Sourcing 101

Why Knowing Minimum Order Quantity (MOQ) is Important?

MOQs can range from low to high, depending on the supplier, and they can significantly affect cash flow and inventory.

Why Knowing Minimum Order Quantity (MOQ) is Important?

My Client’s Dilemma over MOQ

A client shared with me his confusion when he was discussing with two apparel factories about a new jacket design they were developing for the upcoming winter season.

The one in China, he said, advised him that the MOQ (minimum order quantity) for them to produce the jacket is about 100 units.

But when we got the quote from the apparel factory in Cambodia, they told him that their MOQ requirement to do business with him is 30,000 pieces!

You can literally see from his face how bewildered he is because of the big difference in MOQ requirements from two different country sources.

So...What Is Minimum Order Quantity (MOQ)?

Minimum Order Quantity (MOQ) is the fewest number of items a wholesaler, retailer, or e-commerce site requires a customer to buy in order to make a purchase. MOQs are set by suppliers and many businesses require customers to meet their minimum order quantity.

This ensures that customers are buying at least the minimum amount of stock required for wholesale prices.

MOQ can be based on the number of units or the total order value set by the supplier.

Let's make it more straightforward with this simple example:

You buy water bottles at $.30 each. Your supplier’s MOQ for water bottles is 1,000 units. This means you’ll have to spend a minimum of $300 on water bottles per order.

Different types of products will require different MOQs; an item that costs a lot to produce is likely to have a lower MOQ than products that are easy and cheap to produce. (Ooopppss! That's one reason why there's a difference in MOQ.)

Why Do Suppliers Use Minimum Order Quantity (MOQ)?

Suppliers use Minimum Order Quantity (MOQ) to ensure that they can make a profit on each order. It is a way for suppliers to guarantee that they will be able to cover their costs and make a profit, as they will have to pay extra fees if they cannot fill an order.

MOQs also help suppliers manage their production runs, as it allows them to plan ahead and organize their resources more efficiently, thus reducing production costs.

For wholesalers, MOQs are important because it prevents them from overstocking or ordering too much of an item at once, which could lead to losses. By setting minimums for orders, suppliers can also reduce the chances of having too much inventory that needs to be stored and managed.

All in all, using MOQs is a great way for suppliers and wholesalers to save money while ensuring they are getting the most out of their orders.

Why MOQ is important for e-commerce sellers?

MOQ is an important aspect for e-commerce sellers to consider when working with suppliers. MOQs can range from low to high, depending on the supplier, and they can significantly affect cash flow and inventory.

MOQs directly affect the following:

1. Suppliers Who Will Do Business With You

MOQ can automatically sift and pre-qualify you in the eyes of the supplier you are dealing with.

Your capacity to purchase and store the products you are ordering can set you apart from other buyers as the supplier quickly can consider you as a long-term partner that which will make him prioritize your order or just a one-time deal partner that he can choose to less prioritize in terms of scheduling the production of your goods.

2. Reordering

Low MOQs allow you to order fewer products, but depending on how quickly these products sell out, you can find yourself wasting time and money on frequently replenishing stock levels.

Often buyers neglect that there is also a cost in ordering products, technically termed as ordering cost, which involves the summation of costs involved in ordering - including the hours spent, the communication, and the like. So frequent re-ordering of low MOQ must really be managed to focus on the output and not the activity alone.

3. Logistics and Warehousing Of Your Stocks

The minimum number of products you must order also affects how many full container loads and warehousing space you require to ship and store these products. This, in turn, can affect importation taxes, staffing, security, and insurance costs.

4. Inventory Management

A low MOQ can be beneficial as it allows businesses to order in small amounts, which can save on costs while still providing enough inventory to ensure customer satisfaction.

However, a high MOQ may require larger upfront investments and increases the amount of inventory on-hand, which may require additional storage space or other resources.

Furthermore, higher MOQs may also mean longer wait times between orders and lower inventory turnover rates. As such, it is important for businesses to carefully consider their average order size when determining their MOQs in order to ensure they have the right amount of inventory on hand while avoiding overstocking or running out of stock.

5. Financials - Cash Flow & Profit

High MOQ can directly impact cash flow as your cash may be tied up with your high inventory. If your supplier has a high MOQ, your inventory holding cost will affect your budget for other matters such as marketing, advertising, and growth.

Profit will also be affected as a high MOQ might drive you to push more sales and sales activity to get as many products out in the market. This means more to be spent on marketing, advertising, and delivery of goods to quickly deplete too many.

So, Why is There A Difference in MOQ for Different Suppliers?

In my number of years of sourcing with different companies in different countries for our e-commerce business clients, I observed that the main reason why there's a difference in MOQ is basically because of the supplier's capability to produce at a profitable margin.

And this would really apply to my story above but on a larger scale because my friend was comparing two different countries.

The differences in order requirements would require knowledge about the country’s capacity to produce your desired merchandise.

In the example, China most likely has those raw materials available in their district locale. China is known for being able to go and order raw materials efficiently and quickly due to the proximity between suppliers, requiring them to have way fewer materials for production.

Many Chinese factories also have built their businesses around handling numerous smaller orders, using the Alibaba platform, and sourcing entrepreneurs worldwide. China has built up expertise in being nimble and fast-paced when juggling many projects and items to get the job done for its customers.

This is very much different for Cambodia which lacks other nearby supporting infrastructure to lower the cost of transferring raw materials from one company to another.

So when I explained this to him, he seemed to realize that reason made particular sense even though the labor costs in China are higher at $228.90 compared to Cambodia’s $140 (those are the minimum wages per month in both countries surveyed last 2016).

So you might be wondering if China is so good at making jackets and the raw materials are readily available, why would any e-commerce business person consider sourcing things in Cambodia? Well, that has to do with China's rising cost of labor. China investors are looking at a strategy called “China plus one.”

Pro-Tips for Working with MOQs

As a sourcing expert, I know MOQs can be frustrating, pricey, and even prohibitive if you're new to online selling or expanding into a new product line.

However, there are strategies to successfully handle and manage high MOQs. Let me share some things to you:

1. Negotiate With The Supplier

Nothing is cast in stone and it wouldn't really hurt to ask, so go ahead, and ask your potential supplier for a better offer from their end.

Calculate what you can afford in comparison to what your supplier's competitors are offering, and then provide this information to your supplier in the form of a compelling business case.

2. Pre-Order your Product For Your Customers

If you're uncertain about the demand for a specific product, you can experiment with it by allowing buyers to pre-order it. This helps you to assess initial consumer interest, forecast demand, and receive cash to cover MOQ costs. If you are unable to do so, some basic market research and competitor analysis should be sufficient.

3. Staggard Delivery of Ordered Goods

Some vendors will let you place and pay for a MOQ now, but you send off your merchandise in batches throughout a certain period.

Staggard delivery of goods can help you save money on warehousing, but keep in mind the added risks of product damage or the supplier suspending operations before you finally receive the last shipment.

But be mindful also that the staggard delivery plan will increase your transport cost of goods, so better include that in the calculation for this strategy.

4. Outsourcing Warehouse Services

If warehousing your products will be an issue, consider a 3rd party logistics provider to manage your goods from the port to the customer's doorstep. This not only eliminates the need to invest in additional warehouse space and personnel, but it also allows you to reduce delivery times and costs.

5. Ask for Samples

Asking for samples is a great way in ensuring you are getting the right product from your supplier. It helps you ensure the kind of quality materials they can provide. The assurance of getting the right product coming from their manufacturing facility gives you that certain peace of mind even if they offer you a high MOQ.

6. Caveat on Low MOQ Offer

Remember that the supplier will need to make a profit to continue trading, but if his margins are too thin for every transaction, there must be in some ways he is "shaving" the cost. There might be a sacrifice on quality, safety, or customer support. These are things a new online seller should be on the lookout for as well.

7. Read Carefully The Offer/Contract Before Signing

The "devil is in the details" as they say, and sometimes jumping without checking first what you are signing for could be detrimental to your business. Find out if there are any hidden costs in the order transaction, these could be entailed inside shipping, order processing, insurance, etc. Try as much as possible to ask in detail before engaging fully with the supplier.

8. Get a Reliable Sourcing Agent or Company

Should you consider that sourcing and negotiating with suppliers is not your forte or would take too much of your time, it may be wise to consider asking for help from a pro. Finding a reputable sourcing agent or company would take much of your supply chain issues at hand, as these providers look out for the client's best interest.

MOQ Benefits Both Buyers and Suppliers

The Minimum Order Quantity (MOQ) is a great benefit for both buyers and suppliers.

It helps to ensure that the supplier can meet the customer's needs, while also allowing

them to manage their cash flow and inventory cost more efficiently.

By setting an MOQ, suppliers can guarantee they will have enough stock to fulfill orders without worrying about additional costs associated with extensive inventory holdings.

On the buyer side, MOQs can help to reduce overall costs per order by reducing the number of items that need to be purchased in one go. Furthermore, it also allows buyers better plan their purchases ahead of time, ensuring they are only buying what they actually need.

In the end, having reasonable MOQs allows both parties involved in the transaction to benefit from a smoother supply chain process.

Now that you know what MOQ is, and the impact of high and low MOQs on your supply chain and finance activities, you’re much ready now to start sourcing suppliers, negotiating the price, and building long-term relationships for your e-commerce business.

If you are interested in getting most out of sourcing from different countries, my company, Imprint Genius, can help you navigate and get the best products with the best deals. Click here for more details.

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