Welcome to #TheGreatBuild, a series dedicated to starting an ecommerce business from scratch. In this series, the founder of A Better Lemonade Stand, Richard Lazazzera, shares the lessons he learns and the strategies he tries as he builds his own ecommerce business from the ground up. This series has been created with the intention of showing other new entrepreneurs what it takes to start an ecommerce business so it will hopefully inspire them to start their own online business, too.
To read all the blog posts included in this series, navigate using the Table of Contents down below.
Table of Contents
- #TheGreatBuild: Choosing a Niche & Product to Sell Online
- #TheGreatBuild: Product & Niche Evaluation
- #TheGreatBuild: The Great Reveal of My Product & Niche Selection
- #TheGreatBuild: Make, Manufacture, Wholesale or Drop Ship
- #TheGreatBuild: Negotiating with a Manufacturer
- #TheGreatBuild: Choosing a Shopping Cart
- #TheGreatBuild: Pivoting
- #TheGreatBuild: How to Build a Brand Persona
- #TheGreatBuild: Unveiling My Brand
- #TheGreatBuild: DIY Product Photography
- #TheGreatBuild: How to Launch a Business
- #TheGreatBuild: First Month Revenue & Marketing Report
- #TheGreatBuild: Behind the Scenes of a 6-Month-Old Ecommerce Business
Having an idea is one thing, making it a reality is a whole other story. One crucial chapter is finding a supplier/manufacturer that can provide you with the goods not only at a reasonable price but at superior quality and without requiring a huge initial order. Negotiating the right deal involves a systematic and comprehensive analysis. In this post, I wanted to discuss the process of negotiating with a manufacturer, along with some of my lessons learned and ask your opinion on an important business decision.
As I mentioned in the previous post Make, Manufacture, Wholesale or Drop Ship, my team and I came to the decision to create our own custom line of men’s fashion socks and work with a manufacturer to do it. We believe it would be in my best interest to work with a local manufacturing partner in either the US or Canada, so we began my search by Googling manufacturers and doing research through various community networks.
For the sake of comparison, I also contacted a few manufacturers in China through Alibaba. After a week of phone calls and emails I had few key takeaways:
- It takes almost as much time to and energy to set up a small run as it does to set up a large run for my chosen product. Therefore, many factories were only interested in minimum orders of 100 dozen (1200) units per style.
- Some manufacturers will only speak to people that are ready to place large orders. When I told many manufacturers my initial order would be for approximately 50-100 units per style with a total of 6-12 styles, some practically hung up the phone on me.
- You need to know exactly what you are looking for when you call manufacturers. The more details you can provide them, the better and more relevant their quotes will be. Remember, knowing what you are talking about also gives you a stronger position of power. This is important because ultimately, in the early stages, you need the manufacturer more than the manufacturer needs you. Some of the questions I was asked were:
- What exact blend and percentages of materials are you looking for?
- What type of toe?
- What type of heel?
- What exact size/measurements?
- How many colors are you using?
- What type of patterns/style?
- Do you have example design artwork?
- What is your timeline?
After talking with 12 manufacturers, 3 were viable options but 1 stood out amongst those 3 for a few reasons:
- Gut Feeling: When I spoke with him, he really felt like a partner when talking to him. He wanted to help and wanted to be part of my project
- Lower MOQs: He was willing to provide the lowest minimum order quantity (60 units per style)
- Located Locally: His Canadian factory is 30 minutes away
- Options for Production: He has both a manufacturing facility in Canada and as well as Taiwan, giving us flexibility and options when it comes to where we want the product manufactured. This also gives us flexibility in pricing depending on our choice
- Vertically Integrated: Now only does he have a factory to do the knitting of the socks but he also owns the factory that dyes the yarn, giving us total control over the product and quality
After considering all the options, we really felt like this particular manufacturer mentioned above was the right partner for us. Because of his local proximity, we decided to schedule a face to face meeting with him for the following week. I felt this was an important thing to do because it brought a sense of validation of the deal for both of us. He showed us around the manufacturing facility where yarn was dyed, bringing to life the process of production from start to finish.
Everything was perfect except for one major component…
The issue wasn’t one of production quality, rather the preferred raw materials he uses. In his typical operation, the majority of his clients use a particular stock of carded cotton. Carded cotton is a fine material, but in order for us to compete in this space, we wanted to introduce a higher-end material called combed cotton. This would be a deal breaker for us if he couldn’t provide combed cotton because of the industry and price point we plan on competing in. My team and I really want to create a great product. Great products sell themselves, so anything less than the best would be unacceptable.
It turned out, after a little back and forth talk, he was able to find a way for us to use combed cotton, but the catch would be that we would have to pay upfront for the dying of the material.
This sounded like a reasonable request until I found out the cost. The smallest drum size they have for dying material is 36kg with a cost of $2,000 per color. For reference, 36kg of cotton can produce approximately 1,000 pairs of socks. Knowing we would need a minimum of 8 colors to start we would be looking at a minimum investment of $16,000 upfront + the cost of sock production. We would essentially be buying 8,000 pairs of socks upfront!
After rolling around with this information for a week we decided to call my manufacturer to negotiate. When we talked to him, we told him that we really wanted to make this work, but being a startup, $16,000 wasn’t within the realm of possibilities. We brainstormed and discussed several ideas, including finding an external facility to dye a smaller amount of material, purchasing material in smaller quantities from an external supplier and increasing the price per unit if he carried the responsibility and cost for dying the cotton. Not coming to a final decision, he told me to leave it with him for a day and he would get back to me.
The very next day I got several pieces of good news from my manufacturer:
- The Taiwan manufacturing facility has access to a 10kg dying drum. If we decide to produce our socks in Taiwan, he (the manufacturer) will take on the risk of dying 25 colors of our choice for us
- The Canadian manufacturing facility also has a 10kg dying drum that has been disconnected for a few years we could use. But we would be responsible for dying costs, approximately $555 per color
My Manufacturing Options/Dilemma
- Manufacturing Location: Taiwan
- Total Colours Available: Manufacturer will produce and dye 25 colors of yarn and take on the risk of producing the inventory
- Minimum Order Quantity: 60 pairs per style
- Total Upfront Cost: Total number of pairs of socks for initial order (see chart below):
- Manufacturing Location: Canada
- Total Colours Available: We would need 8 colours to start. This would be credited back to us at a rate of $2.00 per unit until we used all of the material
- Minimum Order Quantity: 90 pairs per style
- Total Upfront Cost: Cost would be $555 per color for a total of $4,440 + total number of pairs of socks for initial order (see chart below):
There Are a Few Things to Consider Here:
- When we are just starting out the price of manufacturing in Canada isn’t that much more, $5.65 vs. $5.25 (about 8%) however when we get into larger quantities like 1,000 pairs per style, the difference is much larger, about 36% more expensive to manufacture in Canada.
- There are many more quantity/cost breaks if we manufacturer in Taiwan.
- How important is it to consumers that products be manufactured locally/domestically? We as a business need to also decide how important it is to us. There are advantages of the product being made here locally where you can watch the process and ensure the product is being made to the highest quality standards.
- If we manufacture our products in Taiwan, the manufacturer will take on the risk of dying 25 colors up front vs. in Canada where we will have to pay to have the yarn dyed. Is this the best use of our cash?
What Would You Do?
Considering my options, what would you do in this situation? As well, many of my readers are from the USA, what are your thoughts on a product that is made in Canada? Do you inherently see more value/quality/pride in a product that is made in Canada?