To help you categorize items correctly, follow these guidelines:
If you sell it, it's a product
Materials cannot be added to sales orders, so anything you sell to customers should be set up as products. It doesn't matter whether you manufacture the product yourself or purchase it from suppliers—the system works with both approaches.
If you manufacture it, it's also a product
Materials cannot be manufactured from other materials. Therefore, everything you produce should be set up as products. This applies whether you sell these items or use them as subassemblies in the production of other products. Read more about subassemblies in this article.
In all other cases, it's a material
The main difference between materials and products is that materials cannot be added to customer sales orders and cannot be manufactured. Therefore, add as materials everything you purchase from suppliers and use in production.