Sourcing Materials — Processes Explained

1. Material Sourcing Methodology

Before discussing how the material sourcing methodology is implemented, it’s important to differentiate it from the sourcing strategy and sourcing policy.

The material sourcing methodology is the structured framework that guides the process of procuring the necessary materials. Think of it as a roadmap that outlines every step of your material procurement journey.

In contrast, the sourcing strategy refers to the specific approach or plan you adopt within that framework to meet your material procurement objectives. It defines how you intend to achieve your goals by selecting suppliers, negotiating terms, and managing logistics.

Meanwhile, the sourcing policy consists of the overarching guidelines and rules that govern all material sourcing activities, ensuring that these activities align with organizational standards and regulatory requirements.

With these distinctions clear, the next step is to implement your material sourcing methodology. The process begins with a clear definition of the required materials—this specification serves as the foundation for the entire sourcing process, ensuring that everyone involved understands the materials needed and the desired quality standards.

Securing commitment from management and obtaining support from key stakeholders is crucial for moving forward with the material sourcing objectives. Once these are in place, you should form a dedicated sourcing team to drive the procurement efforts.

With the right team assembled, you then perform a series of analyses, which include evaluating the current purchasing situation, assessing internal processes, conducting financial reviews, analyzing existing contracts, researching the market, and reviewing your material portfolio.

Finally, you interpret the conclusions drawn from these analyses to shape your material sourcing methodology. The outcomes will help determine the most effective approach for procuring high-quality materials at competitive rates, ensuring a reliable supply chain for your organization.

2. Market Research

The assignment to buy goods or services can come from companies, managers, or procurement managers themself.  More about that in step 2, but before a procurement manager starts procuring supplies, there must first be a need for the said supply. Therefore, it’s the procurement manager’s responsibility to recognize the need for supplies and to develop market research for the said supply. 

Market research will help the procurement manager come up with the exact number or amount for the needed supplies.

For example, an IT company has around 40 people coming in as new hires and there are only 20 computers for use. The procurement manager’s market research must have data and research that will help him/her in making sure he knows everything needed for buying additional computers for their growing company. 

Some of the questions that a procurement manager should ask during market research should be the following:

• Does the company have a current supplier?
• Does the company have an alternate supplier in case the original supplier is gone?
• Does the company have an ample budget for procurement?
• Is there a shortage of the material that the company is trying to procure?
• If yes, will this affect our company’s budget allocation for the procurement?
• Is there an alternative if the supply needed is not available?

The market research should also cover sourcing for new available suppliers. Depending on the company or not, sourcing specialists can help the procurement manager in identifying new sources of supplies. 

Doing your own market research will lessen the chances of searching for suppliers that do not match your requirements.

Finally, the market research helps in identifying key information needed for the next steps. Information such as pricing per supply and brand quality is important and should be included in the research.

3. RFI (Request for Information)

The second step involves asking for information not just from suppliers, but from the heads of the department or branch that need the supplies. 

Because before you create a purchasing order, you will need to come up with the exact number of supplies needed. Information such as the number of available supplies and the pricing per supply are just some that you can ask when making the request. 

When doing market research, you must ask the following questions:

• Which department or branch in the company needs the supplies?
• How many supplies are needed?
• How long should supplies last? A month? A year?
• Does the branch already have a reliable supplier?
• Is there an opportunity to look for new suppliers?
• How much budget is allocated for the said supply?
• This is why market research is the first step of our procurement process since it will help you identify key information about the supplies you need. 

Once the procurement manager has enough data, a purchase request is then sent to higher management for budget approval. This is where company management will then decide how much budget is given to the procurement manager, based on data that was given by the initial market research.

The RFI can be considered a part of the process where you ask for more information from the branch managers, sourcing specialists, and others involved.

4. RFQ (Request for Quotation)

The request for quotation is the part of the procurement process where you ask suppliers for their initial pricing for the supplies needed. Usually done by letter, the procurement manager sends the request while the supplier responds by giving the initial price for the supplies.

For an idea of what to ask the supplier, here are some questions that one can ask:

• Does the supplier have a warehouse for the supplies?
• Where are the supplies located?
• For materials supplied outside of the country, how long will delivery take?
• For materials supplied locally, how long will delivery take?
• How much is the initial price per supply?
• Is there a shortage of the said supplies right now?

Once a reply from the RFQ or request for quotation is received from the supplier, the procurement manager should hold a meeting to discuss the quotes given. A detailed analysis for each pricing is considered while the initial market research will give the procurement manager an idea of how much each supply is priced at a market level.

The information from the market research, once again, is invaluable because it will give the procurement manager an edge when proceeding towards the next procurement process.

5. Negotiation Phase

Perhaps the most challenging yet exciting phase during the procurement process, the negotiation phase is where the procurement manager tries to get or procure the supplies either at a reasonable price or amount. 

Negotiations can also extend towards the procurement manager offering concessions towards the supplier in the hopes of doing more business in the future.

During the negotiations phase, the negotiator should consider asking the following:

• Is there an ample amount of supplies for the order?
• Are there special discounts that the negotiator can take advantage of?
• Who is the contact person for the supplier and from the company?
• The negotiation phase is also the event where the skills of a professional procurement manager may shine; once successful, this means he/she has proved his/her mettle as a master negotiator! 

During the negotiation phase, always make sure to be ready with the information you gathered during the market research phase.

6. Contracting Phase

The final step of the procurement process, the contracting phase is where the procurement manager takes care of all contracts, invoices, receipts, and documents that were signed and are needed during, before, and after the entire procurement process.

Forming a contract leaves no room for mistakes and binds both parties in doing their obligation. Commonly, you need to expressly imply the specific terms that describe the quality of the product or services. Of course, to also protect the supplier, you must do your obligation to pay appropriately.

During the contracting phase, there are only a few questions involved, but to make the process smooth, the procurement manager should check on the following:

• Were the supplies delivered in good condition?
• Were there any delays with the delivery?
• How can the supplier avoid delays (if they happened) in the future?
• Was payment settled with the supplier?

Most companies employ the use of procurement software to keep all important data and documents stored digitally. For more traditional companies, the procurement manager has to keep track of all receipts and must store them for future reference.

Once you both sign the contract, both of you need to follow the stipulated terms you have agreed upon. This is to make sure that the both of you will mutually benefit.

The contracting phase is also important because if there is a need to procure more supplies from the same supplier, all contracts, documents, and receipts can be used for market research once more.

7. Material Supplier Relationship Management (SRM)

The final step is material supplier relationship management (SRM). After completing all the previous steps, you now focus on assessing and establishing strong relationships with your chosen material suppliers, while also maintaining a positive rapport with suppliers who were not awarded the contract.

It is crucial to maintain good relationships with all potential material suppliers, as they serve as viable alternatives in case you need to switch suppliers in the future.

In this phase, active collaboration with your selected material suppliers is essential to ensure they meet their commitments and deliver the agreed-upon materials. Regular communication, performance evaluations, and feedback exchanges are integral parts of this process, helping address any issues, identify improvement opportunities, and promote continuous growth.

Moreover, material supplier collaboration goes beyond a traditional transactional relationship by emphasizing the development of partnerships based on trust, transparency, and shared objectives. By nurturing these relationships, you can strengthen your material supply chain and secure successful long-term partnerships with your suppliers.