Sourcing Raw Materials in Supply Chain Management to Improve Margins

Yes, sourcing raw materials in supply chain management can be a common strategy to negotiate better deals with suppliers or manufacturers. This approach is known as "supplier self-procurement" or "customer-managed inventory." By taking responsibility for sourcing the raw materials or components, you can potentially gain more control over costs, quality, and lead times, which can lead to more favorable negotiations.

Here are some potential benefits and considerations when using this negotiation strategy:

  1. Cost savings: By sourcing the raw materials or components yourself, you can bypass markups or fees charged by the supplier for procurement services. This direct sourcing may enable you to secure better prices through alternative suppliers or bulk purchasing. We’ve seen savings of 20+% by procuring the most resource intensive components.
  2. Quality control: By managing the procurement process, you can ensure that the raw materials or components meet your quality standards. This can help you maintain consistent product quality and reduce the risk of receiving subpar materials from the supplier.
  3. Supply chain transparency: Taking control of the procurement process allows you to have a clearer view of your supply chain. You can monitor and manage inventory levels, lead times, and potential bottlenecks more effectively, enabling you to respond quickly to fluctuations in demand. This requires a larger process to manage the whole supply chain, relative to when you only buy a finished product. Technologies like Centro enable intuitive raw-material tracking and production management without needing to purchase an expensive ERP solution.
  4. Control over lead times: When suppliers are required to manage procurement of raw materials, there are times where they cannot guarantee available inventory for your specific production. This extends lead times for your finished product. However, if you own the procurement of certain material, you dictate when it is ordered and for the manufacturer, they focus on securing your position in their production run. This simplified production run can enable you to bypass certain queues in production runs that you would have been stuck in if you simply bought a finished product.
  5. Increased bargaining power: When you offer to handle procurement, you may gain additional leverage in negotiations. Suppliers may be more willing to provide better pricing or terms to maintain your business since they no longer need to allocate resources to procure the raw materials themselves.
  6. Brand readiness: Before offering to self-procure, ensure that you have the necessary expertise, resources, and capabilities to manage the procurement process effectively. Consider factors such as material supplier qualifications, logistics, import/export regulations, and any associated costs or risks involved. Working with fractional logistics and supply chain experts is one way to accelerate your readiness without committing headcount to a full-time hire.
  7. Communication and collaboration: Clear communication and collaboration with the supplier are essential when implementing this strategy. Establish expectations, timelines, and quality specifications upfront to ensure a smooth transition and minimize potential disruptions.
  8. Flexibility: Lastly, procuring raw materials is also a different form of investment. Unlike finished products, raw materials are more malleable and in turn, enable pivots more easily within your vertical and product category. If you decide to divest from one product (T-shirt), you can invest in another (long sleeves) because you have the material. Whereas buying the T-shirt means you are committed to T-shirts.

It's important to note that not all suppliers may be open to the idea of customer-managed inventory. Some suppliers may prefer to control the procurement process to ensure quality and consistency. Therefore, it's crucial to evaluate the feasibility and willingness of the supplier to accommodate this negotiation approach.

Overall, offering to source and procure the raw ingredients or components yourself can be a viable strategy to negotiate better deals, especially if you have the capability to manage the process efficiently and the potential cost savings outweigh the additional responsibilities.

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