Minimum Order Quantity (MOQ) When Strategic Sourcing

Do you remember the scene in the movie Father of the Bride when Steve Martin’s character George Banks goes nuts over the number of hot dogs in a package versus the number of buns in a package?

No?

Here’s a clip:

The problem George Banks ran into is a basic explanation of Minimum Order Quantity (MOQ). Hot dog buns are sold in “lots” of 12, in the case of the movie. Only need eight? Oh well.

Here's a try-this-at-home: See if your local grocery store will allow you to purchase one blueberry. It's not gonna happen. You might get away with buying a half-pint container, but that's about as small a quantity as they'll sell.

The same thing happens in manufacturing when suppliers insist on minimum order requirements, either raw materials or components. MOQ could be thought of as a necessary evil, but let’s face it: it’s business. It’s part of the way global manufacturing operates. We think it’s good to have an understanding of factors driving MOQs, and we have a few tips to take the sting out of those minimum requirements.

Circumstances That Influence MOQ

1. Raw Materials

This is probably the most important factor when it comes to determining your MOQ. Raw materials are sold in specific amounts which produce a specific numbers of parts. That number is the MOQ.

Here’s an example: A supplier has a polymer with an MOQ of 300 kilograms, equivalent to 5,000 pieces. But the customer only needs 1,000 items, annually. Obviously, the customer doesn’t need the entire 300 kilograms, but the supplier still has to buy that amount. In this case, the customer will usually end up paying for the entire amount of raw material. An MOQ ensures that a supplier doesn’t have to pay for material that isn’t needed. 

Your supplier is dealing with MOQs, too. Suppliers commonly source components from subsuppliers who have their own MOQ requirements. For the sake of efficiency, factories either can’t (or won’t) hold goods/materials in inventory. Components are usually purchased after the supplier receives your order so minimum quantities are a factor for all parties from the start.

2. Order Volume

Suppliers want to encourage customers to order larger quantities. It’s standard operating procedure: Higher volumes receive a discounted rate. You’ll always pay a higher price when you order a smaller quantity.

Something to consider: If you’re ordering small quantities, you could be talking to the wrong folks —You might need a wholesaler, not a factory.

No one is trying to shut out low-volume buyers, but as in all business, the transaction needs to be a win-win.

Strategies to Take the Sting Out of MOQs

The minimum order requirement is not usually a negotiable item, but there are workarounds that you can try that might benefit both parties.

Streamline Your Components  

• Do you have more than one SKU that uses the same, or a similar, component?
• Does this supplier make other goods for you using the same materials?

Streamlining your components across multiple SKUs may allow you to meet the minimum quantity and simply allocate the components among several SKUs.

Work with a Smaller Supplier

Your lower-volume order might be better suited to a smaller supplier than a bigger factory

. Do all the same due diligence you would with any other supplier. Regardless of size, they need to be able to produce a high-quality, compliant product.

Assess Your Customization Needs

Do you really need that irregularly shaped circuit board? Custom goods cost more than standardized or mass-produced items. Take a fresh look at your design:

• How much customization is in your part/product?
• Are there areas where a mass-produced component is tolerable?

Pro tip: Be strategic about customization. Use it where it really counts.

Beware of Suppliers with Low Minimums

The phrase “caveat emptor” (let the buyer beware) should be at the top of your mind. Be skeptical of suppliers with surprisingly low minimum order requirements. There’s a possibility that the item isn’t compliant with industry or safety standards. How much have you gained if you save money, but can’t legally sell your product?

Pro tip: Send RFQs to multiple suppliers for comparison.

Try Negotiating

Even though MOQ are usually non-negotiable items, you really don’t have anything to lose by asking. A successful negotiation could depend on several factors, including:

• Time of year (slow, busy or holiday season)
• Supplier's current capacity
• Your relationship with the supplier

The busier your supplier, the less inclined they are to negotiate. If sales are slow, however, they may be more motivated to work with you to win your business.

If your company is small, placing a large order could be challenging. Consider asking your supplier if you can instead place a blanket order with scheduled product release dates so you aren't obligated to take the full quantity immediately. Your other option is to offer to pay a nice premium to order a smaller quantity. See what they are willing to do to win your business.