By now, as a frequent visitor and customer with Sourcing Nova, you should have a solid understanding of the MOQ meaning and, more importantly, how it matters with your business. This is yet another acronym in a sea of acronyms necessary when sourcing products from China.
MOQ means Minimum Order Quantity. This means the minimum order amount a manufacturer will make for you or any customer. MOQ, normally measured in units, is the amount necessary to sell to cover all of the elements of production: raw materials, labor and machinery. At best, it means the manufacturer makes a profit and at worst, the manufacturer breaks even.
This explains why some products you buy are sold in set amounts – dozen eggs or 24 soft drinks – it represents a minimum purchase requirement.
Here is an example of MOQ in business. You wish to start selling moka pot coffee makers. You need inventory to get started. You approach a manufacturer and inquire on buying the moka pots. They tell you that the MOQ is 50. You are only planning on selling a few to family and friends, so you ask for fewer.
The manufacturer cannot go lower than 50 – this is their MOQ.
Inventory is how a business stays alive. You want to have enough on hand to satisfy customers but not so much you are stuck with dead products. It is a very difficult balance to find and maintain. Consider – your customer can buy one or 14 moka pots.
Why does a manufacturer have a minimum order amount
The economics of scale.
This means a manufacturer will save more money in the long run by making 50 moka pots than one. There is quite a bit involved in creating a product. Manufacturers have to have products on hand as well to make products. This means they need the same elements of production as mentioned above. Machinery is not cheap to run, and the starting and shutting down is often the most expensive time. The manufacturer has to make a minimum number of products to cover their costs and a small profit.
Many manufacturers in China do not have products on hand but make them on request. This is a way they are able to keep costs low and their profit margins acceptable.
If you are fortunate to find a manufacturer with a low MOQ, below 10, it is highly likely this is a new manufacturer trying to establish themselves in the industry.
Ultimately, MOQ’s help manufacturers communicate with customers and create venues to work together for profitabilty on both sides.
You, as the buyer, can order samples for testing. This drastically cuts down the chances of a huge order of potentially defective products. Once you determine the manufacturer is trustworthy and offers a superb product, you can continue ahead with the proper MOQ.
Valuation on MOQ
Valuation means finding out how much something is worth. Some people do not work with physical products but a dollar amount. For example, a bakery may require a minimum order amount of their pastries, cakes, pies and the like for a certain size order.
The baker currently sells pies at $10.00 each. However, they want to increase their production and start mail order pies. The baker reduces the price to $5.00, but a minimum order of 40 pies is necessary. This means your customer will need to purchase 40 pies.
This may seem strange, but the Economics of Scale save the money for the bakery and cut potential ‘low ballers’ who are looking for cheap pies.
The idea is to sell lots of pies to a few number of buyers.
Factors that make the MOQ
There are a few factors that figure into the MOQ.
The manufacturer takes his expenses into account, a per head cost and calculates the number of products necessary to make to cover costs and at minimum break even.
· Fixed costs – Rent, insurance, retirement and overhead (utilities).
· Materials – Materials are commodities, and prices will vary depending on their own factors.
· Labor – Labor costs can vary depending on number of employees necessary.
· Demand – Demands for production increase starting around March through June for the Chrismas season.
· Profit point – This has to be reviewed as a whole and based on what the customers are buying from you. This is a great chance to bundle complementary products to your line. For example, adding hair styling tools to your current line of wigs.
· Shipping costs – Sourcing Nova has a full guide on this topic.
· Salaries – Salaries are not part of labor. Salaries cover employees that are permanent employees usually working in the main offices.
· Customer relationships – The MOQ will have a part to do with your customer base. High MOQ’s may leave customers with unsold products and no need to reorder. You need to focus on communication and tips to lower their costs.
Types of MOQ’s
There are two MOQ’s coming from a manufacturer. High and low. Sourcing Nova will discuss both.
A high or complex MOQ means there are several factors that figure into the cost. These become necessary when a simple per item cost for products is not cost effective for the manufacturer. The most common area this happens is with clothing of any sort:
· MOQ in fabric meters – 2,000 meters for every color
· MOQ in per item – 500
· MOQ in dollars – $20,000.00
· MOQ in units – 2,000
The second issue that arises with high MOQ is the economy of scale at the product level. This was discuss previously.
The third issue keeps customers from missing on a low-value order, like buying 4,000 shirts at $0.25 a shirt.
The last issue is the transportation cost. There will be a truck for the customer’s delivery who may work on a price for the FCL or LCL.
High MOQ for the top 20 percent of customers
High MOQ will not have a value because the prices vary depending on the specific products selected. Regardless, it is a very small sliver of the buying industry – 20 percent – who will qualify for High MOQ. There are some businesses who cater to this 20 percent of the populace.
A first high MOQ for a customer may be 2,000 to 5,000 units with following orders rising into the tens of thousands or in tons of product.
Low MOQ are for small orders of products, usually less than 250. It is common for Low MOQ customers to be like you, trying to start themselves in the industry. These can be measured in each or unit or in dollar value. This means the Low MOQ can be one of two things:
Product – the number necessary to reach the MOQ
◦ Printing manufacturers, for example, who need a certain number of books for a print order
The order – the total amount reaches a certain dollar amount
◦ Chemical manufacturers, for example, who need at least half of a container to make costs.
There are also manufacturers who are equally attempting to establish themselves in an industry. Their goal is a customer base, even if it means taking a loss for a time.
The MOQ is not the only factor to consider in a manufacturer. Be sure you are also certain the manufacturer is providing a history of safe products, good delivery timing and integrity in business.
Manufacturers expecting MOQ of over 250 want large quantity orders and negotiation may not be possible.
Advantages and disadvantages of MOQ
There are always two sides in business. MOQ is no different.
Advantages of MOQs
You can look on Alibaba for products. The more you order; the more you will save in the long term. There are other advantages as well:
· Cash flow – Large purchases from your customers mean business stability in lean times. Having one or two large orders is much better than smaller orders with sporadic arrivals.
· Lower shipping – Pulling orders takes time and labor. If your team can pull one or two big orders at one time, this cuts down on the labor costs.
· Better sales – Customers who have a large amount of inventory on hand are keen to sell or pay taxes on the inventory. Do not, however, push too large MOQ on customers. This can backfire on you and cause real problems.
· Negotiation power – MOQ’s are good for you, but these should not be so rigid there is no room to wiggle if there is a new customer with high potential. Think of it as give and take. You will give a little but take a little. This means you will lose some on the front end but easily recover losses on the backend.
· Profitability – Small orders will hurt you over time. Each order filled is time lost from something else. The less time you are filling orders, the more time you can focus on finding more customers, updating existing customer products and invest in improving the business as a whole.
· Save money – There is money in costs and shipping that can quickly eat profits if you are not careful. MOQ allows some control over profits and losses.
· Strong business relationships – Even if you cannot negotiate initially, ordering MOQ from a factory and continuing orders will establish you as a valued customer. This can translate into special benefits and perks like faster production times, increased quality of raw materials and discounts in other ways.
Disadvantages of MOQ
There are several factors to consider when looking for a manufacturer with an MOQ.
· Upfront cost – You may want to sell products for $1.00, but you have to buy $1,000.00 in product and warehouse your inventory.
· Barriers – Manufacturers are trying to make money as well, and they may price MOQ well out of your range.
· Competition – There is competition in any field. You will have to strike the balance of low and high MOQ against the competition to gain a customer base.
· Returns – Your return policy could hurt you in the long run. Be sure your return policy is fair but does not cause you to go bankrupt from angry customers returning their products for refunds.
There is always a potential to negiotate with a manufacturer. The worse you can be told is ‘no.’ You move on to a new manufacturer in this case. However, there are some things you can do to leverage the negotiation into your favor:
· Find an alternative, lower quality material for the end product
· Order half now and half after you make sales
· Offer to pay other fees in exchange for a lower MOQ
· Crowdfund for preselling products
· Price match company against company
· Order samples
· Order with your competition or those who need the same items
· Demonstrate your business value
A word about negotiation
It is tempting to drive costs down with the manufacturer to meet your needs, and it may happen if the manufacturer feels you have potential. However, there are unintended consequences:
· Sub par products – You may lose product quality because the manufacturer is trying to cover costs lost with the lower MOQ.
· Lose good faith – You could stand the chance of losing your manufacturer or perhaps being pushed back into the production queue. MOQ’s exist to help cover costs of the manufacturer. Good business partnerships are vital to success.
· Value – You can also lose on your products because of this. Your manufacturer may not be quite as willing to work with you on returns or much else.
Most importantly, you can take a big chance if the manufacturer becomes more successful. You may be dropped from their roles completely and are left to restart the process of finding a manufacturer all over again.
There are some situations where manufacturers will set a maximum order quantity due to restraints they may encounter – raw materials, labor, factory size and the like. However, if you would like more than the MOQ, most will certainly work with you on your order.
There are four steps to calculate the MOQ. This is not a precise scientific formula but a start in the right direction.
· Product demand – How popular is your product currently?
◦ Review past sales if you have any
◦ Be in contact with Sourcing Nova to adjust product shipment and delivery
◦ Review sales closely and often to make those adjustments
· Break even point – What can you charge at the bare bones minimum?
◦ An easy equation: Fixed costs + variables / per item cost
▪ Example: Fixed costs are $10.00 and variables around $5.00. You earn $0.50 proft on each item sold. If you maintain the variable at $5.00 or less, you need to sell $30.00 of product each month just to make it.
· Costs – Warehousing costs vary depending on your products (size, time in storage, special requirements), labor, distribution and the like are all variable costs
· MOQ – If you have a high demand product, you will have to do some speculation. This includes potential demand, scenario planning, volume discounts and inventory storage costs if any. This will help you figure your own MOQ.
Balancing your MOQ
The MOQ may seem daunting on the surface when you are trying to get started in a niche. You can make it with a bit of planning and tightening the belt. Here are Sourcing Nova’s recommendations:
· Be forthright about your inventory – Compare current inventory to any available stock on hand. If the MOQ is high, think about ways to move the inventory without a huge loss. Can you work out a deal? Marketing campaigns are always an option as well.
· Work out deals – If your customers will buy larger amounts, can you consider a better deal or work with them on a per unit cost? It is a negotiation of sorts.
· Sell off poor products – Products that are not moving with any regularity or decent order quantity should be done away with – often with a deep discount sale. There is another manufacturer around who will make that product.
· Raise inventory turnover – Flash sales, sales that just happen, are great. There are other ways to get rid of inventory. You have to work at it.
· Find someone new – Like we said above, there are other manufacturers to be found. You have to look for them when things are not working. However, start before you think you should just in case. You do not want to be behind your competition.
· Get creative – Ask if you can mix/match products from the same manufacturer. Do they have complementary products left over from other sales? This is a great way to stay on a manufacturer’s good side and save some money in the process.
How to find a manufacturer
By now, it is a hope you recognize that finding a manufacturer on your own is feasible, but there are many factors that will cause headaches, delays and likely loss of capital. Instead, it is a strong recommendation that you research the products you are considering for ordering and selling.
Sourcing Nova can help you with this process. We take the following into consideration when looking for a manufacturer for your specific products:
· A manufacturer who can make your products
· Making sure the resources are in place before starting
· Your product safety requirements – you can see more on this from our candle blog
· A positive track record of order fulfillment
· Premium service and customer support team
· Can we negotiate on your behalf
· Are the MOQ consistent
MOQ’s exist because that is the cost of business. If you cannot meet demands of one, find another. If you can afford products from any manufacturer, leverage that into your favor.
Sourcing Nova has plenty of manufacturers with various levels of MOQ across countless products. We can help you find almost anything and at a price that is fair to you. Contact us below. We are excited to help you get started.