Sourcing 101: From Choosing a Supplier for Your Private Label, to Protecting Your Supply Chain Against Surprises

By Drew Estes

If there’s one thing ecommerce sellers learned in 2020, it’s how dependent we are on our supply chains. Sure, Amazon FBA takes care of this in terms of warehousing and final deliveries, but getting your product to FBA fulfillment centers in the first place has been a nightmare this year for many sellers, especially for those sourcing products from abroad.

Since we’ve already done a deep dive into getting started with freight forwarding, this article won’t focus much on shipping. Instead, we’ll map out how to get set up with a distributor or manufacturer, and provide some general tips to mitigate risk in your supply chain.

This post is mostly written for merchants who plan to own a brand (private labeling). If you’re reselling rather than private labeling, you can skip this post, because the sections below about finding a supplier will be different for you.

Sourcing as a reseller is all about identifying gaps where you could help a brand get more sales, and creating a great pitch to show them you’re the person for the job. We’ll cover that in the future, but not today.

Now let’s get started.

What Exactly is a Supply Chain?

When we talk about supply chains, we’re talking about the system of people, actions, organizations, technology, information, and resources involved in creating your ecommerce product and getting it from your supplier to your customers.

That means everything from the factory employees and quality control inspector to your inventory management system and communication arrangement, to the map of steps your product takes from factory to consumer.

The better you understand and organize your supply chain, the easier life gets.

Deciding What to Sell

If you already have a product chosen, go ahead and skip this step. If not, don’t rush this process.

New sellers make all kinds of mistakes when choosing a product. A big mistake is when you don’t rely on data to choose a product, such as when you rely on a “hunch” or jump on a trend that looks promising.

To choose products more strategically, use some product research software to find products that have high demand and low competition. For instance, Massview’s product research tools allow you to access Amazon metrics like search volume, monthly sales numbers, average page 1 review count, and many others.

This data provides a simple way to estimate the level of demand and the intensity of competition for a product, so you can always feel comfortable that people will buy the product you choose, and that you won’t be fighting an uphill battle to get early sales.

Once you’ve got a product chosen, it’s time to figure out where to source it from.

Suppliers and Manufacturers: Secrets and Misconceptions

Suppliers and manufacturers are not always the same thing. Sometimes a supplier is also a manufacturer, but suppliers (also known as distributors or trading companies) are often just the middleman. They buy from a factory in bulk and resell the product.

The obvious problem with this is that a middleman will take a cut of the profits, so your margins won’t be as good. But here’s the thing: it’s not that simple.

Contrary to what many sellers believe, working with a trading company can be a great arrangement. Yes, it can cut into your profits a bit, but there are some upsides.

First, manufacturers are much less likely to speak English than trading companies. This means you’ll have an easier time getting help, providing feedback, and building a more productive relationship.

To add to this, trading companies optimize their business around the sale and distribution of goods, so they’re much more accustomed to working with merchants and their needs.

Here’s the big juicy secret we discovered when working with suppliers in China: most of the time, the manufacturer you’re sourcing from isn’t the only manufacturer involved. They might not even be the one making your product!

What does that mean exactly? Get this: after a long time working with a manufacturer, we sent in a Chinese engineer to check out the factory, and we learned the manufacturer was actually outsourcing production to yet another factory. Ridiculous!

Thankfully the margins still worked well for us, but as the business scaled, we decided to track down the original factory and buy from them instead.

If you want to sell a multi-component product like electronics, it’s pretty much inevitable that your product will come from five, ten, maybe twenty or more factories. Your supplier might just be the company who assembles it all, or organizes the assembly. You can’t always know without some serious digging.

If you forget everything else in this section, remember this: product quality and customer support are both extremely important when sourcing your product, so as long as your supplier can deliver these, a slightly higher price isn’t a big deal.

Don’t just assume you have to buy directly from the manufacturer. At least, not until you’ve grown your business to a much larger scale. Plus, if you hire someone who labels themselves as a trading company or distributor (rather than pretending to be the manufacturer), you can probably expect better transparency from them.

Places to Find Potential Suppliers

Now that you understand the differences, it’s time to start your search.

If you want to source from outside the US, the simplest way is to check out sites like Aliexpress, Alibaba, Oberlo, IndiaMart, and eWorldTrade.

Platforms to find North American suppliers include ThomasNet, Maker's Row, or MFG.

There are some tradeoffs to consider when you’re deciding to source domestically or internationally. American manufacturers tend to produce higher quality products, and “Made in the USA” gives you much stronger branding when selling to American customers. Plus, you can be confident that there aren’t any sweatshops involved, which isn’t a guarantee overseas.

The downside to US manufacturing is that it costs a lot more, so it’s not realistic for everyone.

Sourcing from overseas, you still need to make sure you’re getting the quality you need. A low price point doesn’t matter much when your brand suffers due to low quality products.

Once you’re on a site with your product in mind, it’s time to see what kind of options you have.

Choosing a Supplier, Part 1: The RFQ Shotgun

How do you land a great deal with a supplier? It’s partly a numbers game. That’s why you’re going to need to send out a ton of quote requests if you want to have great options.

That said, you don’t want to fire off a ton of RFQs (Request For Quote) to a bunch of companies you aren’t interested in talking to. Narrow it down a little bit first and save yourself some time later.

There are a few things you need to look for when searching for a manufacturer:

• Same Industry: make sure your manufacturer produces items similar to what you want them to make. That means they’ll likely have good sources for the necessary materials and they’ll have a better understanding of quality and pricing standards. They might even be able to give you industry advice or make helpful introductions.
• Product catalog: your search will be much more straightforward if you’re working with a supplier who lists (or can easily provide) a catalog of everything they produce, and possibly even the materials they use.
• Customer ratings: much like you’re shopping online, a safe bet is a supplier who has a high rating and a high number of reviews. You want someone reliable.

If they have any certifications relevant to your industry, this is generally a plus. If they’ve been in business for a long time, that’s also a good sign. A huge green light is if they’ve worked with other big brands and you can easily verify the work.

Send out a quote request to anyone who looks promising. As a rule of thumb, contact several dozen or even 100 companies if you want the best results.

Show them you’re a serious merchant by knowing exactly what you want from a supplier. Consider the product you want (dimensions, color, materials, textures, etc). What quality standards are you looking for? What materials do you want to use? How much will you be ordering from them in the short term and the long term?

Options B & C: Shortcuts to the Shortlist

There are a couple other options for putting together a list of your top choices for international suppliers – that is, if you happen to have connections or some extra money to spend.

The first is ImportGenius. These guys provide a solid service at a monthly cost (currently starting at around $99 a month), where you can find different shipping companies based on current products.

In other words, you can find a competitor for your product and see where they’re sourcing from, then figure out where that product came from. It won’t work for every company, but it can give you some great leads.

Option C involves some translation. If you or someone you know speaks Chinese, then skip Alibaba and all that, and head to Taobao.

Taobao is one of the world’s largest companies, though most Americans have never heard of it. Owned by Alibaba, it’s the world’s biggest ecommerce website, and caters mostly to China. However, if you can navigate the language gap (Google Translate only goes so far), you can get much better prices than you’ll find on other platforms.

Choosing a Supplier, Part 2: Narrow the Selection

Once you’ve learned all you can about what you want and who might be able to provide it, look at your pool of potential suppliers and compare their quotes. Cut out any options that are too expensive or just seem suspicious (trust your gut when something seems fishy).

As the list gets smaller, send out replies to the more promising options. You may want to negotiate on price a bit (we’ll get to that in the next section), and even mention your current best offer to the suppliers quoting high prices.

In your reply (and your further research) try and get a clear idea of the following:

• Pricing: How much does that cost drop at different quantities? This is a big factor to consider when you’re comparing different suppliers. Learn about the profit margins they make per order, and compare it to the industry norms. Some shadier suppliers might pretend to have very thin margins so they can charge you more.
• Shipping Times: how long will it take from the time you submit an order to the time it’s ready for shipment? Ask whether they alert you when they ship your order, and what kind of order tracking they offer. Ask about what their policy is for late shipments – can they provide a refund or discount on this shipment, or at least on the next one?
• Communication & Customer Service: Think of your supplier as a partner, and this makes perfect sense. You want someone on your team who you can rely on, who’s looking out for your best interests and gives you the support you need. Sometimes you get a quick sense for how helpful a supplier will be, but if you don’t look for it, you might not be able to tell until you start working with them. Ask what kind of support they provide, such as whether they give you a designated contact who you can reach out to about any issues or questions (ideally with a direct email and/or phone number).

If you’re still interested after their responses, ask if they can put you in touch with some of their other customers (if they can’t, you might want to go elsewhere). Promptly contact these other customers and ask for their feedback about working with this supplier. What kind of issues have they had? Are they satisfied with the customer service and product quality?

Throughout this process, your list will be shrinking down to your best options.

Negotiate Prices – Don’t Accept the First Quote

Love it or hate it, learning some basic negotiation tactics will take you far. Remember, you’re building a relationship with your supplier, so the more they want to work with you, the better.

Push back on the first quoted price, but when you get down to a couple dozen options, you’ll want to know who can give you the best deal.

Negotiation works best as a collaborative effort. That means aside from being respectful, you should also establish yourself as someone who’s easy to work with, reliable, and low risk. If you plan on giving them a lot of business, you’re at an advantage.

With that in mind, here are some quick tips on improving your negotiation outcomes:

• Give yourself options: get quotes from each supplier you talk to so you have some leverage to get better deals. Even if you don’t mention your alternatives explicitly, giving yourself options will keep you from getting sucked into a bad deal.
• Be helpful: generosity can go a long way, especially when it doesn’t cost you much. Offer things that might help them, such as referring other customers to them, or helping them expand their business in some way. Consider other ways they can help you beyond a good price, such as faster turnarounds or free add-ons.
• Save in bulk: prices should always drop for larger orders, but their quoted price isn’t necessarily final. Push back a bit or suggest a price that works better for you. Don’t be disrespectful with this: you still want to be on good terms after the deal is made.
• Ask for discounts in other areas: sometimes it makes more sense to have them discount your shipping costs rather than production costs. Think outside the box.

Think of negotiation as a long-term game. If it’s mutually beneficial and helps you build trust, you and your supplier will both be much better off.

If you focus on the small prize early on and get too aggressive on getting the cheapest possible order cost, you risk souring the relationship, which can come back to bite you later.

For best results, do your research and learn the negotiation culture for the country you’re sourcing from. Haggling in India is a very different game than it is in China or Thailand.

Get Samples and Improve the Product to Your Standards

By now, you should have narrowed down your search to your top 3-5 options. These options should have good references, good communication, and quote reasonable prices.

Don’t just make a giant order straight away. Get a sample from each option to see what kind of quality they deliver.

Many companies will send samples for free or at a discount, though they may still charge for shipping.

If there’s anything you need changed, just let them know and request another iteration based on your feedback and specifications.

The product doesn’t need to be perfect! The point here is to push it out quickly, so make it just good enough to sell – you can improve it more once you’ve gotten some sales

Establish Total Fees & Calculate Your Margins

Now that you’ve gotten down to your final choices, you have a bunch of numbers to compare. Sometimes the best choice is obvious, but if not you’ll want to enter your data into a free FBA Fee Calculator.

Doing this helps you in two ways. First, it helps you figure out which supplier is the best option. Second, it lets you calculate your approximate margins to make sure it’s a feasible business.

You may have found a great product in high demand, but you want to make sure it has some cushy margins so you can get started on the right foot. Some merchants are perfectly comfortable with 25-30% profit margins, but ideally you should aim for 50-100%.

With a price point calculated, you have the last data point you need to choose a supplier! Now all you need to do is choose one.

Make Your First Small Order! If It Sells, You Scale

When you’ve picked your favorite supplier from the pool and gotten your product good enough to test demand, it’s time to make your first order. It doesn’t need to be perfect just yet.

Order a small batch to start, say 50-100 items (or less, if it’s a high-end good with lower sales volume). The idea here is to make sure the product sells well before you scale order size.

Once you’ve gotten some sales to validate your product (and maybe some reviews to improve it), you can start making bigger improvements to the product. For suppliers overseas, bear in mind that your requests may need to be more specific than you’d normally expect, due to language and cultural differences.

Protect Your Supply Chain: Best Practices, Failsafes and Contingency Plans

While this past year hasn’t exactly been a “typical” example of what it’s like being an ecommerce merchant, it shows us how important it is to add failsafes to your supply chain.

As a simple rule, the bigger your business gets, the more important it becomes to protect your supply chain.

In other words, start with small steps. As you start putting in bigger orders, consider the ways you can protect your supply from interruptions.

How do you minimize risk with your supply chain? Here are a few tips to consider.

• Maintain good communication with suppliers: keep up with your freight forwarders and suppliers and build a relationship with them. Keep easy lines of communication between you. Be willing to give and receive feedback, and build trust over time. As with any relationship, business or otherwise, they’ll be much more willing to be flexible and help you when you’ve established mutual trust.
• Have fallback plans: what will you do if your supplier has a material shortage? Or if their country’s borders shut down? Or if prices go way up? What if your freight forwarder can’t ship your items for some reason? Make sure you at least have an idea of what you’d do in situations like these so you can still fulfill orders when problems arise.
• Improve your margins: the better the margins on your products, the more flexibility you have to adapt to changes and disruptions. Learn the normal margins for manufacturers in your industry and use the info to make better deals.

Once your product is consistently getting great sales with minimal advertising, consider making a huge bulk order and storing it somewhere cheap, such as renting warehouse space in your area. Aside from better margins, you’ll have a backup inventory in the event of a supply chain problem.

Later on, you can think about more advanced safeguards. This might include things like quality control standards (such as inspectors in the factory, or a clause in your contract about defective orders), understanding your supply chain in more depth (learning material sources, finding the original factory), and diversifying your sources to have manufacturers in multiple countries.

Save Factory Visits for Later, But Visit Eventually

Factory visits aren’t necessary in the beginning – the early days of starting your business should focus on validating your product and proving that it will sell.

Once those sales kick off though, a factory visit helps a ton.

It isn’t always easy to do, especially with foreign manufacturers (or when dealing with pandemic travel restrictions), but it can be a huge help in making your final choice. If you can make it happen once the virus is under control, we can’t recommend it enough.

Even if you don’t go personally, having someone over there who you trust who can walk through the facility, maybe even video a bit for you, will help.

Not only do you get a better sense for the quality of products and organization that the company has, but you also pick up on a thousand other small things that give you a much better understanding of your supply chain – things that might otherwise take months of research and outreach to learn.

As an example, we learned on our factory visit (link below) that we could import higher quality clothing at crazy low prices due to a small quirk in the US tax code.

If you want to verify that your manufacturing is actually happening in the factory you’re buying from, go there and ask if you can watch them produce it. A shadier company might point you to the machines they use, but it’ll be hard for them to mislead you if your product uses specialized tools like plastic molds.

Check out New Mogul Episode 4 on YouTube to check out one of our Chinese factory visits and see how helpful they can be!

Summary & Key Takeaways

Sourcing can be intimidating for new sellers, so just take it one step at a time. Don’t worry about getting everything perfect just yet: none of your choices are permanent, so you can always change things up once you have more experience.

To get started, use a product research tool to find a product with great potential. Then, use a platform like Alibaba to find suppliers and send out quote requests to around 100 of those with good ratings and references. The more you know what you want, the more helpful responses you’ll get.

Next, narrow down your list. Cut out options with higher prices or bad communication. As the list gets smaller, talk to the references they provide to cut your list down further.

Once you’ve got your final three, order samples from each of them. Find a balance of price, communication, and product quality that works for you. It doesn’t need to be a perfect product just yet, just good enough to sell without being dishonest to customers.

Pick your favorite supplier and make your first small order of less than a hundred items. Launch your product and make sure people are buying it before you consider scaling.

If the product sells, congratulations! Have your supplier make any necessary improvements and increase your next order size.

As time goes on, you’ll want to take steps to protect your supply chain and eventually visit the factory itself, but don’t worry about this just yet.

For now, just pick a product and start sending quote requests!