Sourcing and fulfillment (which are direct costs) are the other side of the “what do you sell” question: How do you build that product? How do you fulfill that service? What does it cost you? Where do you buy the components? They’re critical factors for any business.
In a Lean Plan, sourcing and fulfillment costs might be merely implied in the direct costs section of the forecast, or in a few bullet points in tactics, or operations. In a full formal plan, it might be included in the section on the operations. If you’re using LivePlan, you’d add sourcing and fulfillment as a topic within the operations section in the Execution chapter of your plan. Keep in mind, not every business will need a sourcing and fulfillment section in their plan, so only include it if you need it.
What are sourcing and fulfillment?
Sourcing or fulfillment are descriptions of where you get the products you sell (sourcing); how you fulfill the services you sell (fulfillment); or how you package, assemble, and ship products you sell online (fulfillment).
For products, sourcing commonly covers how you purchase from distributors, vendors of raw materials, suppliers, and so forth. For services, fulfillment commonly includes how you work with subcontractors, drivers, analysts, research sources, and so on. Fulfillment also applies to assembly, packaging, and shipping for online product businesses.
However, whether or not you include a section on sourcing and fulfillment in your business plan depends of course on the exact nature of your business.
Sourcing is important for most product businesses, but maybe not for the craftsperson selling handmade goods or hand-painted greeting cards at a local flea market. Fulfillment is important for most service businesses, but maybe not for the self-employed management consultant who does the work alone. It’s important for some product businesses—those that take orders and ship, or those that assemble products, might have both sourcing and fulfillment.
Use your common sense as you decide what works for your plan. If you are developing a more traditional plan, then the title of that section is normally “Sourcing” for products, “Fulfillment” for services, and “Sourcing and Fulfillment” if you sell products and services, or if the products you sell need to be assembled and shipped, or if you need to deal with packaging and shipping for online orders.
Sourcing is likely to be important to a manufacturing company. Your vendors determine your standard costs and hold the keys to continued operation. Analyze your standard costs and the materials or services you purchase as part of your manufacturing operation. Include spreadsheet lists, bills of materials, and standard cost breakdowns. Include unit economics.
You may have additional documentation you can copy and attach as appendices, perhaps even contracts with important suppliers, standard cost breakdowns, bills of materials, and other information.
Where materials are particularly vital to your manufacturing, you might discuss whether second sources or alternative sources are available, and whether or not you use them or maintain relationships with them. This is also a good time to look at your sourcing strategy, and whether or not you can improve your business by improving your product sourcing.
Product sales, retail, distribution, resale
The bookstore needs to buy books. The restaurant needs to buy raw foods. The hardware store needs to buy everything it sells to have the goods on the shelves. So, resellers should explain how they work with distributors if they do.
They can also call out the most important distributors, and explain the discounts and margins involved.
Fulfillment for products includes assembly, packing, and shipping
Some product businesses include a fulfillment function related to assembly, packing, and shipping.
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For example, one of the early strategic decisions we took at Palo Alto Software was not to assemble physical products and pack and ship from our offices. Instead, we used an outside vendor, called a fulfillment house, that stored components (disks, boxes, packing materials) and did assembly and shipping on-demand, for a fee. That allowed us to focus on the software without having to manage those fulfillment functions.
The per-unit costs were higher, but we didn’t have to worry about capital costs for shrink wrapping equipment or fixed costs of employees and managers.
Services have sourcing and fulfillment too
Sourcing is not just for product-based companies. For example, a professional service company, such as an accounting practice, medical practice, law practice, management consulting firm, or graphic design firm, is normally going to provide the service by employing professionals. In this case, the cost is mainly the salaries of those professionals.
Other service businesses are quite different. The travel agency provides a service through a combination of knowledge, rights, and infrastructure, including computer systems and databases. A restaurant is a service business whose costs are a combination of salaries (for kitchen and table waiting) and food costs.
How to include sourcing and fulfillment in your plan
For a traditional business plan, “Sourcing,” “Fulfillment,” or “Sourcing and Fulfillment” will be a section in the product description. Include details, such as bill or materials, or distributor or vendor relationships, as needed to serve your business plan purpose.