What to do Before Product Sourcing // Setting the Foundation for finding suppliers
Validation is a great place to set the foundation for sourcing your product. During validation, you’re able to organize your project and get everything in place for the full sourcing. For most projects, this should be the first real step in starting your sourcing journey, or second only to selecting your product idea and coming up with a product spec sheet.
Most of the time, we feel it’s wise to do validation before the final product specification sheet or when you have a vague idea about a product or a niche a client wishes to tackle. Validation allows you to figure out if your product can be made, and if so, will it be profitable.
Validation is NOT full sourcing but it is a complimentary service that is done in advance to set the foundation for sourcing later. Its purpose is to determine the feasibility of a product and get an early cost analysis.
What is Product Validation?
Product Validation, sometimes called soft sourcing, helps to determine if your product can be manufactured, allows for an estimation of how much it will cost, and provides insight into any regulatory, customs or manufacturing challenges you might encounter.
The goal of a product validation report is:
To determine if your product can be made
If it can be made, can it be profitable and made as you want
To determine what manufacturing capabilities are needed
A high and low examination of the total landed cost
A high and low estimation of the lead time for manufacturing
Regulatory issues or compliance needed for product
Any tariffs or duties on your product.
In this section, we’ll cover how to do each of these steps so that you can source your product with confidence.
Why Validate your Product?
There are several big reasons to validate your product before starting with sourcing: Due Diligence, cost analysis, and to anticipate challenges in advance.
Product validation is about doing the due diligence on a product to make sure it is feasible and worth your money and effort to manufacture your product. Product validation will also uncover any duty, tariffs, customs fees, and import fees for your product. Validation should also find any certification and compliance issues your product may have. Too many buyers place too much trust on their suppliers or freight forwarders to figure these issues out when in reality the responsibility is on you the buyer to know what is needed to import a product into their respective country.
Figure out the Landed Cost
The landed cost is the total cost that it will take to get your product made and shipped to its final destination, which is usually an Amazon fulfillment center, a 3rd party fulfillment center or your business.
Landed Cost = Total Manufacturing Cost + Fixed cost + Shipping + packaging + Duty/Fees/Customs
Product Validation will give you an early cost analysis of your product so that you can determine the cost, and see if your product will be profitable. The goal is to figure out the total landed cost to manufacture, ship, prep and fulfill a batch of products. In the end, you should get the total manufacturing cost + fix cost + shipping + duty/fees/customs to end up at the total. From there you should do your own research of similar products that are already on the market to determine if it’s feasible.
The rule of thumb is ⅓ for making and shipping your product +⅓ to pay to Amazon + ⅓ for yourself (profit).
Many people will start at the end and determine what the ideal landed cost should be, while others will start with the manufacturing cost and determine the target final price from there. Ultimately the profit margins and final pricing (what you’ll charge the end customer) are up to you.
OF NOTE: there are two types of product validation that are quite different from each other–manufacturing validation and marketing validation. Marketing validation is when you test the market to see if there is any demand for your product while manufacturing validation determines if and what it takes to be made. While Cosmo offers manufacturing validation, unfortunately, we do not offer market validation at this time.
What do you need to start?
The only thing that you really need to start validation is a product specification sheet. How detailed the product specifications sheet is will depend on the product and your progress. Since this is early sourcing, the goal is to get basic quotes, determine if a product can be made and what it takes to make your product. No need to worry if you don’t have every small detail of your product figured out. If you don’t have a product specification sheet yet, check out our guide on how to create one: https://www.cosmosourcing.com/blog/how-to-create-a-great-product-specification-sheet
Some people know exactly what they want and will have a fully detailed product spec sheet before they start validation. For some people, they will start product validation with a basic product specification sheet then refine and finalize the product spec sheet at the end of the validation phase. There are many reasons to keep your product specification sheet flexible at this point. Most commonly, you may not know what it takes to create your product, so you make the final sheet based on the manufacturing requirements. Perhaps you learn that a supplier offers a larger range of customization than expected.
To be clear, the more detailed you are with your product specification, the more detailed your responses will be. Since we are getting estimations, the highs and lows will be more in line with the end numbers with a more detailed product spec sheet.
How to do Product Validation
Product validation isn’t overly difficult. We broke it down into a few simple steps for you to complete it. When you are done you should have all the info you need to start souring in earnest.
Find Suitable Factories for Quotes
As mentioned earlier, product validation should set the foundation for the full sourcing stage. Thus when you are looking for factories and suppliers for this step you make sure they are good enough to use later. Generally, I do a simple search for factories in this step, while in the sourcing step I go into extreme depth, using a wide range of resources such as customs data, trade shows and more.
During the product validation phase you only really need to use websites such as Alibaba, Global Sources or Made in China. You can see a full list of websites to find suppliers here: https://www.cosmosourcing.com/blog/how-to-create-a-great-product-specification-sheet. Simply search for your product and you should get a decent list of potential suppliers. Once you start finding suppliers you can go ahead and move on to the next step.
Reach out to the suppliers, get quotes & manufacturing details
During the product Validation phase, you should be seeking soft quotes. Soft quotes are quick quotes provided by a supplier to give you a solid idea of the price, as opposed to a hard quote which is definitive and can be acted on.
In the previous steps, you should have a product spec sheet and a request for quote (RFQ) ready. This is the first time you should send out messages to potential suppliers. You should use the RFQ that you created previously here and attach your product spec sheet. In addition, you should use the free “request for quote” tools that Alibaba and other sourcing websites have available.
When messaging suppliers you should include all relevant details of your product, your expected order quantity, which country you are shipping to and ask them to create a quote for you. Since at this point, you’re just getting a basic soft quote you do not need to pry into to much detail. Just keep it simple for now as we’ll get into much more complexity later in the sourcing process.
I usually only message a few factories at first. One trick that I like to use is to start with factories that I think are good, but not great, first. The reason for this is I like to gauge the response of the factories and tweak my message to get a better response from my preferred potential suppliers.
When you have established contact with a few factories, feel free to ask them details about their factory and what it takes to make your product. For instance, if you need fabric printing done, ask about sublimation or screen printing, and if you don’t know the difference ask them to show you. They’ll likely answer in details and as a result, you’ll know more about that aspect of manufacturing and you can tweak your product spec sheet or message accordingly. Really take advantage of this step to fully learn all details about your product.
A good factory or at least one that is good at establishing a relationship with their customers will be able and willing to answer most of your questions, including the basic ones. This is the best time to ask the questions you want and need to know about the product. Once you get to the full sourcing phase you should be an expert in your product and what it takes to make it. After a little bit of back and forth, be sure to thank them for their time and that you will get back to them later about the full order.
As stated earlier, validation is setting a foundation for the full sourcing phase. Because organizing your quotes and responses is one of the key building blocks of sourcing, we end up using the same excel spreadsheet that we use in the full sourcing report.
By now you should have responses from about a dozen or more suppliers. Using Excel, separate the following information into distinct cells:
Input this info across the top row:
MOQ (Minimum Order Quantity)
Cost Per Unit
Total Cost (MOQ x Cost per unit)
And down the first column add the names of your suppliers.
With this info, you should have a basic but well-organized spreadsheet to manage the quotes and factories. The spreadsheet we use has significantly more details, but for most people, this should be sufficient.
When making the estimations, only include quotes you view as legitimate. Since there is not exactly a correct method for doing this, it ends up as something you’ll perfect the more you do it. Regardless, we did try to summarize the best strategies here: https://www.cosmosourcing.com/blog/how-to-avoid-scams-when-sourcing-for-fba-china-vietnam
Get Shipping Quotes
When talking to some of your potential suppliers you should ask them about the packaging method. Usually, items are placed individually in a box and then those boxes are placed in a larger box, often called a master carton. You should ask them the weight, dimensions, and quantity of the master carton and from there use one of the free online tools to get shipping quotes.
I personally have a few freight forwarders that I reach out to get early quotes, but there are some free tools that you can check out:
This is the information you’ll need to get a quote from a freight forwarder.
H.S. or HTS code
Master Carton Dimensions (HxWxD)
Total number of cartons
Carton gross weight
Since we just getting a solid estimation at this point most people do not need to fully reach out to freight forwarders, which we will discuss in more details later. Shipping by sea will be significantly cheaper than shipping by air, however, shipping by air will be quicker.
Another aspect to keep in mind is the Incoterms. These are the shipping terms for your products. This will be discussed in depth in a later chapter or you can read the blog post about them here: https://www.cosmosourcing.com/blog/incoterms-defined-fob-exw since we are keeping it simple at this point, ask your supplier to quote EXW (items available to pick up at the factory) and FOB (items available to pick up at the closest port to the factory). You will need to specify shipping terms when getting a quote from your factory and inform the freight forwarder of the terms as well. It’s much easier for a freight forwarder to pick up the goods at a port, and the majority of our projects use FOB.
How to find the tariffs of your product
By now you should know that the US has imposed a 10% tariff on around $200 Billion worth of goods exported from China into the United States and is expected to rise to 25% on March 1st, pending a lack of a trade agreement. Now there is a great deal of uncertainty with the tariffs, but we will let you know how you can navigate it the best that you can. Even before the current trade dispute, buyers still had to pay duties and customs fees on a wide range of products shipped into the United States.
We wrote a more in depth guide here: https://www.cosmosourcing.com/blog/guide-to-tariffs-customs-duty-import
This section is also written from an American perspective but the process is relatively similar in Canada and the European Union.
Figuring out the HTS Code
One of the big things that you need to know about your product is the HTS Code. HTS stands for Harmonized Tariff Schedule and the system in which the US determines what tariffs are placed on a product. Any product imported into the US needs to be accurately classified by its HTS code and the tariffs will be applied accordingly. The HTS code is based on the International Harmonized System, which is a globally recognized system of trade classification.
This part can be difficult, especially if it’s a new product which takes a decent amount of searching to find the right product category. If you're importing an existing product, then they should have a classification. But if you are importing a new product that does not exist in the market it can the easiest way to do it is to look for similar items or items made of the same material.
You can freely search the US’s database here: https://hts.usitc.gov/
In the end, you should have an 8-10 digit number (####.##.####) that corresponds to your product. Now that you have that figured out you can look up the tariffs.
Looking up the Tariffs of Your Product
This is for importing into the United States, however, almost every other country posts the rates on a publicly available government website. For the most part, the rates will be done by the department or ministry that handles trade. You can use the same HTS tool to look up your tariffs as you did to look up the HTS code: https://hts.usitc.gov/
If you are importing from China into the United States, you can view the full list of affect products and their tariffs here [PDF Warning]: https://ustr.gov/sites/default/files/2018-13248.pdf
Want to avoid tariffs?
Looking to avoid the tariffs on Chinese goods? Sourcing from Vietnam is one of your best options. Cosmo Sourcing has been helping clients find suppliers in Vietnam since 2013 and will be expanding our services in Vietnam in the coming year. If you’re interested, check out our Vietnam Sourcing page or reach out directly to us at email@example.com
Existing Tariffs and Duty Taxes
Keep in mind that in addition to the new tariffs there are still existing duties and fees applicable to most products. By using the same link to the HTS database, you should be able to find the existing duties. This database has the duty listed: https://hts.usitc.gov/
In the above, you’ll notice multiple columns, from left to right they are
Heading/Subheading, which is the HTS Number (4, 6, and 8 digits) Stat Suffix, which combined with the Heading/Subheading is the 10 digit HTS Number
Unit of Quantity
General Rate of Duty
Special Rate of Duty
Column 2 Rate of Duty
This is just a quick summary, the full in-depth guide can be found here [PDF Warning] http://www.usitc.gov/documents/hts_external_guide.pdf
How to figure out Regulatory Issues when Importing from China
Looking up regulatory issues tends to be the hardest aspect of the validation step. There isn’t really a centralized database for what regulations are needed for each product.
The best resource in the US is from the Customs and Borders Protection (CBP), which publishes a number of guides across a huge range of products and classifications. Not sure if what your importing is a bolt or a screw? They have a guide for that. Are you importing mittens? If they are crocheted or knitted than–surprise–you’re getting tariffs! You’re going to want to sit down for this one … Check out this groundbreaking decision on The difference between candle holders and decorative glass!
To add further complications, agencies such as the FDA and FCC regulate the import of goods but defer the enforcement to CBP. If you are importing anything relating to health or food, it’s most likely subjected to FDA approval or regulations. If you are importing an electronic item, particularly one that has radio waves, including but not limited to cellular, wifi or Bluetooth, you need to get FCC approval. If you are importing natural food items, it is regulated by the Department of Agriculture, and may also be subject to the FDA as well. There are more agencies that have their own regulation but the FCC and FDA are the two that we encounter the most. Ultimately it’s up to you to research and find out the regulations.
The CBP is the agency that is in charge of clearing goods for export, so they are the final authority on this issue. If you are really unsure, you can message the CBP and request a letter to classify or clarify the goods. However, because it is a government agency, it is affected by government shutdowns–so at the time of this writing–not responding to any request. Even when the agency is open, there are no guarantees they will respond and if they do the response can take weeks. At the end of the day, we recommend you do the research yourself.
You can go to the Customs and Border Protection's website and see the full list of guides. https://www.cbp.gov/trade/rulings/informed-compliance-publications
You're Finished with Validation, Now What?
When you are finished with the product validation report you will have a Yes or No answer if a product can be made to your requirements. If it can be made you will also have an estimation of the total landed cost (manufacturing cost + shipping + duty/fees + etc) and any potential regulatory issues.
If the validation comes up with No it cannot be made or it cannot be made profitably then you have 2 options.
Move on to another product
Use the info to make radical fundamental changes to your product.
When you come up with Yes your product can be suitably made to your specification, then you can move to the full sourcing phase.
At the end of the product validation step, you should have a much better understanding of your product, the manufacturing requirements and more. It is common that people go back and change parts of their product based on information they learned during validation. Some of the reason is to make it cheaper or easier to make and source. So at this point, you may want to go back and update your product specification sheet. Once you are happy with the new product spec sheet and you feel confident you are finished, you are ready to get started sourcing your product.
Let Cosmo Do it For You
If you don’t want to do validation yourself, Cosmo Sourcing offers Product Validation, as well as a full range of services to plan, find, make and ship your product from China or Vietnam.
We combine all services into our Simple Sourcing Package, which is designed to do everything to take your idea, turn it into a product and ship it to an Amazon warehouse. Cosmo can do everything from creating a product spec sheet, validation, sourcing, ordering and evaluating samples, arranging inspections, finding freight forwarders, quality assurance, negotiations and even working with prep and fulfillment centers in the States. Our goal is to handle every single step of your business in China and Vietnam for you.
We have helped clients ranging from Fortune 500 too small FBA sellers. Don’t hesitate to reach out to us and let us know how we can help you. firstname.lastname@example.org