If you have ever purchased any goods from China on B2B sites such as Alibaba, then you must have seen the term MOQ. You may know what MOQ is, but you may not have thought about what determines MOQ? Why do Chinese suppliers need to set this MOQ? As an overseas buyer, what does MOQ mean for your business as you buy products from China?
First, what is MOQ?
MOQ is minimum order quantity, which is an amount set by the manufacturer and indicates the minimum amount they will make for any given order. It is easy to find the minimum purchase amount of products from suppliers on B2B websites such as Alibaba. Buyers can also consult the manufacturer directly when inquiring about ordering products from China.
Why do Chinese suppliers set MOQ? What is the purpose behind MOQ?
Chinese manufacturers set MOQ for the following reasons:
I. Cost and Profit
Manufacturers bear many costs to operate a factory: plant rents, labor wages, machinery and equipment and raw materials. This means Chinese manufacturers have very low profit margins, usually less than five percent of the order value. Manufacturers must take advantage of economies of scale to be profitable. In the long-term operation, manufacturers estimate by experience where the minimum order quantity is set to meet profit margins. For most manufacturers, the MOQ is the break even point of profit and loss. If the quantity of an order is below a certain threshold, the manufacturers will be unable to make ends meet and will take a loss. If the quantity of an order is above this set threshold, they make a profit.
II. Eliminating overseas buyers with insufficient capacity
Just as overseas buyers want to find quality Chinese manufacturers, Chinese manufacturers want to find quality overseas customers. Generally speaking, a mature buyer looking for products from China has enough confidence in their business, and these buyers know that their business can easily sell the products. If the buyer recognizes the quality of the manufacturer’s products, then MOQ is not an issue. Customers who have confidence in the future and products are the long-term customers that manufacturers build relationships with. These buyers mean stable and regular income for the manufacturers. Conversely, if buyers cannot satisfy even the most basic MOQ, then the manufacturers may be hesitant to do business with those buyers. Since buyers have no confidence in their ability to sell products, it is understandable that manufacturers are hesitant to sell to these buyers. Therefore, MOQ is the simplest and most effective reference for manufacturers to evaluate buyers.
Manufacturers use the average purchase quantity of their orders in previous years to determine MOQ. The total number of orders higher than MOQ may be quality customers, which can bring stable cash flow. Orders lower than MOQ are relatively unattractive, since these may not be profitable. Sourcing Nova works closely with many high-quality manufacturers. If you are looking for large-scale high-quality manufacturers to buy your products, please contact us.
III. MOQ subject to raw materials and components
In China, manufacturing companies do not want to keep inventory and are reluctant to order too many raw materials and components at one time. All manufacturers purchase raw materials and components to produce products as per order. This reduces business risks and loss of profit. Suppliers of raw materials and components also have MOQs. These suppliers also want to maintain zero inventory of raw materials and parts. Suppliers in turn set MOQs based on their minimum purchases.
IV. The factory needs to meet important customers first
Manufacturers have their own maximum amount of units. A well-functioning factory often has some old customers waiting in line for production. Often manufacturers leave room for capacity for repeat customers placing unexpected orders. Manufacturers are often reluctant to spend time and energy on small, unprofitable orders. In peak production seasons, they are even more reluctant to do business with small buyers because the cost does not meet profit margin. In this case, it is common to set a higher MOQ than usual, as this keeps small customers from ordering. The manufacturer keeps their major customers but still leave the door open for smaller customers to order products at a later date.
V. Degree of customization
In Chinese manufacturing, the more customized the design, the more different components and raw materials used means a higher MOQ requirement. MOQ requirements are lower if the buyer is willing to use manufacturer-defined standard raw materials and components.
For overseas importers, how helpful is it to study the MOQ of Chinese Manufacturers?
For large importers, supplier stability is crucial. If the factory has high MOQ requirements, this indicates the manufacturer production capacity is larger, and the unit price of the product is more competitive.
For small and medium businesses importing products from China, a large up-front investment may not be profitable. It is important to find a lower MOQ. This requires Sourcing Nova to look more closely into the structural composition of MOQ for the buyer.
Sourcing Nova studys the MOQ structure of the factory. This helps importers adjust to the following product strategies:
1. If MOQ depends on the production cost of the manufacturer, it is meaningless to bargain.
Manufacturers will not take a loss on products. This requires Sourcing Nova to think rationally and find a solution that is fair and profitable for both parties. In this case, the decisive factor is the manufacturer’s expected profit per order. They are not interested in the minimum order quantity but the minimum order value. Therefore, if the importer is willing to increase the purchase price of a single product, the manufacturer will provide a smaller MOQ.
For example, the profit of a single order for a factory is expected to be $500.00 USD. If the original purchase price of a product is $10.00 USD and the production cost is $9.50 USD, the MOQ is 1000 PC (10×1000-9.5×1000 = 500 ). This will meet the predetermined product cost. If the importer’s initial investment is $10,000.00 US dollars, this is substantial expense for many small buyers. However, if the importer is willing to increase the purchase price of a single product to $12.00 USD, then the factory may accept a MOQ of 200. The manufacturer meets the goal of a single order profit of $500.00 USD (12×200-9.5×200 = 500). If the importers’ initial investment is only $2,400.00 USD, less than a quarter of the original purchase price, funding pressure is greatly reduced .
2. Change supplier
There are many large manufacturers in China, and they are unwilling to take small orders. The main customers of such manufacturers are large retailers (Wal-Mart and Target) or international brands (such as Philips). If overseas customers only operate a small-scale e-commerce website or a newly opened Amazon online store, then the big factory is definitely not the best choice. At this time, those looking to purchase products from China should adjust goals and find more suitable small-scale manufacturers.
3. Change raw materials or components
Sourcing Nova dealt with a factory producing cutting boards, and they were sometimes willing to produce small orders, as low as 500 PCs. However, if the customer requests a color box, their MOQ becomes 1000 PCs. The color box printing factory’s MOQ is 1000 PCs. The factory must meet this MOQ to be able to provide customers with color boxes, otherwise the cost of extra color boxes will be a loss for the manufacturer.
Buyers have two options:
- Replace the color box with a white box label. The label printing cost is lower than that of the color box, and the quantity requirements are lower;
- Purchase 1,000 color boxes, but only use 500 of them. The rest will be reserved for the next order or discarded directly.
4. Avoid peak production periods
If a buyer chooses a large factory to produce your products, small and medium-sized importers need to avoid peak production periods. Choosing a factory to arrange production orders when idle is more likely to get a lower MOQ.
Another option is extending the product delivery time, allowing the factory to prioritize orders from larger customers.
5.Reduce the grade of customization
If customization involves molds, complex components, multiple raw materials, various sizes and colors, then the factory will encounter MOQ pressure from multiple sub-suppliers.
If the importer is willing to purchase the conventionally produced products of the factory and reduce the types of raw materials, then the MOQ will be much smaller.
6. Advance payment
In China, manufacturers tend to have a long-term stable partnership with one another. Guanxi is crucial in China. Under normal circumstances, buyers pay 30 percent of the production in advance, and the remaining 70 percent is paid before shipment. If the buyer is willing to pay 60 percent in advance, this is goodwill between the manufacturer and importer. In order to repay this kindness, the manufacturer may reduce the MOQ.
7. Increase the total order amount
Sometimes, importers like to split orders and place small orders for each products. If the importer can combine their orders, or find another importer to buy the same products, this forms a larger order. As long as the profit of this order exceeds the factory’s minimum order profit expectation, even if the MOQ of a single product fails to meet the requirements, the factory may accept this order.
8.Reduce the number of suppliers
In order not to put all the eggs in one basket, some importers will use multiple different suppliers to produce similar products at the same time. This means some products fall short of MOQ requirements. If the number of suppliers is reduced appropriately and the order centralized, the suppliers will also be willing to make partial concessions.
Some common questions about MOQ:
Many importers purchase products based on their own interests and ignore the principles of fairness and integrity. Common problems are:
1. Blind negotiation to reduce MOQ
Some importers carelessly consider the structure of the MOQ and bluntly require the supplier to reduce their MOQ. For some high-quality manufacturers, such tyrannical buyers are unwelcome, and the manufacturers are unlikely to do business with such buyers. Manufacturers refuse to deal with such negotiation requirements. Even if the manufacture reluctantly agrees to a lower MOQ, the buyer’s priority will be very low. In some extreme conditions, manufacturers reduce the quality of raw materials and accessories to ease the cost pressure caused by lower order volumes.
This is a notorious negotiating technique, and many buyers are still use it. They will make promises that far exceed their actual capabilities and promise to place a large order in the factory in the near future. The buyer requires the factory to accept a sample order that is cheap and has a quantity is far below the MOQ. These false promises lead to boycotts by Chinese manufacturers. Please note in China, operators of manufacturers in the same industry know each other. They share customer information good and bad. Manufacturers are happy to share stories of poor customers with one another. If you don’t want to set obstacles to your future when ordering products from China, don’t make this obvious mistake.
3. What should the importer do if the manufacturer’s MOQ cannot be met?
1. Buy off-shelf products
Buyers looking for wholesalers to buy spot or to buy factory inventory directly, the most common platforms are Taobao and Aliexpress. This is not a perfect solution and lacks long-term sustainability, but it is a rescue solution. Inventory products still need to meet the labeling requirements and safety standards of the importing country. China’s domestic market sales standards are lower than the European and American countries’ quality inspection standards. An incompatibility problem in the inventory products is highly likely.
2.Finding a small factory
Small manufacturers’ specifications are not as good as big companies’ specifications, but the advantage is greater flexibility. Sourcing Nova can find some suitable small manufacturers and arrange orders with a smaller MOQ.
3. Reduce requirements
Use easier-to-find alternative raw materials, reduce the degree of customization, increase product unit prices, pay in advance and extend delivery times for the best MOQ.
To sum up:
In China’s manufacturing industry, MOQ is a requirement that can be seen everywhere, and there are reasons for its existence;
When overseas buyers are negotiating MOQs, they need to consider their structural composition, be rational and justified and be fair to both parties before prices can be accepted. Don’t bluntly ask to reduce MOQ;
If you are looking for high quality Chinese manufacturers to purchase products, try Sourcing Nova’s purchasing agent service. We promise to find the best deals for you, your business and your money.