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February 16, 2016

Minimum Order Quantity (MOQ): A Necessary Evil

Minimum order quantity: protecting suppliers and scaring off buyers daily. This is a common sentiment, especially when working with Asian manufacturers. But there's good reason it's a facet of global manufacturing, and whether you like it or not, MOQ isn't going anywhere, so you'd better learn how to navigate it. Read on to learn exactly why it's important for both suppliers and buyers and how you can approach it with an open mind, no matter what size your business is.


Why is Minimum Order Quantity Necessary?

There are several reasons minmum order quantity is a staple of manufacturing, especially in Asia. Each supplier will have their own motives for determining minimum quantities, but below are a few reasons that seem to be true across the board.

Suppliers Want to be Profitable 

To put it bluntly, suppliers need to make sure your order is worth their time. Chinese factories typically operate on rather low profit margins since most Asian markets are oversaturated and highly competitive. Your order needs to be large enough to justify the expenses needed to execute. After all, setting up a production line and training workers isn't as simple as it seems.

Factories have Minimum Order Quantities too

A common scenario is that suppliers are sourcing components from subsuppliers, who have their own minimum order quantity requirements. The MOQ your supplier gives you is often a reflection of the numbers their supplier gave them. Many factories cannot (or choose not to) hold goods in inventory since it's rarely efficient for factories to keep high volumes of pre-made stock. Components are more likely purchased after the supplier receives your order, so minimum quantities are a factor for all parties from the start.

Order Volume can Dictate Pricing

One important thing to note is that order quantity can affect pricing: order a higher volume and receive a discounted rate; order a smaller volume and pay more per piece. This is one way suppliers incentivize buyers to order larger quantities. If you are ordering a tiny quantity, chances are you may be talking to the wrong people altogether – you might need a wholesaler, not a factory.

Although these requirements may seem unfair to low-volume buyers, keep in mind that this needs to be a mutually beneficial transaction. The supplier needs a shot at coming out profitable, while the buyer must feel that they are paying a fair price. 

How to Tackle MOQ Issues

While you won't have much luck asking a supplier to throw out a minimum quantity requirement altogether, there are several strategies for approaching the subject and finding a middle ground that works for 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 that use the same materials? Streamlining your components across multiple SKUs may allow you to meet the minimum quantity and simply allocate the components among a number of SKUs. 

Work with a Smaller Supplier

It may be possible to place a lower-volume order with a smaller supplier who is more hungry for your business than one of the bigger factories. Just make sure they can produce a high quality, compliant product before jumping the gun. Many Asian factories are known for accepting an order and then figuring out how to make it, so be sure to qualify each supplier before placing an order.

Assess Your Customization Needs

Seems pretty obvious, but custom goods are pricier than their standardized and mass-produced counterparts. The more custom your design, the higher the MOQs you will have to meet, and the more money you'll spend. Go back to your design and identify areas where the mass version will suffice. Be strategic about customization and utilize it where it really counts.    

Beware of Suppliers with Low Minimums

If you come across a supplier with shockingly low minimum order quantities, this is likely a red flag. The product may turn out to be non-compliant with industry and safety standards. In the end, it won't matter that you saved some cash if you can't legally market or sell your product. An easy way to determine if a supplier's MOQ is suspiciously low is to send RFQs to multiple suppliers for comparison. 

Try Negotiating

Minimum order quantities can sometimes be negotiable, so why not ask? How fruitful negotiations prove to be will depend on several factors, including:

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

When a supplier is operating at full capacity, they will be less inclined to negotiate with you. However, if their sales have been slow, they may be more eager for your business and therefore willing to negotiate to secure the order.

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.

Read More:
3 Tips for Painless Supplier Agreements
How to Change Suppliers the Right Way
The Trick to Managing Long Lead Time Components Through Your Supplier



Filed Under: Product Management, Manufacturing