Revealing the truth behind CHINA’S Minimum Order Quantity (MOQ)

China is known as the world’s factory. However, sourcing from China, or Asia for that matter, is not as simple as it looks. There are a number of challenges that come with sourcing from Chinese manufacturers and large minimum order quantity (MOQ) is just one of them.  If you are doing business with China chances are, you are already dealing with this phenomenon. For those of us looking at China as a potential source market, you may be wondering what is a minimum order quantity? Well, it is the lowest number of units the Chinese manufacturer is willing to produce to fulfil your order.

A high volume order is more profitable for factories and means higher profit margins at the lower rate per unit. For many small and medium-sized companies, meeting the minimum order quantity requirements which is set by the factories can be challenging. However, factories in China typically operate on low profit margins. To put it bluntly, your order needs to be large enough to justify the expenses needed to manufacture your product. You should also be cognisant that factories have suppliers from whom they purchase their sourcing components, and these suppliers have their own minimum order requirements and most times the MOQ given to you is similar to what the factory receives from its suppliers.

Before we look at ways to negotiate for a lower minimum order quantity, it is important to note that a direct relationship exists, between price and order quantity. The larger the volume the greater the discounted rate you receive. Conversely, a smaller volume means you pay more per piece.

This is a method utilised by suppliers to incentivise buyers to purchase larger quantities. But, if you require smaller quantities you will need to buy from a wholesaler rather than a factory.

Whilst, tackling the issue of MOQs in China can be daunting it is not a hopeless situation. There are strategies you can employ to achieve your goal.

Firstly, it would be wise for you to use standard components in your manufacturing. Private labelling is all the rage, but this requires product customization which can lead to increased costs. The goal is to use generic components that are easy to source and or produce. Actually, if you are producing multiple products, you can utilise this same component across the board. This means that you may be able to keep the cost down for the supplier and meet your minimum order quantity. Furthermore, should you have excess components, the supplier can then utilise this excess to manufacture another product.

Secondly, while working with a large factory has its benefits in terms of economies of scale, you can consider working with smaller manufacturers where it may be possible to place a lower-volume order. However, you must ensure that they can produce a high quality product. Small manufacturers may be more flexible when it comes to negotiation because their production output is much less than larger firms. However, you should exercise caution since a low minimum order quantity is not all there is to sourcing. Be diligent in your selection and exclude manufacturers that are not in compliance with product regulations and who cannot meet deadlines.

However, negotiating for a lower minimum quantity should not be overlooked. In this case, you should be reasonable with your negotiations. Good business practice suggest that you commence negotiations after you order a sample from the supplier, which signals to them that you are serious about doing business. The rest is highly dependent on your persuasion skills and your ability to convince them that you are a small buyer just starting out. Only as a last resort, should you offer to pay a higher price for the products, to offset the lower profit margins that come with small minimum order quantities.

Another option is to purchase from middlemen like trading companies or sourcing agents. They may have access to clients with large purchasing abilities and preferential relationships with the manufacturer. Agents may be able to negotiate for lower minimum order quantities because of their existing relationship with the supplier. Agents can consolidate orders from different clients and are able to take advantage of joint orders to meet large minimum order quantity and even reduce the cumulative costs for each client. This is because fixed costs like transportation fees are shared. 

All in all, you should be aware of suppliers with outrageously low minimum order quantities. It may turn out that the product is non-compliant with industry standards and in the final analysis, it will not matter that you saved money because you may not be able to sell your product. 

Author: Michelle Low Chew Tung, Managing Director, INVENI Business & Technology Ltd.  www.invenitt.com or [email protected]