Choosing the Right Supplier and Raw Material Quantity Order to Minimize Costs
By Javier Guandalini, Founder of 4everalive Labs
Selecting the right supplier and determining the optimal quantities of raw materials to purchase are two of the most critical decisions any manufacturer must make. In industries like skincare, cosmetics, food production, or pharmaceuticals, raw materials directly influence product quality, production efficiency, and overall profitability. But these decisions are far from straightforward, especially for manufacturers who don’t rely on sophisticated Material Requirements Planning (MRP) systems.
Without automated software tools to forecast demand, track usage, and manage inventory, small and medium-sized businesses must rely on manual methods to gather data, analyze variables, and make smart procurement choices.
At 4everalive Labs, I help entrepreneurs develop private-label skincare lines and grow their businesses. As we work together, I’ve learned that one of the keys to success is maximizing savings while ensuring high product quality and minimizing risks such as stockouts, production delays, and raw material waste.
In this article, I’ll walk you through how to evaluate and optimize key procurement variables — including the often-overlooked expiration date of raw materials — without needing complex MRP systems.
Key Procurement Variables to Consider Without an MRP System
For manufacturers operating without an MRP system, the most important procurement variables to evaluate are:
- Price per Pound (Unit Cost)
- Proximity of Source
- Assigned Quality Score
- Delivery Turnaround Time
- Holding Costs
- Usage Rate of the Raw Material
- Usage Rate Across Other Product Formulas
- Expiration Proximity of the Raw Material
Each of these factors plays an integral role in your supplier selection and raw material ordering decisions. Understanding how to evaluate these variables manually or with simple software tools can make the difference between maintaining a profitable, efficient operation and encountering stockouts, waste, or higher-than-necessary costs. Let’s dive deeper into each variable and how it should be considered when optimizing procurement decisions.
1. Price per Pound (Unit Cost)
The price per unit, or cost of raw materials, is one of the most straightforward factors to assess when evaluating suppliers. While it is an important component of procurement, the price should not be the sole determinant. Additional costs such as shipping, handling, and any potential bulk discounts or incentives must also be considered.
To Calculate Total Cost to determine the total cost of raw materials, use the following formula:
Total Cost=(Price per Pound × Quantity Needed) + Shipping and Handling Costs
Example: Suppose you need 1,000 pounds of a certain oil. Supplier A offers a price of $5 per pound with an additional $100 in shipping fees. Supplier B offers $4.50 per pound, but their shipping charge is $200.
- Supplier A Total Cost:
Total Cost = 5×1000+100 = 5100
- Supplier B Total Cost:
Total Cost = 4.50×1000 + 200 = 4700
In this example, Supplier B offers a better deal despite the higher shipping cost, so even though you might initially focus on price per pound, shipping must also be factored in to make a true comparison.
2. Proximity of Source
A supplier’s location is often an overlooked factor in procurement decisions, but it can have a significant impact on shipping costs, lead times, and your overall supply chain reliability. A supplier located closer to your production facility can reduce both transportation costs and delivery time, which is especially important for businesses that need to maintain lean inventories and keep production running smoothly.
How to Approach Proximity Optimization: Start by mapping out the geographic locations of all your suppliers and the associated shipping costs. You may be surprised at how much shipping and transit times vary depending on the distance from your facility. For businesses without MRP systems, you can use spreadsheets to track these details and make data-driven decisions.
Example: Let’s say you need to order 500 pounds of raw ingredients. Supplier A is based in your city (50 miles away), and charges $50 for delivery, with a 2-day shipping time. Supplier B is located 500 miles away and charges $200 for delivery, but it will take 7 days to arrive.
- Supplier A:
- Shipping cost: $50
- Delivery time: 2 days
- Total cost: $50 + price of material
- Supplier B:
- Shipping cost: $200
- Delivery time: 7 days
- Total cost: $200 + price of material
Even if Supplier B offers a lower price per unit, the additional shipping cost and longer delivery time may make Supplier A a better choice, particularly if you need the material urgently or are trying to maintain a just-in-time inventory system.
3. Assigned Quality Score
The quality of raw materials is perhaps the most important factor in any manufacturing process, especially in industries like skincare, food production, and pharmaceuticals. Inconsistent or subpar raw materials can lead to production delays, product defects, or customer dissatisfaction.
How to Evaluate Quality Without MRP: For manufacturers without advanced MRP software, quality evaluation can be done manually by maintaining quality scores for each supplier. You can track customer feedback, laboratory test results, and any production issues that arise from specific batches of raw material. Keeping a simple spreadsheet to document quality scores for each supplier over time will help you identify those that consistently meet your quality standards.
Example: Suppose you are sourcing a plant extract for a new skincare product. Supplier A offers a high-quality extract with a purity score of 9/10, while Supplier B’s extract is rated 6/10 due to inconsistent batch quality.
- Supplier A (High Quality, Price: $5 per lb):
- Purity Score: 9/10
- Consistency: High
- Supplier B (Lower Quality, Price: $4.50 per lb):
- Purity Score: 6/10
- Consistency: Moderate, occasional batch issues
In this case, Supplier A’s slightly higher price might be justified by the higher consistency and quality, ensuring your product meets your brand’s standards and reduces the risk of customer complaints or returns.
4. Delivery Turnaround Time
Delivery time is an essential factor that impacts your ability to keep production running smoothly. Shorter lead times give you more flexibility to react to unexpected changes in demand or delays in production. For businesses that don’t use MRP systems, it’s important to track delivery times manually so you can evaluate which suppliers are the most reliable.
How to Track Delivery Times: Keep track of past orders in a simple log or spreadsheet, recording when each order was placed and when it arrived. Over time, you’ll be able to identify suppliers with reliable lead times versus those who may cause delays.
Example: Let’s say you are deciding between two suppliers:
- Supplier A has an average delivery time of 3 days.
- Supplier B has an average delivery time of 7 days.
If you have just enough raw material in inventory to last 5 days, you’ll want to choose Supplier A to avoid the risk of running out of stock and delaying production. Supplier B, even though they might offer lower prices, is less reliable in terms of delivery time.
5. Holding Costs
Holding or inventory carrying costs are often overlooked but can add up quickly, especially for raw materials that are ordered in bulk and stored for long periods. Holding costs include warehousing, insurance, and the opportunity cost of capital tied up in inventory.
How to Calculate Holding Costs: You can estimate holding costs as a percentage of the value of your inventory. For example, if your annual holding cost rate is 20% of the value of the inventory, and you have 1,000 pounds of material worth $5 per pound, your annual holding cost would be:
Holding Cost = 1000×5×0.202 = 500 annually
Example: If you order a large quantity of raw material to take advantage of a bulk discount, you might reduce the per-unit cost, but you also increase your holding costs. Therefore, it’s important to balance your order quantities with your storage capacity and production needs. If you don’t need to use all the material immediately, purchasing smaller quantities more frequently might be the better option to reduce holding costs.
6. Usage Rate of the Raw Material
Understanding how much of each raw material you use over time is essential to avoid overstocking or understocking. For manufacturers without MRP systems, you can manually track your usage rate by reviewing historical consumption data and planning orders based on future demand.
How to Track Usage Rate: Keep track of your consumption rate by measuring how much material you use each week or month. This can be done manually by reviewing production logs or using basic inventory management tools.
Example: Let’s say you use 100 pounds of a particular ingredient each week, and you have a 2-week lead time from your supplier. In this case, you should reorder 200 pounds every 6–7 weeks to ensure you don’t run out of stock and to avoid overordering.
7. Usage Rate Across Other Product Formulas
If you’re using the same raw material across multiple product formulas, it’s essential to account for all usages when determining order quantities. Consolidating your raw material requirements across product lines can help you make bulk purchases and save on unit costs.
How to Track Multi-Product Usage: Track how much of a given material is used in each product formula and total the quantities across all products. A simple spreadsheet that consolidates the data from multiple formulas can help you identify the total amount of material you need and how much to order.
Example: If Product A uses 50 pounds of a material, and Product B uses 70 pounds, you need a total of 120 pounds to meet demand for both products. By ordering 120 pounds instead of 50 or 70 individually, you might qualify for bulk discounts, reducing your cost per unit.
8. Expiration Proximity of the Raw Material
Expiration dates are especially important for industries that use perishable raw materials, like food and skincare. Raw materials with a short shelf life might expire before they can be used, leading to waste and financial loss. Keeping track of expiration dates is critical for managing inventory effectively and minimizing product spoilage.
How to Factor in Expiration Dates: When you receive a batch of raw material, make a note of the expiration date. Track the date in your inventory log or system, and be proactive about using those materials that are closest to expiration. If a supplier offers a raw material batch with a shorter shelf life, you may want to request a discount or negotiate a better price.
Example: If you purchase 100 pounds of an ingredient with a 3-month expiration date, and your monthly usage is 40 pounds, you’ll want to ensure you use the ingredient before it expires. If Supplier B offers a batch with 12 months of shelf life left, it may be more advantageous to go with them, even if the price per unit is slightly higher.
Conclusion
Choosing the right supplier and determining the optimal raw material quantities is critical to running a successful manufacturing operation. By considering key procurement variables such as price per pound, proximity, quality, delivery time, holding costs, usage rates, and expiration dates, manufacturers can make smarter, more cost-effective decisions — even without an MRP system.
At 4everalive Labs, we provide entrepreneurs with not only the raw materials they need to build their skincare brands but also the business tips and guidance that help them grow and scale effectively. We understand that success in manufacturing is about more than just the products — it’s about optimizing your entire supply chain, from procurement to production.
Unlike other companies, we provide personalized business advice with every order, helping our clients navigate challenges and streamline their operations. Whether you’re looking for guidance on supplier selection, inventory management, or scaling your production, we offer tailored solutions to support your business growth.
By Javier Guandalini, Founder of 4everalive Labs
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