When businesses manufacture products, the process of buying raw materials and components isn’t just a purchasing activity. What you’re buying directly impacts the quality of your product, and how much you’re paying for it impacts your bottom line.
This is why the purchasing process for raw materials is treated as strategically separate from your general procurement as material procurement. No matter whether you’re a small business starting its growth journey or a large-scale operation, mastering material procurement is essential.
What is material procurement?
Material procurement refers to the comprehensive process of identifying, sourcing, purchasing, and managing the physical materials used in the production of goods or services.
While general procurement covers anything that is purchased through a procurement process, material procurement focuses specifically on your cost of goods sold (or cost of services) and MRO supplies (maintenance, repair, and operations). Examples include electrical components for a computer manufacturer or subcontracted designers for a graphic design company.
For businesses that manufacture goods, material procurement is an intersection of your supply chain, production processes, and costs. When executed well, you can maintain a steady flow of high-quality materials at optimal prices with low risk of disruption.
Types of material procurement
Material procurement is a term that covers three different types of procurement.
Direct procurement
Direct procurement involves purchasing materials that are directly used in the production of goods or providing a service.
The “direct” in direct procurement refers to how these materials are directly used in the good or service. For example, a furniture maker purchasing wood and fabrics would consider that activity direct procurement.
Since direct procurement impacts your cost of goods sold and the quality of your products, supplier selection and quality control are of great importance.
Indirect procurement
Indirect procurement involves the goods and services that support production, but are not included in the final product. This covers your MRO supplies, like equipment repairs, maintenance products, or safety equipment.
Indirect materials aren’t used directly in production, but they are still an essential part of keeping your operations running smoothly.
Just-in-time procurement
Just-in-time (JIT) procurement involves aligning material purchases and deliveries with your production schedules, minimizing the time that inventory is held before being shipped out. This reduces warehouse space requirements, letting you operate with less capital.
But just-in-time procurement depends heavily on supplier reliability. One missed or defective delivery will disrupt your entire production schedule, putting you out of inventory when it’s needed.
Single sourcing vs multiple sourcing procurement
In all types of material procurement, businesses choose between single sourcing and multiple sourcing. The difference between the two is whether the business works with one supplier or multiple.
Single sourcing can build stronger relationships and potentially secure discounts by committing to higher volume deliveries. But depending on one supplier makes the business vulnerable to disruptions.
Multiple sourcing reduces the risk of disruptions, but requires more relationship management and processing more invoices.
Key aspects of material procurement
Procurement management is composed of three key aspects that, together, optimize purchasing operations.
Strategic sourcing
Strategic sourcing refers to finding, maintaining, and building supplier relationships that provide the critical combination of quality, reliability, and cost-effectiveness.
While cost minimization is certainly a priority in material procurement as it directly affects profitability, it’s not the only consideration.
Material procurement is more than simple transactional purchasing. A reliable and innovative supplier who acts as a strategic partner may be worth the cost depending on your priorities.
Risk management
Whether you work with one supplier or many, you are inevitably taking on risk. Part of the material procurement strategy is aligning that risk with the business’s priorities.
The main risks of procurement include:
- Supply chain disruption: The possibility of natural disasters or other instability compromising the supplier’s ability to deliver materials.
- Price volatility: A shift in the markets causing the value of raw materials to increase or decrease.
- Lack of compliance: An inability to deliver raw materials within regulatory or ethical guidelines.
- Quality problems: Delivery of defective materials that disrupt production.
With each supplier, you take on some mix of the above risks, some of which may be more or less manageable depending on the business. For example, you may prioritize a stable supply chain at the cost of increased price volatility.
Technology and automation
The tools you use in your procurement processes help you manage material procurement effectively.
Procurement platforms (like BILL) expedite processes with automation, including automated three-way matching and invoice processing. The time savings give procurement teams the opportunity to focus on strategic sourcing, scouring markets for potential new suppliers.
The data of each transaction and interaction gets visualized into easy-to-understand reporting, supporting teams in data-backed decision-making. Plus, past trends get translated into demand forecasts, showing you how much material you’ll need and when.
Why is material procurement important?
Material procurement intersects with many of a business’s strategic initiatives, giving it great importance for these reasons.
Cost control
Material costs often make up the largest portion of the costs of production. Effective management of material procurement directly impacts your profitability by strategically sourcing the best quality materials at the lowest cost.
Given that your raw materials are a frequently recurring cost, any savings that can be found or negotiated compound, providing savings on every subsequent order.
Beyond the price of materials, running an efficient material procurement process reduces the total cost of ownership of a contract, with better payment terms, volume discounts, and minimized waste.
Consistent operations
A production line is only as good as the supply of materials that keep it running. Reliable material procurement ensures you have the right components available to keep up with your production schedule.
The consistency of production trickles down into consistent delivery to customers, building your reputation while avoiding the costliness of emergency material purchases.
Quality of output
The quality of your final product depends on the quality of the materials that go into it. Procurement teams with clear specifications and the time to vet their suppliers for their ability to deliver will directly contribute to the quality of your products.
Cost savings that come at the expense of the quality of material could save the business in the short-term, but lead to more costs down the line, dealing with reworking production, processing returns, and losing customers.
Non-monetary value creation
When you invest in supplier relationships, you create value beyond cost savings. A strategic partnership may lead to technical expertise, new innovations, and closer collaboration, improving the products you produce.
Not to mention, there are competitive advantages with a strong supplier relationship. You may get priority delivery in times of shortages or early notification of pricing changes.
The material procurement process
The material procurement process can be broken down into eight essential steps.
Step 1: Identifying material needs
Every procurement process begins with clearly defining what it is you’re buying. You’ll need to collaborate with people involved in each step of the production process, confirming technical requirements, quality standards, quantities, and delivery dates.
For maximum value, incorporate a demand forecast to tie the production schedule to a financial projection. The demand forecast should use historical data and market trends to determine how much to order and when.
Step 2: Supplier research and vetting
Finding the right suppliers means evaluating them on the following traits:
- Manufacturing capabilities
- Quality certifications
- Financial stability
- Delivery track record
- Technical expertise
Request samples and check references to verify the supplier’s claims. It’s even worth trying to visit their facilities if possible. Be thorough, as a supplier who looks good on paper might not live up to those promises in reality.
Step 3: Request for quotation (RFQ)
Once you’ve identified a short list of qualified suppliers, issue a request for quotation (RFQ) that specifies what you need as specifically as you can.
RFQs are not a formalized order. Rather, they are a request for a price given the specifics of the delivery.
The clearer your RFQ, the more information suppliers have to give you an accurate quote so you can properly compare the competition.
Step 4: Evaluating quotes and supplier selection
Compare the quotes provided by each of the shortlisted suppliers.
Remember, they need to be evaluated for factors beyond pricing alone. Look at their promised delivery schedule, quality assurances, payment terms, and warranty provisions.
It’s worthwhile to score each of the suppliers based on your determined criteria. Organizing this information in a spreadsheet helps you compare across each factor.
Step 5: Negotiation and contracting
Negotiation involves massaging the details to create a mutually beneficial agreement for you and the supplier. Thoroughly discuss the pricing structure, delivery arrangements, quality guarantees, and out clauses to ensure everyone is happy.
All of this information needs to be translated into a binding contract. A good contract takes into consideration every requirement and potential issue, protecting you from potential problems.
Step 6: Purchase order submission
Once the contract is finalized, you’re ready to start submitting purchase orders. A purchase order (PO) is a formalized and binding request for the purchase of materials.
A purchase order is made up of the following components:
- Item descriptions and qualifications
- Quantities
- Delivery dates
- Shipping instructions
- Your business billing information
Once a purchase order is approved internally, it’s ready to be sent to the supplier.
Step 7: Delivery tracking and receipt
When the delivery arrives, verify that its contents match what was requested on the purchase order. You should also take this opportunity to inspect for quality, reaching out to the supplier if there are any issues.
Don’t sign off on a delivery until it has been reviewed for quality and accuracy. Once a delivery has been accepted, it may be harder to get a resolution from the supplier.
The delivery will likely come with an invoice. Confirm that the invoice is accurate, performing a two-way or three-way matching procedure.
Step 8: Payment processing
If everything with the delivery and invoice is verified, it’s time to process the payment according to the agreed terms outlined in the contract. Use the requested payment method, paying by the due date.
If your cash flow allows it, you may want to process payment early, taking advantage of any early-payment discounts the supplier offers. Early payments also build goodwill with suppliers, supporting your relationship and turning it into a partnership.
Challenges in material procurement
Even the smoothest-running operations encounter challenges in their material procurement processes. Look out for these common pitfalls and follow our suggestions to overcome them.
Supply chain disruptions
Natural disasters, geopolitical events, transportation problems, or supplier difficulties can disrupt deliveries, leaving you short of materials and threatening production schedules.
It’s best to have a list of secondary suppliers who can be turned to in a time of need, especially for your critical materials. You should have a contingency procedure that outlines who these suppliers are and any specifics for their procurement process.
Price volatility
The prices of materials can fluctuate unpredictably, changing as supply or demand changes. An unexpected change in price can disrupt your budgeting or financial planning, directly hurting your profitability.
The risks of price volatility can be reduced with fixed-price contracts, locking in a price for a specific duration or quantity of product. Suppliers could be willing to lock in a fixed-term contract if it means you’ll be committed as a customer long-term.
Quality inconsistency
Any suppliers unable to deliver consistent quality can cause massive disruptions to your production schedule. What might look like a good option cost-wise could lead to more problems down the line.
Combat this with clear quality requirements that are written into supplier contracts and backed with consequences. There should be a defined procedure for handling quality disputes, and potentially supplier incentives for deliveries that match quality standards.
Managing supplier relationships
Balancing multiple supplier relationships becomes complicated as the business grows, potentially requiring even more suppliers to be brought into the picture. Poor communication with suppliers can lead to misunderstandings and missed deliveries.
It’s important to schedule regular reviews with your main suppliers to discuss performance and your upcoming needs. This keeps you accountable for having the necessary conversations and staying in touch with suppliers.
Benefits of effective material procurement
Building a strong foundation for material procurement delivers returns across multiple facets of your operations. Do it right, and you’ll enjoy these benefits.
Cost savings
You need to buy raw materials to keep producing products, and effective material procurement ensures you’re paying the lowest possible price for something that matches your standards. You’ll improve your contract negotiations, tapping into volume discounts and reading the total cost of ownership of a contract.
Every dollar saved on materials flows through to your bottom line, helping you consistently improve your profitability in every reporting period.
Efficiency improvements
When you streamline the material procurement process, you free up your team’s time to focus on strategic activities. Once you move from reactive to proactive procurement, you have the highest possibility of sourcing the best suppliers for the best prices.
This also directly impacts the efficiency of your production. Having the right materials arrive on time and meet expectations keeps your production running smoothly, maximizing efficiency.
Enhanced supplier relationships
Treat suppliers as strategic partners, and they will pay it back with preferential treatment. You may get priority deliveries in a tight market, collaborative problem-solving or product development, and volume discounts.
Impact on overall business performance
Reliable material supply supports broader business objectives, empowering you to meet customer commitments and quality standards consistently. And if you get a discount from a supplier, it could give you a competitive advantage that helps you take over more of the market.
Leveraging technology in material procurement
Modern procurement teams lean on specialized tools and technology that help them process a high volume of orders with a smaller headcount.
Procurement platforms centralize supplier information and streamline approval workflows, cutting down on the time required to go from identifying a need to turning it into a purchase order. These tools reduce errors and ensure compliance with your procurement policies.
Automation eliminates repetitive, menial tasks that eat up procurement teams’ time. Purchase orders can be quickly generated with templates and automatically routed to each stakeholder who needs to give approval.
All of the activity that takes place in a procurement platform gets turned into reporting and analytics that help you make impactful decisions. Modern analytics tools help you spot opportunities to consolidate spending, predict future needs, and track supplier performance.
If you’re relying on manual processes, you’re dealing with inefficient workflows and a lack of visibility into this essential data. And data-driven procurement leads to smarter decisions than a gut instinct ever could.
Streamline your material procurement process
Cut out the guesswork and manual processes of material procurement by switching to a dedicated, automated procurement platform.
Enter BILL Procurement, a platform that gives you automated procure-to-pay workflows, stronger spend control, minimized payment errors, and AI-powered efficiencies.
With one simple switch, procurement is less of a pain and becomes a valuable source of data to improve your procurement strategies. Reach out for a demo and see for yourself how it can impact your operations.
