, too, and make use of effective demand forecasting to read the market.
Unrest in supplier countries and potential economic sanctions on those countries could destabilize an entire supply chain. It’s important to stay up to date with current events and choose suppliers from nations with a history of political stability.
Saving Money with Material Sourcing
Material sourcing can be a long and costly process, and making it sustainable means considering key decisions and avoiding wasted spend.
Below are several methods for a cost-effective sourcing process:
Negotiate Supplier Discounts
Through the bid invite processes, supplier discounts can be negotiated. When a company can pick a supplier, they naturally have negotiating leverage.
Finding nearby suppliers and sourcing locally cuts down on long-distance travel expenses, and suppliers may also be willing to lower prices to account for reduced delivery costs.
Perform market research to understand how much stock variety is required to cut down on initial supplier costs, as well as holding costs from storing excess, unused stock.
Review The Market
Look for the best rates for each item. That way, a company can understand if a supplier is overcharging or if the deal is fair.
Deepstream’s RFx software provides a digital platform for RFIs and RFQs, as well as managing supplier strategies in a centralized environment.
Don’t believe us? Read how our RFx software helped one of DeepStream’s customers improve its supplier relations:
“Managing multiple suppliers' responses and the time lapses between quotes often led to confusion and repeated work. DeepStream provides us with a centralized platform where we can easily obtain quotes, track responses, and eliminate the inefficiencies we once faced.”
Tracking and measuring supplier performance is essential to the long-term health of any trading relationship. It provides essential information on where communication and work processes can be improved – and whether existing suppliers remain the most productive solution or if the material sourcing process needs to be revisited.
The best ways to measure and track performance include regular performance reviews at agreed intervals (for example, every month or every quarter), and by comparing performance KPIs against set goals and objectives.
DeepStream’s RFX software records all supplier data and communications in one place, making it effortless to review current performance and re-enter the source-to-contract process if and when necessary.
Frequently Asked Questions (FAQs)
Q: Is Material Sourcing the Same as Procurement?
A: Material sourcing is not the same as procurement, but a step within the wider procurement process. Procurement refers to the entire process of negotiating contracts and getting the best price for what a company needs, with sourcing comprising the element of identifying and reviewing potential suppliers.
Q: What Are the Steps of Sourcing?
A: There are six key steps in the strategic sourcing process. The first is to analyse internal company needs. The second is to identify potential suppliers. The third is to develop a sourcing strategy. The fourth is to negotiate with suppliers. The fifth is to implement the strategy itself. Finally, the last step is to review the strategy performance and implement changes based on that information.