Product Sourcing Glossary: The Terms You Need When Working with Manufacturers
If you are sourcing a product from an overseas manufacturer for the first time, the terminology can feel like a foreign language. This glossary covers the terms you will actually encounter when getting a product made, from your first supplier quote to the moment your shipment clears customs. Each definition is written from the buyer's perspective, with practical context drawn from how these terms arise in real sourcing projects.
We have organized this glossary by stage of the sourcing process rather than alphabetically, so you can find what you need based on where you are in your project.
Updated February 26, 2026
Terms You Will See Before Placing an Order
These are the terms that come up early in the sourcing process, when you are requesting quotes, evaluating suppliers, and preparing to move forward with production.
BOM (Bill of Materials)
A complete list of every raw material, component, and sub-assembly needed to manufacture your product, along with quantities and specifications. Your BOM is one of the first things a factory needs to provide an accurate quote. The more detailed your BOM, the more precise your pricing will be. A vague BOM leads to vague quotes, which lead to surprises later.
Counter Sample
A sample produced by the factory based on your reference sample or specifications. The purpose is to confirm that the manufacturer can replicate what you need before committing to production. You send them your sample (or detailed specs), and they send back their version so you can compare quality, materials, dimensions, and finish. Expect to go through at least one round of revisions.
Golden Sample
The final, approved sample that both you and the factory agree represents exactly what production should look like. This is your benchmark. Every unit off the production line should match the golden sample. Keep one in your hands and make sure the factory keeps one on theirs. If a quality dispute arises later, the golden sample is what you reference.
MOQ (Minimum Order Quantity)
The smallest quantity a factory is willing to produce in a single order. MOQs exist because factories need to cover the cost of setting up machines, sourcing raw materials in bulk, and allocating production time. MOQs vary widely depending on the product type, complexity, and factory size. A small garment workshop might accept 200 units per style, while a large injection molding factory might require 5,000 pieces. MOQs are often negotiable, especially on repeat orders or if you are willing to accept limited customization.
NDA (Non-Disclosure Agreement)
A legal agreement that prevents the factory or sourcing partner from sharing your product designs, specifications, or business information with third parties. NDAs are standard practice when sharing proprietary designs with potential manufacturers. Keep in mind that enforcement varies by country, so an NDA is one layer of protection, not a guarantee. Pair it with practical steps, such as controlling who has access to your full technical files.
ODM (Original Design Manufacturer)
A manufacturer that designs and produces products that buyers can purchase and sell under their own brand. Unlike an OEM arrangement, where you provide the design, an ODM already has ready-made products or designs you can choose from and customize (logo, color, packaging, minor modifications). ODM is common for buyers who want to launch quickly without investing in full product development.
OEM (Original Equipment Manufacturer)
In the sourcing context, OEM refers to a manufacturing arrangement in which the factory produces a product entirely based on your design, specifications, and requirements. You own the design, and the factory builds it. This is the most common arrangement for brands developing custom products. The term can be confusing because "OEM" technically refers to the company that designed the product, but in sourcing conversations, it almost always means this type of custom manufacturing deal.
PP Sample (Pre-Production Sample)
A sample made using the actual production materials, molds, and processes that will be used during the full production run. PP samples come after your golden sample is approved and after tooling is complete. This is your last checkpoint before mass production begins. Reviewing the PP sample carefully is critical because approving it gives the factory the green light to produce your entire order.
RFQ (Request for Quotation)
A formal request is sent to one or more factories asking them to provide pricing for manufacturing your product. A good RFQ includes your product specifications, target quantity, materials, packaging requirements, and any quality standards. Sending detailed RFQs to multiple factories lets you compare pricing, lead times, and terms side by side. The quality of your RFQ directly affects the quality of the quotes you receive.
Tooling and Mold Costs
The upfront cost of creating the custom molds, dies, jigs, or fixtures needed to manufacture your product. Tooling is common for products involving injection molding, die casting, or stamping. Mold costs can range from a few hundred dollars for simple designs to tens of thousands for complex multi-cavity molds. You typically pay for tooling before production begins, and it is a one-time cost (though molds do wear out over time and may need replacement after a certain number of cycles). Clarify mold ownership in your agreement: in most cases, you should own the mold even though the factory holds it.
Shipping and Logistics Terms
Once your product is manufactured, you need to get it from the factory to your warehouse or fulfillment center. These are the terms that come up during that process.
Bill of Lading (BOL or B/L)
A legal document issued by the shipping carrier that serves as a receipt for your goods, a contract for transportation, and a document of title. You need the bill of lading to claim your shipment upon arrival at the destination port. There are two main types: a straight bill of lading (non-negotiable, goods go directly to the named consignee) and an order bill of lading (negotiable, can be transferred to another party). Your freight forwarder will handle most of the paperwork, but you should review it for accuracy.
CBM (Cubic Meter)
The standard unit for measuring cargo volume in international shipping. CBM is calculated by multiplying the length, width, and height of your shipment in meters. Shipping costs for less-than-container-load (LCL) shipments are typically quoted per CBM. Knowing your product's CBM helps you estimate shipping costs and determine whether you have enough volume to justify a full container.
Certificate of Origin (CO)
A document that certifies the country where your goods were manufactured. Customs authorities in your importing country require it to determine applicable tariff rates and whether the goods qualify for any preferential trade agreements. Your factory or sourcing partner typically arranges the certificate of origin, but it is your responsibility to make sure it is accurate.
CIF (Cost, Insurance, and Freight)
An Incoterm under which the seller (factory) covers the cost of the goods, marine insurance, and freight to the destination port. After the goods are loaded onto the vessel, the risk transfers to you. CIF means you do not arrange ocean freight yourself, but you are still responsible for customs clearance, duties, and inland transportation at the destination end. CIF quotes can appear cheaper up front, but you have less control over shipping costs and carrier selection than with FOB.
Customs Broker
A licensed professional who handles customs clearance on your behalf when goods arrive in your importing country. They prepare and submit the documentation, classify your goods under the correct tariff codes, calculate duties owed, and ensure compliance with import regulations. Using a customs broker is not legally required in every country, but it is strongly recommended unless you have significant experience with import procedures.
DDP (Delivered Duty Paid)
An Incoterm where the seller handles everything: manufacturing, shipping, insurance, customs clearance, duties, and delivery to your specified location. DDP means the goods arrive at your door, and all costs are covered. It is the most convenient option for the buyer but usually the most expensive, because the seller builds their logistics costs and a margin into the price. DDP is more common with trading companies or established suppliers who regularly ship to your market.
EXW (Ex-Works)
An Incoterm where the seller's only obligation is to make the goods available at their premises (usually the factory). From that point forward, you are responsible for everything: loading, inland transport to the port, export customs, ocean freight, insurance, import customs, duties, and delivery. EXW gives you maximum control but also maximum responsibility. Most buyers working directly with overseas factories use FOB instead, which at least covers export logistics.
FCL (Full Container Load)
A shipment that fills an entire shipping container, which you pay for exclusively. Standard container sizes are 20-foot (roughly 28 to 30 CBM) and 40-foot (roughly 58 to 60 CBM). FCL is more cost-effective per unit than LCL for larger orders, your goods are not handled or mixed with other shipments, and transit times are generally shorter because there is no consolidation or deconsolidation at each end.
FOB (Free On Board)
The most commonly used Incoterm in product sourcing. With FOB, the factory is responsible for manufacturing the goods, transporting them to the port of export, and loading them onto the vessel. Once the goods are on the ship, responsibility transfers to you. You arrange and pay for ocean freight, insurance, customs clearance, and delivery from the destination port. FOB is the standard for most factory quotes because it gives you control over your shipping costs and carrier selection.
Freight Forwarder
A company that coordinates the logistics of moving your goods from the factory to your final destination. Freight forwarders book cargo space, arrange transportation (ocean, air, rail, or a combination), handle export and import documentation, and manage the various handoffs along the way. A good freight forwarder is one of the most important partners in your supply chain, especially when you are importing for the first time.
HS Code (Harmonized System Code)
A standardized numerical code used worldwide to classify traded products. The first six digits are universal across countries, and additional digits vary by country for more specific classification. Your HS code determines the duty rate you pay when importing, and getting it wrong can mean overpaying on duties or triggering a customs audit. Your customs broker can help you determine the correct classification, but it is worth understanding the basics yourself.
Incoterms (International Commercial Terms)
A set of standardized trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities, costs, and risks between buyers and sellers in international transactions. The most relevant Incoterms for product sourcing are FOB, CIF, EXW, and DDP (all defined separately in this glossary). Incoterms do not cover payment terms, ownership transfer, or contract disputes. They only define who pays for what and where risk transfers during shipment.
LCL (Less than Container Load)
A shipment that does not fill an entire container and is consolidated with cargo from other shippers. LCL is the practical option when your order volume does not justify a full container. You pay per CBM rather than for an entire container. The trade-off is longer transit times (due to consolidation and deconsolidation at both ends), a slightly higher risk of damage from handling, and a higher per-unit shipping cost compared to FCL.
Landed Cost
The true total cost of your product once it arrives at your warehouse. Landed cost includes the product price, tooling (amortized across units), shipping, insurance, customs duties, customs broker fees, inland freight, and any inspection costs. Calculating your landed cost before placing an order is essential because the factory price alone can be misleading. A product quoted at $2.00 FOB might have a landed cost of $3.50 or higher, depending on the product category, shipping method, and duty rates in your market.
Shipping Mark
The label or marking on the outside of your cartons that identifies the shipment during transit. Shipping marks typically include the buyer's name or code, destination, carton number, gross and net weight, dimensions, and any handling instructions. Clear shipping marks help prevent your cargo from getting lost or misrouted, especially in LCL shipments where your cartons are mixed with other cargo.
Quality and Inspection Terms
Quality control is one of the most important parts of the sourcing process. These terms come up when you set quality expectations and verify that production meets your standards.
AQL (Acceptable Quality Limit)
A statistical sampling system is used during inspections to determine whether a production batch meets your quality standards. AQL does not mean you accept defects. It defines the threshold for a batch to pass or fail based on a random sample. The most common AQL levels for consumer products are 1.0 for critical defects (safety issues), 2.5 for major defects (functional problems), and 4.0 for minor defects (cosmetic imperfections). Your third-party inspection company will use AQL tables to determine how many units to inspect based on your total order quantity.
First Article Inspection (FAI)
An inspection of the very first units produced at the start of a production run. The purpose is to catch problems before the factory produces thousands of units with the same defect. An FAI checks dimensions, materials, color, function, and overall conformity against your approved sample and specifications. Requesting an FAI is a smart precaution, especially for new products or new factory relationships.
Quality Assurance (QA)
The proactive systems and processes put in place to prevent defects from occurring in the first place. QA happens before and during production: verifying that raw materials meet specifications, confirming that the factory's processes are set up correctly, and ensuring that workers follow the approved production procedures. QA is about building quality into the process rather than catching problems after the fact.
Quality Control (QC)
The reactive process of inspecting and testing finished products to identify defects before shipment. QC typically happens at the end of production (called a final random inspection or pre-shipment inspection). A QC inspector pulls a random sample from the finished goods, checks them against your specifications, and issues a pass or fail report based on your AQL criteria. QC catches problems, but it does not fix the root cause.
Third-Party Inspection
An independent inspection conducted by a company that is not affiliated with either you or the factory. Third-party inspection companies (such as SGS, Bureau Veritas, Intertek, or smaller regional firms) send inspectors to the factory at various stages: during production (in-line inspection), when production is mostly complete (pre-shipment inspection), or before goods are loaded into the container (container loading inspection). Using a third-party inspector removes the conflict of interest that exists when the factory inspects its own work.
Payment and Contract Terms
How you structure payments and agreements with your factory directly impacts your risk and leverage throughout the production process.
Deposit and Balance Payment Structure
The standard payment structure in overseas manufacturing. Most factories require a deposit (typically 30% of the order value) before starting production, with the remaining balance (70%) due before shipment. The deposit covers the factory's cost of purchasing raw materials. The balance is usually payable after you review inspection results and before the goods ship. This structure gives you leverage: if the factory produces defective goods, you have not yet paid the full amount.
L/C (Letter of Credit)
A payment method where your bank guarantees payment to the factory's bank, provided the factory meets specific documented conditions (such as presenting a bill of lading, packing list, and inspection certificate). Letters of credit protect both parties: the factory knows they will get paid if they ship conforming goods, and you know the factory must meet your documented requirements to receive payment. L/Cs involve bank fees and can be complex to set up, so they are most common for large orders or when working with a new supplier.
Lead Time
The total time from when you place (and pay the deposit on) your order to when the goods are ready for shipment. Lead time includes raw material procurement, production, quality inspection, and packing. Lead times vary widely by product: simple products might take 20 to 30 days, while complex items with custom tooling can take 60 to 90 days or more. Always confirm lead time in writing and build a buffer into your planning. Factories often quote optimistic lead times, and delays happen.
PO (Purchase Order)
A formal document you issue to the factory that specifies exactly what you are ordering: product description, specifications, quantity, unit price, total value, payment terms, delivery terms (Incoterm), required shipping date, packaging requirements, and quality standards. The PO, once accepted by the factory, functions as a binding agreement. It is your primary reference document in the event of any dispute about what was agreed.
T/T (Telegraphic Transfer)
A bank wire transfer is the most common payment method in international sourcing. T/T is straightforward: you wire money directly from your bank to the factory's bank account. It is fast, relatively inexpensive, and widely accepted. The typical structure is 30% T/T deposit before production and 70% T/T balance before shipment, though these ratios are sometimes negotiable depending on the relationship and order size.
Manufacturing and Production Terms
These terms relate to the manufacturing process itself and help you understand what happens between placing your order and receiving finished goods.
Capacity
A factory's ability to produce a certain volume of goods within a given timeframe. Capacity matters because it affects lead times, MOQs, and the factory's willingness to take on your order. A large factory running at near-full capacity may not prioritize a small order. A smaller factory with available capacity might be more attentive but could struggle with large volumes. Understanding a factory's capacity and how much of it your order represents helps you set realistic expectations.
Contract Manufacturing
An arrangement in which you hire a factory to produce your product according to your specifications, with the factory handling all aspects of the manufacturing process. You own the design, brand, and intellectual property. The factory provides the labor, equipment, and production expertise. This is the most common manufacturing model for brands sourcing overseas.
Economies of Scale
The cost reduction that occurs when you order larger quantities. Per-unit costs drop as volume increases because the factory spreads fixed costs (machine setup, tooling, overhead) across more units, and raw material costs decrease when purchased in bulk. This is why a factory might quote $5.00 per unit at 500 pieces but $3.50 per unit at 5,000 pieces. Understanding economies of scale helps you make smarter decisions about order quantities and pricing negotiations.
SKU (Stock Keeping Unit)
A unique identifier for each distinct product variation you sell. A single product might have multiple SKUs if it comes in different sizes, colors, or configurations. SKU count matters in manufacturing because each unique SKU may require separate setup, packaging, or production runs. More SKUs at lower quantities per SKU generally mean higher per-unit costs and higher MOQ challenges.
Total Cost of Ownership (TCO)
The full cost of a product when you account for everything beyond the factory price: tooling, sampling, shipping, duties, inspections, warehousing, defect rates, and the cost of managing the supplier relationship. TCO is the metric that matters when comparing suppliers. A factory quoting $0.50 less per unit might actually cost you more if their defect rate is higher, their lead times are longer, or their location results in higher freight costs.
Sourcing Strategy Terms
These terms describe different approaches to finding and working with manufacturers, and they come up frequently when you are deciding how to structure your sourcing.
China+1
A supply chain diversification strategy where businesses maintain their existing Chinese manufacturing base while adding production capacity in at least one other country (commonly Vietnam, India, Thailand, or Mexico). The goal is to reduce dependence on a single country and mitigate risks from tariffs, trade disputes, supply chain disruptions, and geopolitical tensions. China+1 does not mean abandoning China. It means building alternatives so your supply chain is not entirely dependent on one source.
Direct Sourcing
Working directly with the factory that manufactures your product, without intermediaries such as trading companies or agents. Direct sourcing can offer lower costs (no middleman markup) and a closer relationship with your manufacturer. Still, it requires more effort on your part: finding and vetting factories, managing cross-language, cross-time-zone communication, coordinating logistics, and handling quality control. Direct sourcing works best when you have experience with the process or a sourcing partner to help navigate it.
Dual Sourcing
Using two different factories to produce the same product, either simultaneously or as a backup arrangement. Dual sourcing protects you from supply disruptions: if one factory has a capacity issue, quality problem, or external disruption (natural disaster, power outages, policy changes), you already have an alternative, qualified, and ready. The trade-off is higher management complexity and potentially higher costs if you are splitting volume across two suppliers instead of concentrating it with one.
Nearshoring
Moving manufacturing to a country that is geographically closer to your home market, as opposed to offshoring to a distant location. For North American buyers, Mexico is the most common nearshoring destination. For European buyers, it might be Turkey or Eastern Europe. Nearshoring advantages include shorter shipping times, easier factory visits, overlapping business hours, and sometimes favorable trade agreements. The trade-off is that manufacturing costs in nearshore locations are often higher than in traditional offshoring destinations like Vietnam or China.
Sourcing Agent vs. Sourcing Company
A sourcing agent is typically an individual or small operation that acts as a middleman between you and factories, often earning a commission (usually a percentage of your order value) from the factory or from you. A sourcing company is a more structured operation with in-country teams, established factory networks, and defined processes for supplier vetting, quality control, and project management. Sourcing companies generally work on a flat-fee or project-based pricing model rather than a commission model, which removes the conflict of interest that comes with percentage-based compensation.
Trading Company
A business that buys products from factories and resells them to international buyers. Trading companies do not manufacture anything themselves. They act as intermediaries, adding a markup (typically 10% to 30% or more) on top of the factory price. Trading companies can be useful when you need small quantities or a wide variety of products from multiple factories. Still, for larger or ongoing orders, you will usually get better pricing and more control by working directly with the factory or through a sourcing partner.
Sourcing Kit: Take Control of Your Sourcing Process
This glossary gives you the language. The Cosmo Sourcing Kit gives you everything else: contract templates you can use with any factory, negotiation scripts for pricing and payment terms, supplier vetting checklists, and self-guided courses covering the entire sourcing process from product spec to delivered shipment. Thousands of buyers have used it to source with confidence instead of guesswork.
