everything you can craft has a number of material slots representing the amount of raw material needed to create it. a sword could maybe have 8 slots while a dagger only has 3. When forging an item you can fill these slots with different materials to influence the attributes of the created weapon. When you want to forge a sword, for example, you can fill 2 slots with high quality but expensive steel while filling the other slots with cheaper iron. you could put some special materials in some slots for some special attributes.
the boni every material component gives to the weapon attributes aren't fixed values. they are random values in a range depending on the material chosen for the creation of the weapon. for example: every slot of bronze could add 2-3 damage while a slot of iron could add 1-6 damage.
so where does the skill of the blacksmith come in?
the blacksmith should be able to use his skill to manipulate the outcome even further. for every level of blacksmith skill you receive a "reroll". when choosing what slot to fill with what material you can assign your rerolls to the slots. when rolling the values of the materials, those slots with rerolls on them are rolled multiple times and only the best result is taken.
want an example?
so, i want to forge a sword with 8 slots and i'm a level 3 blacksmith. i use 6 chunks of bronze, 1 chunk of iron and one chunk of silver for some additional holy damage. the iron gives the most damage, so i assign one of my rerolls to the iron. but i really want some holy damage and silver is rare, so i assign the other two rerolls to the silver.
now i click the craft button and that's what's rolled:
slot 1 (bronze) roll 1: 2 damage
slot 2 (bronze) roll 1: 2 damage
slot 3 (bronze) roll 1: 3 damage
slot 4 (bronze) roll 1: 2 damage
slot 5 (bronze) roll 1: 3 damage
slot 6 (bronze) roll 1: 2 damage
slot 7 (iron) roll 1: 2 damage
slot 7 (iron) roll 2: 5 damage
slot 8 (silver) roll 1: 10 holy damage
slot 8 (silver) roll 2: 12 holy damage
slot 8 (silver) roll 3: 5 holy damage
the weapon gets the best results from every slot. the bronze gives 2 + 2 + 3 + 2 + 3 + 2 = 14 damage. the first roll of the iron was only 2. but gladly i assigned a reroll to it and the reroll was 5. the best value is taken. so we got 19 damage. the best of the 3 rolls on the silver was the 2nd one with 12, so it adds 12 holy damage.
so i crafted a weapon made of a unique bronze/iron/silver alloy with 19 normal damage and 12 holy damage. anyone want to buy it?

some ideas for materials:
bronze: adds a small amount of normal damage
iron: adds a medium amount of normal damage
steel: adds a high amount of normal damage
adamantium: adds a very high amount of normal damage
silver: adds a medium amount of holy damage
obsidian: adds a medium amount of dark damage
ruby: adds a medium amount of fire damage
sapphire: adds a medium amount of air damage
emerald: adds a medium amount of water damage
geode: adds a medium amount of earth damage
meteroid stone: adds a medium ammount of space damage
sands of time: adds a medium ammount of time damage
gold: adds a high amount of value when selling to an npc
mithril: adds a bonus to magical skills
(i hereby apologize for sticking too much to fantasy clichees)