Quotas, sample costs, materials, capital, first runs – don’t know where to start?
o A simple step-by-step guide to getting your product manufactured.
o How to decide which manufacturer to use
o Where to find the best manufacturer for YOUR design
- trade fairs, online sources, agents.
o The pros and cons of hiring and agent vs. going direct.
o The facts about quality control, commissions, quotas and more.
o What you’ll need including letters of credit, shipping options, brokers and codes.
All of the above assumes you have done your market research in terms of design, competitive research, distribution, etc.
Step I: What does manufacturing entail?
Getting your product made and to market can be up to 80% of a company’s revenue!
The scope of this supply chain includes more than you think:
o Organization and financing, selling, design, purchasing, sourcing raw materials/manufacturing/finished goods, shipping, distributing and final accounting to determine success of cycle.
Typical problems include:
o Late supply (= canceled orders), poor quality, financing troubles, packing that doesn’t fit standards, packing leading to breakage, design without consideration of cost.
If you know what to look for in advance, you can save yourself lots of trouble.
Step II: Organization and Financing
This is one of the most important aspects for some of the following reasons…
o Retailers want net 30 or 60 but may pay as late as 6 months.
Manufacturers want a deposit, prepay or pay on finish.
This means you are financing both the retailer’s inventory and the manufacturer’s production. Unless you can negotiate better terms.
o High minimum production runs means money tied up in production or inventory that can’t be spent on marketing, sales, salaries or making rent. Effectively managing production to ensure less time between design and production/distribution allows closer following of trends and less cost as money to finance product is returned faster (eg. Zara, H&M)
This is usually the biggest problem in new businesses.
Step III: SALES – Selling large accounts on samples is one of the best ways to reduce risk of failure
o Large retailers buy Holiday product in February for a September ship date.
o Manage inventory to make sure you don’t produce items that won’t sell and for which there is no demand.
o Often necessitates financing as larger stores will buy thousands of dollars for product meaning …you front thousands of dollars in production costs
o You may be able to negotiate better rates on manufacturing terms and financing if you have pre-cleared orders to use as collateral.
o If you do not have pre-orders, you will have to time your manufacturing so that production is finished as close as possible to ship date of merchandise to minimize inventory holding costs.
Step IV: Design/Packaging
Understand the inputs to decrease markups, extra costs
o Trimmings that manufacturers source for you from sub-parties will be marked up by the manufacturer Plan assortments well – they can be the death of you because of inventory holding costs (one shirt in size 0-14 means significant inventory for one item)
o Package to make good merchandising, efficient packing and shipping, and fulfill imports and material requirements (I.e. FDA, cleaning instructions, fiber content)Have a detailed spec sheet to help monitor process and for quality control including:
- Product, Characteristics, Usage, Materials, Dimensions, Sizes, Colors, Standards, Packaging shipping Methods, Special Instructions
Step V: Purchasing – Streamline purchasing of raw materials
o Some companies purchase almost finished goods and customize to make it their own – less cost and faster turnaround because factory probably makes it for others. Downside is less differentiation.
o Manufacturer’s can sub-source trimmings but will charge a markup. Some manufacturers sub-source from 50-60 material suppliers.
o Before purchasing in bulk, make sure that your trimmings will be viable in samples and with manufacturers machines or process work flow. And make sure that you can reorder the same materials.
o Make sure that you leave enough lead time (more than you’ve been told or think you need) for purchasing of materials as one late item can hold up your entire run.
Step VI: Sourcing – How best to find the right source for you
o Establish goals of manufacturing: scalability, outsourcing, specialized equipment, etc. Review domestic and international options – if you are starting with low quantities it is better to start domestically.
o Determine if you’d like to hire and agent (international) or production contractor.
- An average production contractor in New York costs $500/week and will help source, manage and quality control (“QC”).
- An agent will also help source, manage and QC but usually charges 8-15% and will not want to deal with quantities less than thousands.
o Best way to find manufacturers and agents are online, trade shows and referrals.
o Review process of manufacturing and checklist of important points to monitor process (this will be different for each type of product so you must make your own).
Step VII: Shipping – Understand the inputs to decrease markups
o Quotas – Countries like China have different quotas on various fibers. This isn’t much a problem if you’re doing small runs and just starting out.
o Broker – can help you assess shipping options and should be able to assign harmonized tariff codes to your goods to you. This code determines the levels of duties paid for an individual item. For instance, a silk notepad from China has 0.4% tariff, jewelry roll 20%, shoes 37.5%.
o Options – Internationally use ocean freight as it’s 3-10x less expensive. Under 150lbs you may use airfreight. Domestically, shop around! Prices vary drastically.
o Letter of credit – a letter of credit is set up through the bank to confirm that you have the requisite amount to pay for goods, shipping and duties. When something goes wrong- you’re usually screwed.
Step VIII: Distribution – Ensure cost of distribution is factored in to final price
o Physical distribution: SAMPLE PRICING
o Account Setup fee – $99
o Order Processing – $1.85 per order plus $0.30 for each item in the order
o Carrier Charges (UPS, USPS) – Actual Charges
o Storage – $10.00 per cube space of 4′x4′x4′ per month. One SKU per cube.
o Insurance – $30 per month per $50,000 in inventory.
o Monthly Fees – Minimum $99 or Actual Fulfillment Bill.
o Sales: Website, trunk show or trade show costs
- Standard 10′x10′ booth at the New York Gift show is about $4,900 + electricity, moving fees and whatever you buy to make your booth inspiring
Step IX: Final Accounting and Review – Review the cycle to determine profit – how do your costs measure up to the averages?
o For imports shipping should benchmark 20% mark up from cost of product. Your cost of a landed product (cost upon arrival in your warehouse) should be 50% or less than the sales price you get for it.
o Additional 50% will go to operating costs, marketing, and distribution, general and administrative.
o Finding a perfect source is not a fool proof solution – things happen, manufacturers go our of business, or find bigger customers, or your key account rep. who has assured quality every time may simply decide to go do something else!
o You should always keep looking for new suppliers as backup or as an option if your business improves enough to expand.