Sourcing 101 for New Businesses

by Christine Jaros | December 14, 2021

You are an entrepreneur, and you’ve come up with a great product! It’s that thing that you’ve always put together or cooked up in your garage, kitchen, backyard, home office, barn or craft room. You know! That thing that all your friends and family always ask you to make for them which leaves them smiling and saying, ‘You should do this for a living.’

I know you’ve put this product together a million times (even if only in your head), but now let’s do it professionally with the benefits of being a small business owner who wants to turn an idea or hobby into a thriving revenue stream.

Having spent 35 years in NYC fashion where I built a career within large apparel manufacturers like Calvin Klein and Polo Ralph Lauren, I’ve learned a thing or two about sourcing. Sourcing? What the heck is sourcing?

This is sourcing 101, so we should start with the definition: Sourcing is the process of acquiring the components and materials for your product, and in most cases, producing your product. It is often associated with overseas (international) product development, but it’s as relevant to domestic product manufacturing as it is to out-of-country production.

Start at the Very Beginning

Your first requirement is to create a sketch or schematic that includes a list of materials, ingredients and/or components. This could also be a photo. You may have a second page which identifies the specifications, recipe, and/or measurements of your product.

There are businesses and independent contractors who will put together a ‘specification’ sheet for you (they are known as spec writers). Correct measurements will make all the difference in consistency and quality output. There is nothing that will kill a product’s market opportunity faster than bad quality.

Additionally, many of you will need this break down for Food and Drug Administration (FDA) label applications such as being vegan or organic.

Finally, you will need to assign a style # to this stock keeping unit (S.K. U.) which will be your product’s official item number.

Producers/Manufacturers

Factories have multiple ways of doing business depending on how they are ‘integrated’ which includes their resources/supply chain. What you need to determine as you search for a manufacturer is:

• Are they a finished goods manufacturer? This means they do all the sourcing for you. They will take your sketch and spec sheet and produce a sample for you to approve or change. At the end of it all, you will receive your product in its entirety.

Your quoted cost will include all the materials, however, since they are sourcing (providing) the materials, they may take a small mark up on that charge to you. This means ultimately your cost of goods sold (COGS) may be higher with this type of producer. You might want to seek a factory used by your competition. Why? Because they have a proven track record in making products like you want to make. Note: Each factory has its own minimum requirements.

• What are minimums? These are the minimum units a factory will accept in an order. It is based on their production line set up and factory capacity. To make your product, they may have to change or add specific machinery, so they want efficiency in addition to financial sense. They too want to make a profit. Before you enter a contract with a factory, you need to calculate your anticipated rate of sales. You may be buying into minimums that sound reasonable but will be in your garage or storage space costing you money for years.
• Another factory option is a Cut and Make factory. They assemble the product which includes cutting, labor, and minor assembly materials (like glue or thread). But with this option, you must provide all the components or materials including the major assembly parts (like screws, zippers, etc.). Choosing this type of factory is like itemizing your tax return. It’s more work because you must locate, negotiate, and purchase all the materials, however, you may pay much less for the end result.
• A third party or private label factory offers another way to go. In this case, you are going to your competition’s producer and exploring if they will produce your product under your label using their excess capacity and materials. Many California wine makers will use their excess production capacity to provide a less expensive product to a different store distribution (like Sam’s Club). This helps the producing factory’s brand keep their COGS low. For you it provides a great quality product, but your make will not be cheap.

Wholesale Suppliers and Distributors

Now that you are a registered business with an operating license, you can use your status to work directly with wholesale suppliers and distributors. What does this mean? Lower costs and higher profits. Unless there is some emergency, do not buy your supplies at retail price point. You will pay premium price. Wholesale pricing is two to three times less than retail price. Knowing your manufacturer’s suggested retail price (MSRP) means knowing what you want as a profit margin, and where you need to be with your costs of goods (materials/production).

• How do you find suppliers and distributors?  Trade shows and markets are a wealth of opportunity, not only to locate suppliers, but to network with fellow entrepreneurs. A word of caution (and wisdom) – ultimately, your suppliers are part of your secret sauce. They afford you access to a potential market uniqueness, a high-quality product, and a price advantage that your competition may not possess. So, giving up this information, or obtaining this information from industry colleagues should require a high bar of trust and proven relationship. That is why sourcing suppliers at trade shows – whether here in the United States or overseas – is often the way to go.

There are also professional associations that you can join in which this information is shared. Get connected to your industry. It will increase your knowledge, better your product, and put more money in your pocket.

Mind the ABCs of U.S. and State Regulations

In the United States, we have regulations regarding human rights, child labor usage and product safety standards. Do not close your eyes to your responsibility here. Find out how they impact your products. Looking at FDA standards for consumer products is always a place to start. Sourcing products and/or ingredients from other countries who don’t abide by U.S. standards may result in lead in paint, glass in dog food, lack of fire retardant in fabrics, etc. Even finishes and washes can pack a deadly punch, so know your product make inside and out.

Additionally, you may think you can produce your product in your home, but if you are selling to the public, you no doubt will need to abide by Florida state law which covers inspections and product handling, preparation and storage. There are local agencies providing this service in addition to national ones, such as the United States Department of Agriculture (USDA) and Food Safety and Inspection Service (FSIS).

Labeling, Packing and Packaging

Most professionally produced products include some kind of tag or brand identification including hang tags, product/brand labels, care labels, size labels, and warning labels. Ask your factory if they source and attach, or just attach. Not all factories are equipped to do graphics, embroidery, or branding. There are label makers who can produce your logo, font, name, and more on cloth, paper, with embroidery, printing or sublimation.

With regards to packing and packaging, this can include basic plastic wrap, rubber bands, cardboard boxes, Styrofoam, fillers, and more. Again, are you offering your customer basic factory packaging, or packaging aimed at increasing your brand awareness?

The factories we used in apparel would put hanging garments on cheap plastic hangers and cover them in clear bags. We often changed them out, sourcing better hangers and bags that included our brand name printed on them. This was an added task (and cost) in sourcing the items and having them branded.

If any of your labels include claims/descriptions such as vegan, gluten free or organic, you need FDA approval for which is an application with a cost and a product analysis.

Sourcing is a tremendous amount of work, but it also can be a tremendous amount of fun as you may very well travel the world. You will need the ability to communicate, many times in multiple languages, as well as an ability to negotiate and work the numbers. Most experts are willing to share their knowledge with an audience that is passionate and open to learning.