How does one go about sourcing parts/suppliers/assembly for such a project? Can it be done on a small scale?
The first step is likely to assemble a few yourself, or even manufacture a short run yourself. If you don't have the necessary knowledge, advertise among your friends or here and find someone to help you. You can hire someone to design and make a single example of the product, and then take that to manufacturers.
Electronics has had a revolution similar to Open Source in software, but more gradual and less hyped, and it is much less expensive to make short runs of things now.
When you are ready to make a couple hundred or thousand items, look on mfgquote.com and outsource it the same way you would outsource grundgy coding work on rent-a-coder.com.
If you post more details of the device here, you will get more explicit help, maybe even a partner . . . just a suggestion.
So, is it beneficial to make a prototype even if I just hack it together by taking apart some items and assembling with an Xacto knife? I really can't think of any other way to do it.
Basically, we're looking to do some things with those digital picture frames you see in stores now. We want the LCD and card reader–but in a different "body" if you will.
Other sources of inspiration & contacts: http://blog.makezine.com/ http://hackaday.com/