I'm with you - I use 1/8" foam on all my homemade rucksacks.
I even have 1/8" foam in the shoulder straps of one of my internal frame McHale Packs. It's great for keeping the shape of the strap, as you say, but not thick enough to interfere with comfort.
I can't remember where I got mine, but the remaining stuff I have for my MYOG projects came from a sleeping pad. It's yellow, so I'm thinking it may be the 5mm stuff from MEC. I've also used the Thinlight pad material from Gossamer Gear.